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Norwegian High Court Outlaws Transitional Tonnage Tax Arrangements

Wednesday, February 17, 2010

Transitional arrangements that would have left Norwegian shipping companies footing a USD3.6bn bill, have been outlawed as unconstitutional by Norway's Supreme Court, in a landmark victory for the country's maritime industry.

The case brought by Norwegian Shipowners’ Association (NSA) members argued that the new tax scheme was unconstitutional, and would also place extra burden on the industry at a time when it is already suffering from the economic downturn.

Under the current tonnage tax scheme, dating back to 1996, income and profits from shipping are tax-free so long as the funds are not withdrawn as a dividend, or until the shipowner decides to leave the scheme, thus encouraging companies to reinvest profits. The scheme has requirements regarding company type, ownership and activities, and is further limited to the chartering out and operation of directly or indirectly owned or chartered ships.

The High Court case centered the transitional arrangements for the new tax scheme, which were announced in December 2007. The transitional rules would have required shipowners to pay their outstanding tax balances on profits and income that was previously tax-free, even though the company itself had not taken any of the actions that would have made it liable to tax under the 1996 scheme.

The decision would have meant that two thirds of the back tax, accumulating temporarily tax-free, would have been taxed linearly over 10 years. The remaining third could be used for investment in environmental measures. The total stipulated taxable profits amounted to about NOK19.7bn (USD3.36bn). Deducting a third of this for the environmental investment fund, the total tax demand to the industry amounted to NOK13.1bn (USD2.24bn)

When the measures were introduced, to bring Norwegian legislation in line with that of the European Union, companies warned that the taxes would ravage the industry, particularly at a time when companies’ balance sheets were already under strain from the economic downturn. Shipowners warned that, under the new arrangements, workers would be layed off and the productivity of the industry – the third largest in Europe in terms of vessels – would be damaged, and profits would have to be put aside to pay back tax and would not reinvested, as was the case previously.

The Supreme Court’s ruling concluded that the transitional rules are in contravention of section 97 of the Norwegian Constitution, which limits the powers of the authorities to introduce legislation with a retrospective effect.

Welcoming the ruling, Sturla Henriksen, Managing Director of the NSA, said: “We are relieved to hear the decision of the Supreme Court. The Supreme Court has today confirmed the protection of the Constitution against retrospective legislation. It is a decision of principle of great significance for the protection afforded to us all by the law. This judgment will help to re-establish confidence in Norway as an attractive and stable country for business to invest in.”

Finance Minister Sigbjørn Johnsen said: "I take into account that the Supreme Court has concluded that latent tax from the old shipping tax scheme cannot be collected according to the transitional regulations from 2007. The government must assess the situation and the alternative courses of action, before we can conclude in the matter. We will continue to secure competitive conditions for the Norwegian shipping industry.”