Distilled
A Norwegian oil and gas company was assessed as thinly capitalised for seven years. The Oil Taxation Office cut the debt to borrowing capacity and denied the interest — but ignored that the intra-group margin was set below market. The Supreme Court held it could not do both: the adjustment must be net, correcting a low rate upward in the taxpayer’s favour so long as the overall effect still increases taxable income.
The facts
Orlen Upstream Norway AS (“PUN”, formerly PGNiG Upstream Norway AS) is the Norwegian upstream arm of the Orlen group, at the relevant time majority-owned by the Polish State. It was established in 2007 when the group acquired a licence interest in the Skarv field on the Norwegian continental shelf for USD 360 million. In late 2014 it took stakes in the producing Morvin, Vilje and Vale fields, and in Gina Krog, then under development.
Between 2007 and December 2014 PUN drew on six facilities from its Polish parent. The largest was NOK 3,800 million in 2007, refinanced in 2010 into a facility that peaked at NOK 5,050 million; four smaller ones followed. Facilities one and two carried three-month NIBOR plus 2.20 per cent; the remaining four carried NIBOR plus 2.25 per cent. Terms were otherwise materially identical, differing only in tenor and amount. PUN also had genuine third-party financing — a reserve-based bank facility of USD 400 million taken up in August 2010 and refinanced on the same limit in 2015, which the Oil Taxation Office used as its starting point for measuring standalone borrowing capacity.
By decision of 7 June 2022 the Office held PUN thinly capitalised in every year from 2010 to 2016, reclassified the debt exceeding capacity as equity and denied the interest attributable to it, reducing finance costs by approximately NOK 880 million and increasing tax by roughly NOK 243 million. The assessment concerned ordinary corporate income tax only, not the petroleum special tax.
What the Office did not do was revisit the rate. PUN’s case throughout was that a margin of 220 to 225 basis points was itself below what independent parties would have agreed — and that an authority rebuilding the capital structure as though no controlled relationship existed had to rebuild the pricing on the same footing.
The litigation
Oslo tingrett · 19 December 2023 · assessment set aside
The District Court set the assessment aside. The company’s own returns stood for 2011, 2012 and 2014; the remaining years were remitted for recalculation under the court’s directives. PUN was awarded costs of just over NOK 7 million.
Borgarting lagmannsrett · 7 May 2025 · taxpayer prevails
The Court of Appeal dismissed the State’s appeal and issued three directives for redoing the assessment: borrowing capacity to be measured as a share of asset value on unbiased assumptions, implicitly taking account of group affiliation; full utilisation of that capacity to be assumed; and a market rate to be set on the intra-group loans within capacity. On the evidence it found the margin would most likely have been 150 basis points higher between independent parties. The three directives together cut the income increase to roughly NOK 344 million — some NOK 536 million less than assessed, with the market-rate directive alone worth around NOK 193 million of additional interest deduction. PUN’s own appeal, on the remaining years, was dismissed; it was awarded NOK 3,000,000 in costs.
Norges Høyesterett · 26 March 2026 · the State’s appeal dismissed
The State appealed only the market-rate directive, and the Appeals Selection Committee admitted only the question of law: whether the assessment takes account solely of the income-reducing effects of the controlled relationship, or also the income-increasing ones. PUN’s derivative appeal, on the reopening time limit and the size of the 150 basis point margin, was not admitted — so the margin was never reviewed on the merits. The directives on borrowing capacity were not appealed at all, and the finding that PUN exceeded its capacity by between roughly NOK 1,400 million and NOK 2,500 million a year therefore stands. Sitting five judges, the Court dismissed the appeal; Steen concurred in substance and in the result.
ajiho commentary
A tax authority cannot cherry-pick which terms to correct
The heart of the judgment is that the assessment is net. The Court grounded this in the statutory language: the instruction to assess income as if no controlled relationship had existed is entirely general and carries no limitation on which terms may be adjusted, or in which direction. Reconstructing a hypothetical arm’s length position means reconstructing all of it. An authority that rebuilds the capital structure while leaving a below-market rate in place has not applied the counterfactual — it has applied half of it.
The frame of reference is the transaction, not the contractual term
There is no basis for confining the assessment to the parts of a transaction that are reclassified. Where several transactions are so closely linked that they cannot adequately be evaluated separately they may be viewed in context together — and the six facilities qualified, sharing parties, similar underlying needs, near-identical margins and otherwise materially identical terms, differing only in tenor and amount. The Court fenced this in deliberately: only transactions it is natural to view together may be netted, so that taxpayers cannot import unrelated transactions to manufacture an offset. It did not help the State that the Oil Taxation Office had itself adjusted PUN’s intra-group rate upward for 2015 and 2016.
An arm’s length range is a threshold protection, not a pricing outcome
This distinction is routinely conflated in practice. The concept of a range appears nowhere in the Norwegian statute; it comes from the OECD Guidelines and functions as a margin of appreciation in the evidentiary assessment, operating in the taxpayer’s favour. Falling outside the range remains a precondition of any adjustment under the first paragraph, and that protection is untouched. But the third-paragraph assessment then asks a different question — the income most likely to have resulted between independent parties. Once the threshold is crossed, a single most-likely figure governs. And where it is the size of the loan rather than the margin that triggers the provision, the margin’s position within any range is simply irrelevant.
The arm’s length facts displace the actual cash flows
The State argued that an upward interest correction amounted to a set-off against costs never incurred, contrary to the ordinary deduction conditions. The Court rejected the framing: those conditions apply to the new set of facts established by §13-1, not to what actually happened — the point illustrated by the uncontroversial practice of imputing interest income on an interest-free intra-group loan. This is not set-off; it is a different fact pattern. The Court also recorded that §13-1 has no penal purpose, and sent the State’s concern about engineered offsets to the general anti-avoidance rule, where it belongs.
Implicit support is baked into capacity — and nobody appealed it
The Court of Appeal’s first directive required borrowing capacity to be computed implicitly taking account of group affiliation. That directive was not appealed, so it stands unchallenged as the operative instruction. It is a quietly significant point: implicit support applied not to notch a rating for pricing but to size the debt itself. Groups modelling capacity for a Norwegian borrower should assume the same.
One reading note
Six weeks earlier, Oslo District Court decided a materially similar dispute in Alcoa Norway AS and reached the opposite conclusion on netting, expressly declining to follow the Court of Appeal here while this appeal was pending. That reasoning has not survived.
What this means for your business
On assessments already in hand. Where an authority has reduced debt to borrowing capacity, check the intra-group margin against the market. Margins are often set conservatively to look defensible — and where they are, an upward correction may materially offset the adjustment. Here it was worth around NOK 193 million against an NOK 880 million reduction.
On what your documentation must cover. Rate and quantum are no longer separable defences. A file that benchmarks the rate immaculately but says nothing about capacity leaves you exposed on volume; one that addresses capacity but sets the rate by convenience leaves value on the table when an adjustment lands.
On the arm’s length range. Pricing to sit just inside a range protects you at the threshold. It does not determine where the authority sets the price once the threshold is crossed on some other ground. If your debt quantum is vulnerable, a defensible-but-low margin is not the shelter it appears to be.
On facilities drawn in tranches. Several loans on similar terms to the same counterparty may be viewed together. That aggregates exposure, but it also lets favourable features of one facility offset unfavourable features of another — a reason to keep terms consistent across a lending programme.
ajiho will monitor the Norwegian Supreme Court’s developing case law on skatteloven §13-1 and cover further decisions in future FT Cases. The related first-instance decision in Alcoa Norway AS is covered separately.
Case reference
Staten v/Oljeskattekontoret v Orlen Upstream Norway AS, Norges Høyesterett, HR-2026-707-A (sak nr. 25-141970SIV-HRET), 26 March 2026. Appeal from Borgarting lagmannsrett, judgment of 7 May 2025; at first instance Oslo tingrett, 19 December 2023. First voting judge: Hellerslia, sitting with Bull, Thyness, Stenvik and Steen. The Court applied the 2022 OECD Guidelines and left the Norway–Poland treaty, article 9(1), undecided, resolving the case on domestic law. Primary source: official judgment, published on Lovdata (subscription required).