NORWAY Trends and Developments Contributed by: Thea Slethaug, Axel Bjørke, Sigbjørn Sørensen and Jarand Aarhus, Aider Legal
The classification is not determined by what the con - tract is called – it is determined by how the arrange - ment operates in practice in accordance with sub - stance over form considerations generally applied by the Norwegian Tax Administration. Norwegian tax authorities will look at who gives instructions to the workers, who bears the risk of defects or delays, and whether the foreign company is delivering person - nel or a defined output. Contracts must be drafted with this analysis in mind, and the practical execution of the work must be consistent with the contractual classification. Getting this wrong – whether through careless drafting or inconsistent practice on site – can result in significant and unexpected tax liabilities for both the company and its employees. Employee Taxation: A Three-Variable Analysis The taxation of individual employees working in Nor - way on genuine subcontracts is determined by three factors in most tax treaties: the residence of the employee, the residence of the employing company, and the terms of the tax treaty between Norway and the relevant home country or countries. This three-var - iable analysis can produce outcomes that are initially counterintuitive but are of great practical importance for companies building international project teams. The basic domestic rule is that individuals working in Norway become subject to Norwegian income tax from the first day of their Norwegian engagement. However, where a tax treaty applies, an employee may be exempt from Norwegian income tax if the following conditions are met: the employee is present in Nor - way for no more than 183 days in a 12-month period; the remuneration is paid by an employer who is not resident in Norway; and the remuneration is not borne by a permanent establishment that the employer has in Norway. The first condition – the 183-day threshold – is straightforward in principle, though its calculation can be complex in practice. The second and third conditions introduce the employer’s position into the analysis, and this is where the interaction between corporate-level and individual-level tax becomes directly relevant.
To illustrate, consider a French resident who is employed by a UK company and is sent to work on a project in Norway. The UK company’s project is a service project with a duration of less than six months and therefore does not create a permanent establish - ment under the Norway–UK treaty. In this scenario, the UK employer is not subject to Norwegian corporate tax, and one might expect the French employee to benefit from treaty protection given the conditions outlined above. However, the rel - evant treaty for the employee is not the Norway–UK treaty but the treaty between Norway and France in which the employee is a resident. In this scenario, the Norway–France tax treaty does not offer treaty pro - tection to the employee as the relevant treaty requires that both employer and employee are domiciled in the same jurisdiction. As the employer in this scenario is domiciled in the UK and the employee in France, the employee will become subject to Norwegian income tax for Norwegian-sourced income, even though the UK employer does not have a Norwegian tax liability. Now consider a situation in which a Polish national is employed in the same UK company. Under the Nor - way–Poland tax treaty, there is a specific provision that provides protection for the employee in the same circumstances. Accordingly, the Polish employee, doing the same work in Norway for the same dura - tion, may be fully exempt from Norwegian income tax. These examples demonstrate that the structure of international project teams – including which group entity employs the workers being sent to Norway – is a tax decision, not merely an organisational one. Decisions made at the HR and contract stages have direct and material tax consequences that must be modelled in advance. It also follows that where a permanent establish - ment does arise for the employer – because a project exceeds the relevant treaty threshold – the employees lose their treaty-based exemption. The corporate-lev - el and individual-level tax outcomes are connected: a permanent establishment at the employer level pulls the employees into Norwegian taxation as well. This interconnection must be built into project planning from the outset.
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