IKEA Handel og Eiendom AS had deducted from its taxable income interest on an inter-company loan that had been established as the result of an intricate restructuring.
The tax authorities issued a notice of assessment denying tax deduction of the interest payments based on the Norwegian non-statutory anti-avoidance rule.
Appeals were filed by IKEA Handel og Eiendom AS and the cases ended up before the Supreme Court.
Judgment.
The Supreme Court ruled in favour of the tax authorities and upheld the assessment.
According to the court, IKEA Handel og Eiendom AS was not entitled to a tax deduction for the interest paid on the loan. The Norwegian non-statutory anti-avoidance rule applied to the combined transactions as their main purpose was tax avoidance.
The court clarified that the statutory anti-avoidance rule in section §13-1 is limited to transfer pricing and thin capitalisation cases and does not apply to equity transactions that are lawfully made under Norwegian company law.
Excerpts in English
“(81) In my view, section 13-1 does not apply where the series of dispositions includes actual equity dispositions that are lawfully made under Norwegian company law. The assessment themes contained in the non-statutory cut-through rule are suitable for assessing such cases. This also limits the challenges of drawing the line between the scope of application of the statutory and the non-statutory rule. For the sake of clarity, I add that section 13-1 can of course be applied to the parts of such a series of transactions that the provision covers, such as transfer pricing and thin capitalisation. However, as I have mentioned, the borrowing and interest expenses in our case are not affected by section 13-1.
(82) I have therefore concluded that there is no authority in section 13-1 of the Taxation Act to deny Ikea Handel og Eiendom AS the right to the disputed deduction in the company’s income that section 6-40 basically provides.”
….
(93) In my view, it is clear that this standard must also be applied to unnecessary methods of carrying out an otherwise necessary step in the transaction. The State has argued that the company itself could have established the property group, which would not have created the need for a loan-financed repurchase. It can also be questioned whether, in order to achieve the commercial purpose, it was necessary to transfer the shares in the property group Ikea Eiendom Holding AS to the company through a loan-financed purchase at fair value instead of the company acquiring them as a contribution in kind.
(94) In my view, there is no doubt that tax savings were the main – perhaps the only – motivating factor in the choice of procedure. The procedure resulted in Ikea Handel og Eiendom AS incurring large costs in connection with the acquisition of properties that the company had just disposed of free of charge. These costs far exceeded the tax savings the company achieved through the interest deduction. The way in which the series of transactions were made can therefore have had no other purpose than to create a debt burden in Ikea Handel og Eiendom AS that provided a basis for a tax deduction in Norway, which overall was favourable for the Ikea group as such. I cannot see that the company has rebutted this.
(95) I have therefore concluded that the main purpose of the way in which the series of transactions was carried out was to save tax. The basic condition is then fulfilled.”
Click here for English translation
Click here for other translation