Tax treaty rules on the taxation of dividends

The tax treaty rules on dividends primarily apply to distributions received by shareholders as a return on their shares pursuant to a resolution adopted by the company's general meeting.

The OECD Model Tax Convention defines the concept of dividends in Article 10(3). The starting point is that the distribution must originate from a company that constitutes a separate taxable entity under Article 3(1)(b) of the Model Convention.

The concept of dividends must therefore be distinguished from capital gains. This distinction is particularly important in relation to liquidation distributions. Under the OECD Model Convention, liquidation distributions (“profits on a liquidation”) are taxed as dividends in the state of payment. Consequently, the shareholder’s state of residence must grant relief for the withholding tax, even if the liquidation distribution is treated as a capital gain under its domestic law.

If the tax treaty’s definition of dividends does not provide an answer, the term must be determined according to the domestic law of the state in which the distributing company is resident (i.e., where the company’s management exercises its functions). This rule constitutes an exception to the general interpretation rule in Article 3(2) of the OECD Model Convention and means that the shareholder’s state of residence is bound by the interpretation of the dividend concept adopted by the source state.

Rules under Norwegian domestic law

Taxpayer resident in Norway receiving dividends from a foreign company

An individual taxpayer resident in Norway who receives dividends from a foreign company is liable to Norwegian tax in the same manner as for dividends received from a Norwegian company. The legal basis is Section 10-11 of the Norwegian Tax Act. The shareholder is entitled to a shareholder allowance pursuant to Section 10-12 of the Tax Act.

Any tax paid on the dividend in the other state (withholding tax) may be credited against Norwegian tax pursuant to Section 16-20 of the Tax Act.

Taxpayer resident abroad receiving dividends from a Norwegian company

An individual taxpayer resident abroad who receives dividends from a Norwegian company is liable to Norwegian tax under Section 2-3(1)(c), cf. Section 10-13 of the Norwegian Tax Act. The tax rate is determined annually by the Norwegian Parliament and has been 25 percent for many years.

The provision is understood to mean that the gross amount of the dividend is taxable. Consequently, the foreign taxpayer may not deduct expenses or losses incurred in Norway.

As the right to a shareholder allowance under Section 10-12 applies only to individual taxpayers subject to ordinary tax liability in Norway, foreign taxpayers receiving dividends from Norwegian companies are, as a general rule, not entitled to a shareholder allowance. An exception applies to shareholders resident in an EEA state, who may claim a shareholder allowance pursuant to Section 10-13(2) of the Tax Act.

Rules under tax treaties

The OECD Model Tax Convention provides that the right to tax dividends shall be shared between the contracting states. This is also the rule adopted in most of Norway’s tax treaties.

More specifically, Article 10(1) of the Model Convention provides that the shareholder’s state of residence may tax the dividend. Article 10(2) further provides that the source state (the state in which the distributing company is resident) may also tax the dividend, but only up to a maximum rate of 15 percent of the gross amount of the dividend. However, the source state is only obliged to limit its taxation to this rate if the recipient is the beneficial owner of the dividend.

Since withholding tax is calculated on the gross amount of the dividend, the taxpayer may not claim deductions for expenses when determining the source state’s tax base.

Double taxation is prevented by requiring the shareholder’s state of residence to grant a tax credit for the tax paid in the source state, cf. Article 23A(2) and Article 23B(1) of the OECD Model Tax Convention.