Norway vs ConocoPhillips Skandinavia AS, March 2022, Court of Appeal, Case No LG-2021-38180

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ConocoPhillips Skandinavia AS (COPSAS) is a wholly owned subsidiary of the Norwegian branch of ConocoPhillips Norway, which is registered in Delaware, USA. ConocoPhillips Norway, which does not conduct special taxable business, is a wholly owned company in the ConocoPhillips Group. The group’s headquarters are in Houston, Texas, USA.

The question at issue was whether the interest rate on a loan had been set too high, thus resulting in a reduction of the taxable income of COPSAS.

In May 2013, COPSAS entered into a loan agreement with the related company ConocoPhillips Norway Funding Ltd (COPN Funding). The loan had a limit of NOK 20 billion and a term of 5 years. The agreed interest rate was NIBOR 6M + 1.25%. NIBOR 6M is a current interest rate (benchmark interest rate), while 1.25% is a fixed interest rate – the so-called «interest margin». The interest margin of 1.25% corresponds to 125 so-called basis points (bp). The loan facility was primarily established to finance investments in two fields on the Norwegian continental shelf, where the company is the operator.

From previous years, the company has had several long-term loans in USD and NOK with an interest margin of 37.5 bp above a reference interest rate of either LIBOR or NIBOR. The loans have previously been rolled out and renewed for five years at a time. The interest margin of 37.5 bp was fixed. With effect from 27 October 2015, the loans in USD were combined into one loan in NOK. The interest margin of 37.5 bp was continued.

The company’s loan of May 2013 did not replace any previous loans. The fixed interest margin of 1.25% on the company’s borrowing limit of May 2013 had been based on an interest rate analysis prepared by PwC in connection with the borrowing (“Intercompany interest rate analysis”, hereinafter the “interest rate analysis”) on 3 May 2013.

On 8 March 2019, the Oil Tax Office issued a decision where the interest rate of the May 2013-loan was set at NIBOR 6M + 75 bp. This led to the following conclusion:

«The determinations for the income years 2013-2017 are changed accordingly by ConocoPhillips Skandinavia AS’ interest expenses on interest-bearing debt being reduced by the following amounts:

Income year 2013: NOK 27,875,000
Income year 2014: NOK 52,487,500
Income year 2015: NOK 70,972,223
Income year 2016: NOK 71,909,445
Income year 2017: NOK 63,777,778 »

The Court of Appeal notes that when basis points are discussed in the following, reference is made to basis points beyond 6 months NIBOR, unless otherwise specified. The reason for this is that the borrowing rate is agreed as NIBOR 6M + 125 bp.

COPSAS filed a lawsuit with the District Court where the decision issued by the tax authorities was upheld.

COPSAS then filed an appeal with the Court of Appeal.

Judgement of the Court of Appeal

The Court dismissed the appeal and decided in favour of the Norwegian tax authorities.


“The Court of Appeal further points out that COPSAS has on average used around half the borrowing limit, and that the borrowing limit of NOK 20 billion was mostly used to borrow NOK 14 billion. Although it was not clear at the time of entering into the agreement how large a part of the loan framework was to be used, there is much to suggest that if it had been a loan between independent parties, COPSAS would not have taken out a loan of NOK 20 billion and paid for flexibility , when it has been shown that only a limited part of the borrowing limit was used. The Court of Appeal also points out that the loan agreement contains a clause on interest rate adjustment if COPSAS changes its “credit standing” during the term. This means that the agreement allows the interest rate to be adjusted if the loan is drawn up in full, and this can thus also reduce the value of the opportunity to use the entire loan framework.

The question then is whether it should be adjusted for swap, ie currency risk. The experts, Hoddevik and Steen, explained why it is appropriate for companies operating on the Norwegian continental shelf to also borrow money in Norwegian kroner. There will be an extra risk if the companies borrow in dollars, when other income and expenses, including tax, are calculated in kroner. At the same time, a loan of the magnitude relevant in this case must be raised in the international dollar market. The Norwegian bond market is too small for it to be relevant to borrow such amounts in the Norwegian bond market. If COPSAS had borrowed in the market, they would therefore have had to take out a loan in dollars and pay a premium for the loan to be converted to Norwegian kroner.

The various interest rate indices referred to do not take swap into account, but are based on loans taken out in the same currency in which they are to be repaid. The Court of Appeal points out that no consideration has been agreed for this component either, and that it can indicate that the parties have considered that no swap costs should be calculated. One view is that for the lender, COPN Funding, the exchange risk can go both ways, ie that it is basically coincidental whether there is a gain or a loss by the lender operating in the dollar market, while lending in kroner. When it is an intra-group loan, there is no basis for calculating consideration for swap as losses and gains are within the group. As emphasized by the State, compensation for counterparty risk is then not relevant. The Court of Appeal refers here to LG-2016-92595, the Hess judgment,

The Court of Appeal considers that when the loan has been raised in Norwegian kroner and is to be repaid in Norwegian kroner, no adjustments shall be made as if the loan had been agreed in dollars, which would then be paid out and repaid in Norwegian kroner. In the same way as in LG-2016-092596 [LG-2016-92595, Lovdata’s note], the Court of Appeal assumes that it is the actual transaction that is to be considered and not a hypothetical alternative transaction. It is also not documented whether the lender COPN Funding has incurred swap costs, which could substantiate that it should be adjusted for this.

COPSAS has further stated that subsidiary premiums must be taken into account . The expert witness Hoddevik explained that in addition to the rating on A-, an extra premium must be calculated because it is a loan to a subsidiary . The Court of Appeal points out that Hoddevik confirmed that he had not mentioned the subsidiary premium in the district court , and that the reason was that he did not consider it necessary to go into such subtleties at the time . However, Hoddevik ‘s own setup shows that he believes it should be adjusted by 30-50 bp for subsidiary premium . This is such a large addition that it can not be described as a subtlety and the Court of Appeal places little emphasis on Hoddevik’s explanation of this. None of the witnesses could point out that the subsidiary premium was described in the literature, and there is also strong evidence that there is no basis for a separate subsidiary premium .The Court of Appeal considers that the starting points for a subsidiary’s rating in relation to a parent company’s rating precisely take into account the general increased risk of lending to subsidiaries in relation to lending to parent companies.

Following this, the Court of Appeal has concluded that there is nothing wrong with OSK’s procedure for determining the price of arm’s length, and that there is no reason to adjust the interval with regard to flexibility, swap or subsidiary premium. There is then no agreed arm’s length interest rate on the loan, and the income is thereby reduced. There is a basis for discretionary assessment according to sktl. § 13-1 first paragraph.

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