In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf.
From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012.
The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013.
In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE.
Following an audit for FY 2012 and 2013, the tax authorities concluded that parts of the intra-group loan should be reclassified from loan to equity due to thin capitalization. Thus, only a deduction was granted for part of the interest costs. Furthermore, the authorities reduced the interest rate from 10 per cent to 5 per cent. For the income years 2012 and 2013, this meant that the company’s interest costs for distribution between the continental shelf and land were reduced by NOK 2,499,551 and NOK 6,482,459, respectively, and financial expenses by NOK 1,925,963 and NOK 10,188,587,respectively.
The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2019.
This decision was appealed by Petrolia Noco AS to the Court of Appeal.
Judgement of the Court
The Court of Appeal also decided in favour of the Norwegian tax authorities.
“The Court adds for this reason that the appellant had higher debt ratio than the company could have had if the loan should have been taken up from an independent lender. In the Court of Appeal’s view, the fact that the appellant actually took out such a high loan as the intra-group loan is solely due to the fact that the lender was the company’s parent company. For this reason, there was a ” reduction ” in the appellant income ” due to” the community of interest. There is thus access to discretion in accordance with the Tax Act § 13-1 first paragraph.”
“Thus, there is no basis for the allegation that the Appeals Board’s decision is based on an incorrect fact on this point, and in any case not a fact to the detriment of the appellant.
Following this, the Court of Appeal finds that there are no errors in the Appeals Board’s exercise of discretion with regard to the determination of the company’s borrowing capacity.
The decision is therefore valid with regard to the thin capitalization.”
“The Court of Appeal otherwise agrees with the respondent that the cost- plus method cannot be considered applicable in this case. Reference is made to LB-2016-160306, where it is stated :
For loans, however, there is a market, and the comparable prices are margins on loans with similar risk factors at the same time of lending . The cost- plus method provides no guidance for pricing an individual loan. An lender will, regardless of its own costs , not achieve a better interest rate on lending than what is possible to achieve in the market.
The Court of Appeal agrees with this, and further points out that the risk picture for Petrolia Noco AS and Petrolia SE was fundamentally different. The financing costs of Petrolia SE therefore do not provide a reliable basis for assessing the arm’s length interest rate on the loan to Petrolia Noco AS.”
“…the Court of Appeal can also see no reason why it should have been compared with the upper tier of the observed nominal interest margins in the exploration loans between independent parties. In general, an average such as the Appeals Board has been built on must be assumed to take into account both positive and negative possible variables in the uncontrolled exploration loans in a responsible manner.
The Court of Appeal cannot otherwise see that the discretion is arbitrary or highly unreasonable.
The decision is therefore also valid with regard to the price adjustment.”
NO vs Petrolia march 2021 Dom_ LB-2020-5842