Globalisation, remote work and cross-border investments mean that an increasing number of individuals and businesses have connections to several tax systems at the same time. A natural question therefore arises: Can the same income be taxed both in Norway and abroad?
The starting point is that this can occur. Norwegian domestic law and Norway’s tax treaties therefore contain rules intended to prevent international double taxation.
What is double taxation?
International double taxation occurs when the same taxpayer is taxed on the same income or assets in two different countries during the same period.
This may, for example, occur where:
- an individual is tax resident in Norway but works in another country;
- a Norwegian company receives income from business activities abroad;
- an investor receives dividends from foreign companies; or
- several countries claim the right to tax the same income.
The purpose of the rules on the avoidance of double taxation is not necessarily to reduce the total tax burden, but to ensure that the same income is not taxed twice.
How is double taxation relieved?
Norway primarily applies three methods.
1. The credit method
The credit method is the method used in most of Norway’s modern tax treaties.
The method means that the income may be taxed both in Norway and in the other country, but that tax paid abroad may be credited against Norwegian tax.
There is, however, an important limitation: The tax credit will normally not exceed the portion of Norwegian tax attributable to the foreign income. If the foreign tax is higher than this amount, the full amount of foreign tax paid will not necessarily be available as a credit.
For many taxpayers, this is the most practical method for avoiding double taxation.
2. The exemption method
Under the exemption method, the countries agree that one of them shall have the exclusive right to tax the relevant income.
When this method applies, the relevant income or assets are excluded from the tax base in the country of residence. As a result, double taxation does not arise.
This method can still be found in certain older tax treaties, although the credit method is clearly the most common approach today.
3. The alternative exemption method
The alternative exemption method can be described as an intermediate solution. Under this method, the foreign income is included when calculating Norwegian tax, but Norwegian tax is reduced by the portion that proportionally relates to the relevant foreign income.
The method is used in certain tax treaties and is particularly relevant for certain types of employment income.
Tax treaties play a key role
Norway has entered into an extensive network of tax treaties with other countries. The treaties regulate, among other things:
- which country has the right to tax;
- how any double taxation is to be eliminated; and
- which method is to be used to prevent double taxation.
Although Norwegian domestic law contains its own rules on tax credits and other mechanisms for avoiding double taxation, tax treaties will often be decisive when resolving a specific case.
Documentation is key
To claim a tax credit or other form of tax relief, the taxpayer will normally need to document that tax has actually been paid abroad.
If the foreign tax assessment is subsequently changed, this may also affect the Norwegian tax assessment. It is therefore important to keep records of foreign tax decisions and notify the Norwegian tax authorities if the basis for taxation changes.
Conclusion
International tax matters can quickly become complex. Which country has the right to tax, and which method should be used to avoid double taxation, depends on factors including Norwegian domestic law, the relevant tax treaty and the specific type of income involved.
For individuals working abroad, investors holding foreign securities and businesses with international activities, the correct application of the rules may have significant financial implications. A thorough assessment of both Norwegian tax rules and relevant tax treaties is therefore often necessary to ensure correct tax treatment.
