Tax Treaty Case Law around the Globe 2024

3.1. Introduction

The main question for the Court of Appeal was whether a payment from an Estonian limited liability company to a Norwegian individual shareholder (who was the sole shareholder of the company) should be classified as a loan or a dividend payment for tax purposes. Further, the question was whether Norway was restricted to tax the payment under the tax treaty between Estonia and Norway. The Norwegian shareholder was also the sole director and the general manager of the Estonian company.

The tax treaty between Estonia and Norway was signed in 1993 and entered into force 1 January 1994. The Tax treaty was based on the OECD Model from 1992, but due to the differences in the economic welfare between Norway and Estonia at that time, parts of the tax treaty also reflect the United Nations (UN) MC where the source state is provided with greater taxing rights.

Between 2005 and 2017, the Estonian company made several payments to its sole shareholder, including payments to the creditors of the shareholder. The Norwegian shareholder argued that the payment should be classified as a loan for tax purposes, and thus that the payment was not taxable income in Norway. Alternatively, the...