Interest limitation rule held to be incompatible with the EEA Agreement

A company was financed through loans from its parent company in Luxembourg but was allowed to deduct only part of its interest expenses. The tax authorities applied the interest limitation rule for related-party loans set out in Section 6-41 of the Norwegian Tax Act, as it was worded in 2015. The company argued that the provision could not be applied because it was incompatible with the freedom of establishment under the EEA Agreement. Norwegian corporate groups could avoid the limitation by making use of the group contribution regime, whereas companies belonging to foreign corporate groups were unable to do so.

The company prevailed before the EFTA Court

The case was referred to the EFTA Court, which interpreted the EEA Agreement in line with the company’s position. The Norwegian State challenged the EFTA Court’s interpretation before the Supreme Court.

The Supreme Court agreed with the EFTA Court

The Supreme Court followed the EFTA Court and ruled in favour of the company. The Court agreed that the interest limitation rule, when combined with the Norwegian group contribution regime, constituted a specific restriction on the freedom of establishment guaranteed by the EEA Agreement.

The Supreme Court also followed the EFTA Court’s assessment of the proportionality of the restriction, taking into account the weight that should be accorded to the EFTA Court’s advisory opinion. The objectives of safeguarding Norway’s taxing rights and preventing tax avoidance could not justify maintaining the rule without giving the taxpayer an opportunity to demonstrate that the loan transaction had been entered into on genuine commercial grounds.

Source: Supreme Court