By Marianne Iversen, Gaute Gjelsten and Trond Eilertsen

On May 13 2005 the Ministry of Finance presented proposals to amend the tonnage tax regime. The proposals,which were adopted by Parliament this Summer, are based on the revised State Aid Guidelines on maritime transport adopted by the European Free Trade Association Surveillance Authority on March 31 2004.

Two elements of the revised guidelines cause problems for the Norwegian tonnage tax regime: the flag requirement and the definition of 'maritime transport'.

Flag Requirement

There was no flag requirement under the old tax regime. Under the new provisions, a shipping company will have to maintain or increase its proportion of European Economic Area (EEA)-registered tonnage compared to the tonnage owned by the company as of July 1 2005 (except where the company owns at least 60% of EEA-registered tonnage). An exemption from the flag requirement applies where companies subject to the shipping tax regime have maintained or increased their total EEA-registered tonnage during the previous year. This exemption is based on the exemption implemented in the Danish shipping tax regime.

Pursuant to the flag requirement, calculations must be made as a whole for parent companies and subsidiaries within the shipping tax regime under the control of the parent company according to Section 1(3) of the Accounting Act.

Where a shipping company does not fulfil the requirement, the company will be deemed withdrawn from the shipping tax regime. Consequently, the company will be subject to capital gains tax with respect to deferred tax accrued before and under the regime, as well as unrealized gains on the vessels. Such consequence is based on the specific Norwegian shipping tax provisions and does not follow the state aid guidelines.

Exclusion of Offshore Rigs

Under the revised guidelines, the definition of 'maritime transport' excludes floating installations used in the petroleum industry from the tonnage tax regime. In order to give companies time to comply with the new restrictions, the exclusion of these installations will not be effective until January 1 2006.

As a consequence of this exclusion, floating rigs will have to be sold or demerged from the shipping companies. Alternatively, shipping companies could withdraw from the shipping tax regime. Since withdrawing from the shipping tax regime carries considerable tax consequences and is not voluntary, transitional provisions have been requested. The ministry did not decide on the issue of transitional provisions, but stated that this issue should be considered as a part of the 2006 budget. The need for transitional provisions was emphasized by the Finance Committee during the discussion of the proposals in Parliament.

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