The Arm's Length Principle and Equity Dispositions: The Case of Thick Capitalization – Part 2

The arm's length principle has existed for more than 100 years, and a large number of equity dispositions have been undertaken for even longer. Still, neither the OECD nor the Norwegian legislator has ever suggested that the arm's length principle can be applied to equity dispositions. Is this a coincidence or are there valid reasons for not applying the arm's length principle to equity dispositions? In this article, the authors examine this issue from the perspective of the arm's length provision contained in the OECD Model and Norwegian domestic law, aimed at the particular case of thick (equity) capitalization. Part 1 of this article discussed the applicability of the Norwegian arm’s length provision to equity contributions. The issues in this part of the article are whether the tax treaty provisions based on article 9 of the OECD Model apply to equity contributions and whether it is commercially irrational for a parent company to finance a subsidiary with equity rather than debt.