Stavanger County court rules that foreign rig owner was taxable in norway because it was managed from Norway
On 12 July 2013 Stavanger County Court rendered its judgment in the so-called "Odfjell-case", in which it concluded that a foreign rig owning company was liable to Norwegian tax because it received management services from a Norwegian management company. If upheld, the judgment may have far-reaching consequences for the rig industry.
1. The facts
The taxpayer of the case was a company tax resident in Bermuda. The company participated in a Norwegian limited partnership which owned a drilling rig. The day-to-day management of the rig-owning business – which is distinct from the business of operating the rig – was performed by a Norwegian management company pursuant to a management agreement. The rig was bareboat chartered to another Norwegian limited partnership which was responsible for the actual operation of the rig on the Norwegian continental shelf.
In previous case law (Rt. 1997/1646, Trinc & Trag) the Supreme Court has ruled that a foreign rig owner will not become taxable to Norway merely because it bareboat charters its rig to a Norwegian operating company operating the rig at the Norwegian continental shelf. In its judgment in the Odfjell-case the Stavanger County Court addressed a new and different issue, i.e. whether the foreign rig owner becomes liable to tax in Norway because it receives management services from a Norwegian management company.
2. First issue: Limited tax liability to Norway?
2.1 The issue and the County Court's conclusion
Under section 2-3(1)(b) of the Norwegian Tax Act a foreign (i.e. non-resident) company is liable to pay tax to Norway on "income from business that (…) [it] performs or participates in and which is operated here [i.e. Norway] or managed from here". The first issue considered by the County Court was whether the rig-owning business, in which the Bermuda company participated, was taxable to Norway because it was "operated" in Norway. Said rig-owning business primarily consisted of chartering the rig out on bareboat terms.
The County Court answered the question in the affirmative. It found that the management company's duties naturally formed part of the day-to-day business of a rig-owning company and that they were fundamental for the running of the rig-charter business. In the County Court's opinion, this was a clear indication that the rig-owning company's business was "operated" from Norway.
Norwegian day-to-day management may be sufficient for Norwegian tax liability
The judgment highlights the risk that a foreign rig- or ship-owning company may be considered taxable to Norway because of the mere fact that its day-to-day business is handled by a Norwegian management company. Previously, this risk was considered rather remote.
Focus area for the OECD and Norwegian tax authorities
The decision further illustrates that typical rig-group structures are a focus area for Norwegian tax authorities. This is in line with international trends within the OECD. Hence, in the so called "BEPS-project" (Base Erosion and Profit Shifting), the OECD focuses on the allocation of taxable profits to jurisdictions different from those where actual business activities take place (http://www.oecd.org/ctp/beps.htm).
No tax treaty applicable
As the Odfjell-case concerned a company tax resident in Bermuda, there was no tax treaty applicable. If a tax treaty applies, a foreign rig- or ship-owning company will only have a limited tax liability to Norway if it has a "permanent establishment" in Norway. In our opinion, a foreign rig owning company cannot normally be considered to have a "permanent establishment" in Norway merely because it receives management services from a Norwegian management company. Hence, if the Odfjell-case had been governed by a tax treaty, the outcome of the case would have been different.
Relevance of the location of the rig
In its interpretation of TA section 2-3(1)(b), the County Court did not emphasise the geographical location of the rig. Hence, it appears that the foreign company would have had a limited tax liability to Norway even if the rig had been operated on the continental shelf of another country than Norway.
The activities of the rig-owning company and foreign management companies
In the Odfjell-case, the rig-owning company did not have an office or any employees performing any activity. All-inclusive management services were provided from the Norwegian management company and all day-to-day activities and decisions were therefore taking place in Norway. By contrast, if the rig-owning company had had employees performing certain of these functions and/or if the company had also received management services from other (non-Norwegian) management companies the outcome of the case may have been different.
Is "operated in" or "managed from" Norway the relevant criterion?
The traditional view has been that the relevant issue in relation to foreign rig- and ship-owners has been whether their business has been "managed from" Norway. Only if this is the case, they will be liable to tax in Norway. A foreign company's business is normally not considered to be "managed from" from Norway unless the management company is responsible for the rig-owner's board-level decisions. The County Court's judgment challenges this traditional view, by placing greater emphasis on the issue of whether the foreign rig-owner is "managed from" Norway.
Rig ownership through a Norwegian limited partnership
In the Odfjell-case, the rig was owned through a Norwegian limited partnership and the management agreement was entered between the Norwegian management company and the Norwegian partnership (and, thus, not directly with the Bermuda company). However, this does not seem to have influenced the Court's decision in either direction.
3. Second issue: The Exception from limited tax liability to norway for "rigs in internatinal operation"
3.1 The issue and the County Court's conclusion
Subject to various conditions, TA section 2-34(1) exempts foreign companies owning ships in "international traffic" and/or drilling rigs in an "international operation" and being managed from Norway from the limited tax liability to Norway. After having concluded that the rig-owning Bermuda company had a limited tax liability to Norway under TA section 2-3(1)(b), the County Court considered whether it fell under this exception.
The Court Count found that the exception was not applicable to the Bermuda company. In reaching this conclusion it emphasised that the rig had only operated on the Norwegian continental shelf since 2006 (the case concerned the tax assessments for 2009-2011) and would continue to do so at least until 2017. In the Court's opinion, the rig was therefore not engaged in an "international" operation.
Impact of the location of the rig/ship
When considering whether the rig was engaged in an "international" operation the Court emphasised the past, present and future location of the rig's business operations. Hence, unlike in its analysis under TA section 2-3(1)(b), the geographical location of the rig was of significant importance to the Court's analysis under TA section 2-34(1).
Definition of "Norway": continental shelf covered?
The company's argument that offshore drilling on the continental shelf, by its very nature, is an "international" operation was not heard. The Court did not find the fact that the Norwegian continental shelf is outside of the regular definition of "Norway", and also outside the direct scope of the Tax Act, to be of decisive importance. Hence, for the purpose of TA section 2-34(1) the County Court did not consider the continental shelf to be abroad or an international area.
Duration of operations in Norway
In the Odfjell-case, the rig had been operating on the Norwegian continental shelf since 2006 and would continue to do so at least until 2017. The Court agreed, however, that the mere fact that a rig is currently operating on the Norwegian shelf does not mean that it is no longer in "international" operation (if it has past or future operations in another jurisdiction). However, the Court found that the duration of the Norwegian operations, in this case, was of such a length that the rig was not in an "international" operation.
The "international operation" criterion
The County Court's judgment does not provide significant guidance on the content of the "international operations" criterion. Hence, the judgment leaves a number of issues unsolved:
- How long must a rig operate on a Norwegian continental shelf to disrupt an "international" operation?
- What is the relative weight of the rig's past and future operations in foreign jurisdictions seen in relation to its current operations?
- Must a rig operate in the territory of two or more states in order for the operation to be considered "international"? I.e., is there a distinction between operations "abroad" and "international" operations?
4. The judgment is not final and may be reversed
The Odfjell-case has only been considered by the County Court so far. We assume that the taxpayer will appeal the judgement (albeit the judgment had not yet been appealed as of 10 September 2013). The final judgment in the case is, thus, likely to be given either by the Gulating Court of Appeals or by the Supreme Court.
Although it is difficult to predict the final outcome of the Odfjell- case, there is, of course, a possibility that the Count Court's judgment will be reversed by the higher courts. The judgment nevertheless underscores the importance of carefully considering the structuring of international rig-groups.
If upheld, the judgment may severely reduce foreign companies' request of management services from Norwegian ship- and rig management companies. From the perspective of attracting foreign business to Norwegian management companies the judgment's conclusion is therefore not very wise.
Publisert september 2013