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Transitional tax regime for ship-owning companies to be regarded unconstitutional

11 Mar 2010

The Norwegian Supreme Court's decision of 12 February 2010 states that the taxation of previous undistributed income of Norwegian ship-owning companies is unconstitutional.

The Supreme Court's decision does not state how the previous undistributed income deferred from taxation before 2007 shall be assessed for tax purposes. The government will have to propose an alternative to the transitional regime ruled unconstitutional. Taxand Norway investigates the transitional tax regime and its effect on ship-owning companies.

From 2007 a revised tonnage tax system for ship-owning companies was introduced in Norway. This new system made the taxation of profits/revenues from international shipping activity for Norwegian ship-owning companies more favourable than the previous regime. The new regime implies that revenues from such activities are exempt from taxation under the corporate tax regime with definitive effect.

However, the transitional rules state that previously undistributed income deferred from taxation before 2007 has to be posted as taxable income over the next 10 years. The total of unpaid tax for Norwegian ship- owning companies amounts to approximately NOK 21 billions, although 1/3 might be allocated to an environmental fund and not subject to taxation.

The ship-owning companies have claimed that the transitional rules impose tax on previous profits that were exempt from taxation, and must be regarded as unconstitutional imposing tax liabilities with retroactive effect. The Norwegian government has claimed that the previous profits were liable to deferred taxation and were not finally exempt.

The Norwegian Supreme Court has, in its judgement of 12 February 2010, abolished the assessments based on the transition scheme for several Norwegian ship-owning companies. The majority of six Supreme Court Judges concluded that the transitional scheme is in violation of the prohibition against retroactive effect of current laws in the Constitution Section 97. (A minority of five Supreme Court judges concluded opposite.) The majority assumed that the scheme entails a clear retroactive effect, which is associated with previous fiscal years and fixed tax positions. In order for a retroactive effect to be allowed, it must be founded in strong social considerations, which the majority did not find to be sufficiently present in this case. The majority did not discuss whether the assessments were in violence with the protection of property in the Protocol 1 Art.


Taxand's Take

Ship-owning companies should consider carefully how to implement the Supreme Court decision in their financial accounts. The deferred tax liability which arose from the transitional rules may be reversed, but it remains to be seen to what extent. The Ministry of Finance has announced that it will carefully consider the alternatives available to amend the transitional regime within the constitutional frame. However, this frame was only referred to vaguely by the Supreme Court.

Your Taxand contact for further queries is:
Per Harg
T. +47 23 11 65 00

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