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. An assessment was issued by the tax authorities for these years, where the interest deductions had been partially disallowed. The assessment for these years was later upheld in court. For FY 2014, 2015 and 2016, Petrolia Noco AS had also claimed a full deduction for actual interest costs on the entire intra-group loan to the parent company. It is the assessment for these years that is the subject of dispute in this case. The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2021. This decision was appealed by Petrolia Noco AS to the Court of Appeal. Judgement of the Court The Court of Appeal dismissed the appeal and decided in favour of the Norwegian tax authorities. Excerpts “The Court of Appeal also agrees with the state that neither the cost plus method nor a rationality analysis can be considered applicable in this case. With the result the Court of Appeal has reached so far, the CUP method should be preferred – in line with the OECD guidelines. After this, in summary, it appears clear that the interest margin on the intra-group loan is significantly higher than in a comparable and independent market and thus not an arm’s length price. The higher interest implies a reduction in the appellant’s income, cf. Tax Act section 13-1 first paragraph. The Court of Appeal cannot see that the adjustments claimed by the appellant change this. In the Court of Appeal’s view, it is also clear that the reduction in income has its cause in the community of interest. Whether adjustments should be made to the basis of comparison at the time of the price change, the Court of Appeal comes back to when assessing the exercise of discretion. Consequently, there was access to a discretionary determination of the appellant’s income according to Section 13-1 first paragraph of the Tax Act, also with regard to the interest margin.” “In the Court of Appeal’s view, additional costs that would have been incurred by independent parties, but which are not relevant in the controlled transaction, must be disregarded. Reference is made to the OECD guidelines (2020) point C.1.2.2, section 10.96: In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. Independent commercial lenders will sometimes charge fees as part of the terms and conditions of the loan, for example arrangement fees or commitment fees in relation to an undrawn facility. If such charges are seen in a loan between associated enterprises, they should be evaluated in the same way as any other intra-group transaction. In doing so, it must be borne in mind that independent lenders’ charges will in part reflect costs incurred in the process of raising capital and in satisfying regulatory requirements, which associated enterprises might not incur. The decisive factor is whether the costs or rights that the effective interest margin in the observed exploration loans between independent parties is an expression of, are also relevant in the intra-group loan. As far as the Court of Appeal understands, the appellant does not claim that various fees or costs incurred in exploration loans from a bank have been incurred in the intra-group loan, and in any case no evidence has been provided for this. In the Court of Appeal’s view, such costs and fees are therefore not relevant in the comparison. The appellant, on the other hand, has stated that the loan limit that Petrolia SE had made available, and the fact that the loan limit was increased if necessary, means that a so-called “commitment fee”, which accrues in loans between independent parties where an unused credit facility is provided, must be considered built into the agreed interest rate. In the Court of Appeal’s view, Petrolia SE cannot be considered to have had any obligation to make a loan limit available or to increase the loan limit if necessary. It appears from the loan agreement point 3.2 that the lender could demand repayment of the loan at its own discretion. The appellant has stated that this did not entail any real risk for the borrower. It is probably conceivable that Petrolia SE did not intend for this clause to be used, and that the appellant had an expectation of this. In this sense, it was a reality in the loan framework. However, it is clear, and acknowledged by the appellant, that the point of financing the appellant through loans rather than higher equity was Petrolia SE’s need for flexibility. Thus, it appears to the Court of Appeal that it is clear that the appellant had no unconditional right to the unused part of the loan limit. The Court of Appeal therefore believes that the Board of Appeal has not made any mistakes by comparing with nominal interest margins. On this basis, 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 ...

Where the effect of a guarantee is to permit a borrower to borrow a greater amount of debt than it could in the absence of the guarantee, the guarantee is not simply supporting the credit rating of the borrower but could be acting both to increase the borrowing capacity and to reduce the interest rate on any existing borrowing capacity of the borrower. In such a situation there may be two issues – whether a portion of the loan from the lender to the borrower is accurately delineated as a loan from the lender to the guarantor (followed by an equity contribution from the guarantor to the borrower), and whether the guarantee fee paid with respect to the portion of the loan that is respected as a loan from the lender to the borrower is arm’s length. The conclusion of an analysis of such transactions may be, taking into account the full facts and circumstances, that the evaluation of the guarantee fee should be limited to a fee on the portion that has been accurately delineated as a loan, and the remainder of the loan granted should be regarded as effectively a loan to the guarantor followed by an equity contribution by the guarantor to the borrower ...

Comparability issues, and the need for comparability adjustments, can also arise because of the existence of MNE group synergies. In some circumstances, MNE groups and the associated enterprises that comprise such groups may benefit from interactions or synergies amongst group members that would not generally be available to similarly situated independent enterprises. Such group synergies can arise, for example, as a result of combined purchasing power or economies of scale, combined and integrated computer and communication systems, integrated management, elimination of duplication, increased borrowing capacity, and numerous similar factors. Such group synergies are often favourable to the group as a whole and therefore may heighten the aggregate profits earned by group members, depending on whether expected cost savings are, in fact, realised, and on competitive conditions. In other circumstances such synergies may be negative, as when the size and scope of corporate operations create bureaucratic barriers not faced by smaller and more nimble enterprises, or when one portion of the business is forced to work with computer or communication systems that are not the most efficient for its business because of group wide standards established by the MNE group ...

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. Excerpts “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.” Click here for translation NO vs Petrolia march 2021 Dom_ LB-2020-5842 ...

Comparability issues, and the need for comparability adjustments, can also arise because of the existence of MNE group synergies. In some circumstances, MNE groups and the associated enterprises that comprise such groups may benefit from interactions or synergies amongst group members that would not generally be available to similarly situated independent enterprises. Such group synergies can arise, for example, as a result of combined purchasing power or economies of scale, combined and integrated computer and communication systems, integrated management, elimination of duplication, increased borrowing capacity, and numerous similar factors. Such group synergies are often favourable to the group as a whole and therefore may heighten the aggregate profits earned by group members, depending on whether expected cost savings are, in fact, realised, and on competitive conditions. In other circumstances such synergies may be negative, as when the size and scope of corporate operations create bureaucratic barriers not faced by smaller and more nimble enterprises, or when one portion of the business is forced to work with computer or communication systems that are not the most efficient for its business because of group wide standards established by the MNE group ...

Two inter-company loans were provided to Statoil Angola by it’s Norwegian parent company, Statoil Norway ASA, and a Belgian sister company, Statoil Belgium (SCC). Statoil Angola only had the financial capacity to borrow an amount equal to the loan from Statoil Belgium. Hence, no interest was paid on the loan from Statoil Norway. The tax authorities divided Statoil Angola’s borrowing capacity between the two loans and imputed interest payments on part of the loan from Statoil Norway in an assessment for the years 2000 and 2001. The Supreme Court, in a split 3/2 decision, found that Statoil’s allocation of the full borrowing capacity of Statoil Angola to the loan from the sister company in Belgium was based on commercial reasoning and in accordance with the arm’s length principle. The Court majority argued that Statoil Norway – unlike Statoil Belgium – had a 100% ownership of Statoil Angola, and the lack of interest income would therefore be compensated by an increased value of it’s equity holding in Statoil Angola. Click here for translation Norway vs. Statoil Angola, 2007, HRD RT 2007 - 1025 ...