The reimbursement system for exploration costs and state aid


The reimbursement system for exploration costs gives oil companies with deficits the possibility to get their tax value of exploration costs paid instead of carrying forward a loss. In a complaint filed to the EFTA Surveillance Authority (ESA) on 21 august 2017, Bellona states that reimbursement of exploration costs to companies that has no taxable income is illegal state aid. As part of the initial investigation to determine whether to open formal investigation, ESA has asked the Ministry of Finance a number of questions. In their letter of 9 February 2018, the Ministry of Finance gives a thorough statement of the Norwegian authorities' opinions on why the system does not involve illegal state aid.

The debate has raged in the media recently. It has inter alia been claimed that ESA probably will conclude that the system is illegal state aid and that more than 100 billion NOK will have to be reimbursed. We believe that the oil companies and the authorities can sleep well at night.

The reimbursement system for exploration costs

A main goal in Norwegian petroleum politics is to facilitate profitable oil and gas production in the long term. It has also been considered important to ensure that a large share of the value creation accrues to the state, so that it can benefit society as a whole. This is partly obtained by the tax system. The petroleum taxation system is mainly the same as regular company taxation, however subject to a separate petroleum tax law (Act of 13 June 1975 No. 35 Taxation of subsea petroleum deposits, etc.). Because of the extraordinary returns on production of petroleum resources, the oil companies are subject to an additional special tax. In 2017 the ordinary company tax rate was 24 %, and the special tax rate was 54 %. In 2018 these tax rates will be adjusted to 23 % and 55 % respectively. This gives a marginal tax rate of 78 %. Total tax income to the Norwegian state in 2017 is estimated to around 72 billion NOK. (2018 currency).

The reimbursement system for exploration costs was introduced in 2005 to reduce the entry barriers for new companies and to facilitate socioeconomically profitable exploration. Under this system, companies with deficits may choose between receiving an immediate refund of the tax value of exploration costs from the taxation authorities, or carry forward the loss with interest rate compensation to a future year when the company has a taxable income. When the tax value of the exploration costs is required to be paid, the costs will not be deductible by future tax assessment. The reimbursement system thus gives the same economic value of the tax deduction and secures equal treatment of companies with or without taxable income.

State aid

State aid is defined in the EEA Article 61 as (1) an economic advantage for the receiver, (2) given by the state or by the state funds in any form, (3) related to economic activity, (4) which favour certain companies or production of certain goods or services (selectivity), (5) distort competition or threaten to distort competition and is (6) suitable to affect trade between the EEA countries. All terms must be met in order to be defined as state aid. A core question is whether the reimbursement system favours certain companies or goods- and service branches. Economic initiatives that benefit all businesses fall initially outside the EEA Article 61. Support schemes that are open for everyone and based on objective non-discriminating and verifiable criteria will usually not favour certain companies, and are therefore not selective.

Tax law state aid assessment undergoes a three-step test to assess whether a system scheme is selective or not. First, a Reference system must be established. Secondly, are there any exceptions that discriminates a company in similar actual and legal positions Thirdly, is the exception within in the nature and logic of the tax system. Exploration reimbursement is an integrated part of the petroleum tax system. It cannot be seen as part of the regular tax system, but as a special arrangement within the petroleum tax system. The system gives petroleum companies without taxable income the right to an annual reimbursement of the tax value (78 %) of the exploration costs at the same time as petroleum companies with a taxable income. This secure equal tax value of exploration costs for petroleum companies with or without taxable income, and are in conclusion not selective. As an illustration we can imagine an energy tax regime with 78 % tax where only the petroleum industry received the exploration reimbursement. This would be selective.

If ESA concludes that the terms for state aid are fulfilled, it is only the advantage, and not the reimbursements as such, that can be re-claimed. First and foremost it will be the advantage of postponed economic and financial risk.

Read Bellona's complaint here (

Read the Ministry of Finance answers to ESA (

Related practice areas

Primary Contacts

Thomas Nordby
Olav Kolstad


Thursday, February 15, 2018