What is a tax treaty?

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.

Tax treaties are primarily intended to prevent international double taxation

Tax treaties are agreements concluded between states, and their primary purpose is to prevent international double taxation. This is achieved by the contracting states mutually limiting or relinquishing their taxing rights with respect to various categories of income.

From both an international law and constitutional law perspective, tax treaties are considered treaties. They may be either bilateral (concluded between two states) or multilateral (concluded between more than two states). The Nordic Tax Treaty is one of the few examples of a multilateral tax treaty.

States with which Norway has tax treaties

As of today, Norway has entered into tax treaties with more than 90 countries. Most of these treaties are based on the same framework as the OECD Model Tax Convention. The OECD Model Tax Convention was first introduced in 1963 and has been revised several times since then. Although the Model Convention is not legally binding on member states, it has nevertheless served as the foundation for the vast majority of tax treaties concluded since 1963.

What constitutes double taxation?

The introduction to the Commentary on the OECD Model Tax Convention defines international double taxation as follows:

«International juridical double taxation can be generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods. (…)»

Under this definition, international double taxation exists where:

• The same taxpayer is taxed in two states;
• The taxes imposed are comparable in nature;
• The same income or benefit is taxed in both states; and
• The taxation relates to the same period of time.

Tax treaties provide various methods for eliminating or mitigating such double taxation.

The relationship between tax treaties and Norwegian domestic tax law

From a Norwegian perspective, tax treaties are entered into by the King (i.e., the Government) with the consent of the Storting (the Norwegian Parliament). The legal basis for this is the Act of 28 July 1949 No. 15 relating to Double Taxation Agreements. Section 1 of the Act provides, among other things:

“Subject to reciprocity, the King may, with the consent of the Storting, enter into agreements with the government of a foreign state:

1) concerning public taxes and duties, establish rules for the allocation of taxing rights and grant such relief from taxation as may wholly or partially eliminate double taxation (...)”

This provision presupposes that tax treaties entered into by the Government (with the consent of the Storting) become part of Norwegian domestic law immediately upon their conclusion. By allowing for the advance incorporation of tax treaties into Norwegian law, the Double Taxation Agreements Act modifies the otherwise applicable dualist principle.

Accordingly, tax treaties concluded under the Double Taxation Agreements Act are incorporated into Norwegian law with the status of formal legislation.

However, a tax treaty cannot replace a domestic legal basis for taxation, as tax liability to Norway cannot be imposed without authority in Norwegian law. Under the structure of tax treaties, a treaty cannot expand Norway’s taxing rights; it can only restrict them. The contracting states merely agree to relinquish certain taxing rights on a reciprocal basis.

The scope of Norway’s taxing rights therefore depends both on the content of Norwegian domestic tax law and on the provisions of the relevant tax treaty. In any particular case, it must first be determined whether Norwegian domestic tax law provides a legal basis for taxation. If the answer is no, tax liability cannot be imposed, because a tax treaty cannot substitute for a lack of domestic legal authority. If the answer is yes, it must then be determined whether Norway has relinquished its taxing rights under an applicable tax treaty.

The principle that a tax treaty may only reduce—and not increase—tax liability compared with what follows from Norwegian domestic law also means that a taxpayer may choose to disregard the treaty where doing so is more favourable in the specific circumstances.