Limitations on tax deductability of mortgage interest payments

Reference is made to the EFTA Surveillance Authority’s (hereinafter the Authority) reasoned opinion of 19 September 2012 (Event No: 640671), previous correspondence and Package meetings in Norway, concerning tax deduction rights for persons with tax residence in Norway owning real property located in another EEA State where the tax treaty with Norway is based on the exemption method.

The Authority has concluded that the Norwegian tax rule limiting deductions of interest payments made by residents with real property investment in an EEA State where the tax treaty exempts from taxation in Norway any income and wealth related to that real property to the ratio between, on the one hand, the value of the real property abroad, and on the other hand, the value of the taxpayers total net wealth, constitutes a restriction contrary to Article 40 EEA.

The Ministry of Finance would hereby notify the Authority that the Norwegian Government has decided to propose amendments in the Norwegian Tax Act, introducing statutory provisoins that will imply equal conditions for interest deductions for residents who have invested in primary homes or secondary homes in respectively Norway and other EEA States. When such property is located in an EEA State where the tax treaty with Norway is based on the exemption method, it will be a condition that the same interest has not been, or will not be, deducted in the EEA State where the real property is located.

The decision made by the Government to propose amendments in the Tax Act must be seen in the context of the fact that there, as per today, are only six EEA States in which the tax treaty with Norway exempts from taxation in Norway real property located in the other state. These states are the Kingdom of Belgium, the Republic of Bulgaria, the Federal Republic of Germany, the Italian Republic, the Republic of Malta and the Republic of Portugal. As regards the tax treaty with the Republic of Portugal, a new tax treaty entered into force 15 June 2012, with effect as from 1 January 2013. A new tax treaty with the Republic of Malta has been signed, and will most likely be effected as from 1 January 2013. Tax treaties with the Kingdom of Belgium, the Republic of Bulgaria, the Italian Republic and the Federal Republic of Germany are in the final stage of renegotiations, but will enter into force at the earliest in 2014. In accordance with the Norwegian policy for avoidance of double taxation, the credit method will be applied in all these tax treaties.

Thus, the tax treaties with the aforementioned EEA States will change the principle for avoidance of double taxation from the exemption method to the credit method. At the time these tax treaties have been effected, the provision in question, will no longer have any effect when the property is located in an EEA State.

Yours sincerely,

Kåre Aasen Tveit  e.f.
Legal Adviser

                                                                        Liv Jægersborg
                                                                        Senior Adviser