For the first time, the Norwegian courts have ruled in a case regarding the scope of the parent company guarantee (PCG) for licensees on the Norwegian Continental Shelf (NCS). The Borgarting Court of Appeal recently overturned a district court judgment and largely accepted the Norwegian government's interpretation of the PCG's scope of applicability.(1) Although the ruling, which is likely to be appealed, provides some clarity, the question of whether tax claims are covered was not resolved.

Facts

In 2005 Norway introduced a unique scheme allowing for a cash refund of up to 78% of the tax value of petroleum exploration costs if a licensee generates no revenues from upstream petroleum activities from which the costs may be deducted (for further details please see "Parent company guarantee for NCS licensees: scope and third-party claims").

In 2008 Skeie Technology AS issued the Norwegian government's standardised, non-negotiable PCG as a condition for the award of participating interests in several production licences on the NCS to its subsidiary.

In 2009 the subsidiary bought seismic data for approximately NKr412 million (approximately $47 million) and thereafter claimed, and received, a corresponding cash tax refund. A subsequent review of the tax assessment, which was upheld by the last-instance tax appeal board for petroleum tax, concluded that the motivation for the purchase of the seismic data had primarily been to obtain liquidity rather than actual exploration purposes. The government consequently claimed for restitution.(2)

The subsidiary did not have the financial resources to pay the claim and the government therefore sought recourse through the PCG.

Skeie Technology AS, as the guarantor and defendant, rejected the government's claim, arguing that the claim for restitution was not covered by the PCG based on various lines of defence. The district court largely agreed with Skeie Technology AS and ruled in its favour.

Decisions

In a 13 May 2019 judgment, the court of appeal overturned a district court judgment which had been in favour of the defendant.

The Borgarting Court of Appeal emphasised that the wording of the PCG is intentionally wide and that the purpose of the guarantee is to make parent companies liable for petroleum-related activities performed by their subsidiaries to the same extent as if the parent company carried out the activities.

The defendant argued that any claim in the case at hand had to be linked to a relevant petroleum licence held by the subsidiary, partially because the PCG had been issued as a condition for the award (or transfer) of a petroleum licence participating interest. However, the court concluded that the PCG covered all of the subsidiary's petroleum-related activities and not only activities that were subject to a licence.

The court further discussed to which extent the claim could be considered to be in connection with petroleum activities ("operations" in the unofficial translation of the PCG) and concluded that the connectivity requirement also had to be interpreted broadly. The subsidiary's misuse of the refund scheme did not prevent it from falling within the scope of the PCG.

Comment

For some time, there has been a general assumption that the PCG covers tax claims towards a subsidiary. The Borgarting Court of Appeal chose not to resolve this question in general and instead concluded that the government's restitution claim did not constitute a tax claim.

The PCG's form has remained unchanged since the mid-1970s and had not been subject to any court review before this case. Although the court of appeal overturned the district court judgment and provided some clarifications, the tax issue remains. An alternative to further clarification by the courts is for the government to revise the standardised PCG and clarify its scope and content. However, given the conservative approach by the government on this type of issue, a change is unlikely.

The defendant has expressed its intention to appeal the judgment to the Supreme Court.

For further information on this topic please contact Frode A Berntsen or Halvor Klingenber at Advokatfirmaet Simonsen Vogt Wiig AS? by telephone (+4751823200) or email (fab@svw.no or hkl@svw.no). The Advokatfirmaet Simonsen Vogt Wiig AS website can be accessed at www.svw.no.

Endnotes

(1) The Borgarting Court of Appeal's judgment is available in Norwegian here.

(2) The chosen approach is also subject to an ongoing penal case, in which the oil company and seismic company – as well as one member of each company's management – have been fined or sentenced to time in prison. Three of these penal cases have been appealed.

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