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06 November 2013
In the existing financial climate, bank financing is difficult to obtain, equity investors are hesitant and the shipping markets are unsteady. Therefore, there is an emerging trend for yards to provide their buyers with a new form of sellers' credit – by participating with equity in the project companies that are ordering newbuilds.
Different corporate structures can be utilised and the choice of corporate entity should be tailormade for each project – although some typical solutions are used more often than others. However, the choice of corporate entity and its jurisdiction can have both favourable and detrimental tax consequences for the different participants.
The Norwegian kommandittselskap (KS) has been used for project financing in the shipping business for many years. At present, the Norwegian indre selskap (IS) is more commonly used as it has more or less the same advantages as a KS, but is more flexible.
As a starting point, any form of Norwegian partnership – whether a KS, an IS or an unlimited partnership – offers the same key features. Under Norwegian tax law, a partnership is transparent for tax purposes. While the taxable profit or loss of the partnership's business is calculated at the partnership level, the participants (the partners) are the tax subjects. Each partner is allocated its proportional share of the profit or loss, and is subject to tax (or not) depending on its individual financial circumstances.
Non-Norwegian participants in a Norwegian partnership engaged in shipping or offshore activities will typically not be subject to tax in Norway for their share of the partnership's profits. The reason for this can be twofold:
In this way, KS and IS structures are tools that meet the commercial and financial needs for raising capital, as well as being tax efficient for the partners. Thus, a non-Norwegian yard may take an ownership position in a IS or a KS without being concerned about having to pay tax in Norway.
It has become quite common for Norwegian yards to take an equity interest in an IS or a KS partnership. The partnership structure is well known in Norway and is relatively easy to explain to Norwegian yards. However, explaining the IS structure to foreign yards, in particular those from China, has proved to be more challenging. In most cases buyers have succeeded in getting the Chinese yard on board, but sometimes foreign yards have preferred a more traditional solution, examples of which are described below.
A Norwegian private limited liability company (AS) is different from a KS or an IS on two key grounds. An AS is not transparent for tax purposes, which means that the AS is taxed on a standalone basis in Norway. Thus, the above-mentioned tax exemptions available for non-Norwegian investors are unavailable if an AS is used. In addition, dividends distributed from an AS are subject to 25% withholding tax in Norway (unless a reduced or zero withholding tax rate applies under a tax treaty or in accordance with Norway's EEA/EU obligations). Withholding tax is typically a problem for Chinese yards that want to participate through a Hong Kong-based company, as Norway does not have a tax treaty with Hong Kong.
Notwithstanding the above, there are tax-efficient solutions for an AS for certain qualifying activities. These activities typically involve the AS opting to be tonnage taxed, in which case qualifying income is exempt from Norwegian corporate income tax. If the shares in such tonnage tax AS company are held by an EEA/EU company meeting the applicable substance criteria, withholding tax on dividends will not apply.
Establishing an ownership structure in a tax haven is a well-known solution in shipping – and while this may benefit non-Norwegian investors, establishing companies in such jurisdictions offers no tax benefits for Norwegians. On the contrary, such structures may cause Norwegian investors to pay considerably more tax than if a Norwegian or EEA/EU-based structure is used. Dividends and gains on shares in tax haven companies are taxable at 28% in Norway, and such companies may also be subject to controlled foreign corporation taxation, which would typically be avoided if a Norwegian or EEA/EU entity was chosen.
The benefit of using an EEA/EU company is that, if structured correctly, it will offer a good tax solution for both Norwegian and non-Norwegian investors. This model does not generally offer any added benefits for Norwegians compared to a Norwegian AS, but it can be beneficial for non-Norwegian investors as it may provide low tax rates for types of business other than shipping (eg, the operation of rigs) and low or no withholding tax on outbound dividends.
For further information on this topic please contact Are Zachariassen or Anders Myklebust at Wikborg Rein by telephone (+47 22 82 75 00), fax (+47 22 82 75 01) or email (email@example.com or firstname.lastname@example.org). The Wikborg Rein website can be accessed at www.wr.no.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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