Tax treaty rules on the taxation of real property

Article 6(2), second sentence, of the OECD Model Tax Convention defines what is considered real property. The provision provides a broad framework for what is included. Buildings and appurtenances are covered, as they are under Norwegian domestic law. Livestock and equipment used in agriculture and forestry are also included, as well as payments received for the right to exploit natural resources. Interest on mortgage debt is not included.

If it is not possible in a particular case to determine what forms part of the property, the term “immovable property” shall “have the meaning which it has under the law of the Contracting State in which the property is situated.” This follows from the first sentence of Article 6(2) of the OECD Model Tax Convention. Accordingly, the definition of real property under the domestic law of the state where the property is located becomes decisive where the treaty’s own definition is insufficient.

Taxation of income from real property

The general rule in tax treaties is that the state in which the property is located has the right to tax the income derived from that property. Under the OECD Model Tax Convention, this follows from Article 6(1).

The provision applies to all forms of income from real property (“income derived from the direct use, letting, or use in any other form”), cf. Article 6(3). In practice, it is usually unnecessary to distinguish between income and capital gains, since gains from the disposal of real property are generally taxable in the same state as the income derived from it.

Most tax treaties entered into by Norway contain provisions corresponding to Article 6 of the OECD Model Tax Convention.

Article 6 of the OECD Model Tax Convention does not apply where the property is located in the same state in which the owner is resident. In such cases, Article 21(1) concerning “other income” applies, with the result that the taxpayer’s state of residence has exclusive taxing rights.

Taxation of capital gains

As noted above, gains from the disposal of real property are generally taxed in the same state that has the right to tax the income from the property. Under the OECD Model Tax Convention, this follows from Article 13(1).

The gain must be calculated in accordance with the rules of the state that has the taxing right.

Tax treaties generally regulate only capital gains on disposal, not capital losses. The deductibility of capital losses is therefore governed by domestic law. In Norway, Section 9-4(2) of the Tax Act provides:

“Where a tax treaty with a foreign state provides that a gain shall be exempt from taxation in Norway, no deduction shall be allowed in Norway for a corresponding loss.”

This provision is intended for tax treaties that, from Norway’s perspective, are based on the exemption method. Where a tax treaty is based on the credit method, however, the gain remains taxable in Norway.