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Under Norwegian tax law, anyone who is considered a tax resident of Norway is liable to pay tax in Norway. However, even if a person is regarded as a tax resident of Norway, their income may have been earned abroad, since tax residency in Norway is not necessarily contingent upon the individual being physically present in the country.
Global tax liability
As a general rule, Norwegian tax liability also applies to income earned abroad. In other words, individuals are liable to Norwegian tax on their worldwide income (global tax principle).
Under Norwegian law, the global tax principle means that persons who are tax resident in Norway are subject to Norwegian taxation on all income, including employment income, regardless of where in the world that income is earned. This may result in international double taxation if the country in which the income was earned also taxes the same income. In most cases, the source state will have authority to tax such income under its domestic tax legislation.
Rules for the prevention of international double taxation
International double taxation is not prohibited under general international law, nor is it prevented by international law. Nevertheless, there is broad agreement that such double taxation is undesirable. As a result, both national and international rules have been developed to prevent international double taxation.
National rules aimed at preventing double taxation are found in the domestic legislation of each country. In Norway, these rules are primarily contained in the Tax Act and regulations issued under the Tax Act. International rules for preventing double taxation are found mainly in a broad network of tax treaties.
The rules vary from state to state and from tax treaty to tax treaty. In addition, different rules apply to different categories of income. This article focuses on one particularly important provision under Norwegian domestic law: the so-called one-year rule in Section 2-1, tenth paragraph, of the Norwegian Tax Act.
The one-year rule – introduction
In brief, the one-year rule provides that a taxpayer may qualify for a reduction of Norwegian tax if they have worked abroad for a period of at least one year (hence the name "one-year rule") and do not spend more than an average of six days per month in Norway (72 days per year) during the foreign assignment.
The method underlying the one-year rule
The one-year rule is based on what is known as the alternative exemption method, also referred to as the alternative allocation method. Under this method, the state of residence (the country where the taxpayer resides) initially taxes the taxpayer's total income, including foreign-source income that the source state (the country where the income is earned) is entitled to tax. The residence state then grants a deduction from the calculated tax corresponding to the residence state's tax on the foreign-source income.
From a Norwegian perspective, this means that Norway initially taxes the taxpayer's total income, including foreign income over which the source state has taxing rights. Norway must then grant a deduction from the calculated tax corresponding to the Norwegian tax attributable to the foreign income.
Example
Assume that you earn NOK 300,000 in Norway and NOK 100,000 abroad. Also assume that a tax treaty between Norway and the other country grants the other country taxing rights over the NOK 100,000 foreign income. The amount initially subject to taxation in Norway is your total income, including the foreign income. In this case, that amounts to NOK 400,000.
Assume further that the average Norwegian tax rate on NOK 400,000 is 40%. This results in a total Norwegian tax liability of NOK 160,000.
As noted above, Norway must grant a deduction corresponding to the Norwegian tax attributable to the foreign income. Since the applicable tax rate is 40%, the Norwegian tax on the NOK 100,000 foreign income is NOK 40,000.
This amount is deducted from the Norwegian tax liability:
NOK 160,000 (Norwegian tax)
− NOK 40,000 (Norwegian tax on foreign income)
= NOK 120,000 (total Norwegian tax)
Further details regarding the one-year rule
According to the wording of Section 2-1, tenth paragraph, letter (a), first sentence, of the Tax Act, tax relief is granted in Norway for foreign tax on employment income, and only for employment income earned through work performed outside Norway. This excludes payments that are not remuneration for work carried out abroad, such as holiday pay accrued from work performed in Norway or salary earned for work carried out in Norway.
Regulations issued under the Tax Act clarify that the term "employment income" also includes income from independent assignments (freelance income). However, business income and investment income fall outside the scope of the rule.
To qualify for tax relief, the employment income must be earned through work performed outside Norway during the foreign work assignment itself. This excludes income earned abroad before or after the qualifying period.
Furthermore, the foreign work assignment must last for at least twelve consecutive months. The assignment must qualify as a work assignment throughout the entire period. If a person is not working—for example, due to leave, vacation, or similar circumstances—the foreign stay will generally not be regarded as a qualifying work assignment. However, see the section on interruptions of the foreign stay below.
For salary received from the Norwegian state, except remuneration related to services performed in connection with commercial activities, tax relief may also be claimed where a person has several foreign work assignments, each lasting at least six consecutive months, which together amount to at least twelve months within a thirty-month period.
The one-year rule does not require that the employer be Norwegian or subject to Norwegian taxation.
Where the conditions of the one-year rule are satisfied, the right to tax relief applies from the first day following departure from Norway.
Exceptions
The one-year rule does not require that the taxpayer become liable to tax in the foreign state. However, Section 2-1, tenth paragraph, letter (c), no. 1, provides that the one-year rule does not apply to income that, pursuant to an agreement with another state, may be taxed only in Norway. This typically includes, for example, remuneration from public service employment.
The exception also covers situations where the twelve-month requirement is met, but the taxpayer has moved between several foreign countries such that the conditions for taxation in those countries are not fulfilled.
Overall, the purpose of the exception is to prevent unintended complete tax exemption. The decisive factor is whether Norway, under an agreement with another state, has been granted exclusive taxing rights over the income. The term "agreement with another state" refers to an international agreement to which Norway is a party. The exception does not cover agreements to which Norway is not directly a party, nor private arrangements between, for example, a taxpayer's employer and the tax authorities of the host country.
There is also an exception for income earned during work assignments that take place primarily outside the territory of any state. In this context, work performed on another state's continental shelf in connection with the exploration or exploitation of seabed or subsoil resources is treated as equivalent to work performed within that state's territory.
Interruptions of the foreign stay
To qualify for tax relief under the one-year rule, the foreign work assignment must last for at least twelve "consecutive" months. This raises the question of whether visits to Norway during the twelve-month period interrupt the continuity requirement.
The answer is provided in Section 2-1, tenth paragraph, letter (b), of the Tax Act: Short-term stays in Norway do not interrupt a continuous foreign work assignment under the one-year rule. A stay is considered short-term if it does not exceed an average of six days per full month. Accordingly, a person may spend up to 72 days in Norway during a twelve-month period without interrupting the continuity requirement.
If the stay in Norway is caused by circumstances that were unforeseeable when the foreign assignment commenced and are beyond the control of both the employee and the employer, the limit is increased to nine days per month. This provision addresses situations where, for example, war or civil unrest necessitates a longer stay in Norway than the ordinary six-day average would allow. The rule only provides a limited extension of the permitted stay in Norway and presupposes that all other conditions for tax relief are satisfied.
Calculating the permitted stay in Norway
When calculating the amount of time a person may spend in Norway, any part of a day counts as a full day. The permissible number of days in Norway is determined by reference to the number of full months—calculated from date to date—during which the taxpayer has had a foreign work assignment. Permitted stays in Norway are not included when calculating the length of the foreign work assignment itself.
The number of days a person may spend in Norway is calculated in the same manner regardless of whether the applicable limit is six or nine days per month.
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