Taxation of non-resident employees working in Norway

07 February 2019

As at 1 January 2019, the Norwegian authorities have introduced a new PAYE regime that imposes a flat rate tax of 25% on gross employment income for foreign workers temporarily performing work in Norway.

The aim of the change is to simplify the Norwegian tax system and to achieve more accurate taxation of foreign employees performing work in Norway. The tax regime applies also to non-tax residents receiving director's fees or director's pensions.

WHY THIS MATTERS

The new tax regime applicable for foreign workers should simplify tax administration in Norway for foreign companies posting employees to Norway.  In certain cases, the Norwegian tax liability in respect of the worker’s employment income may be less than if the worker was taxed under the ordinary income tax regime. This could open up possibilities for tax planning and potentially reduce costs for foreign employers assigning personnel to Norway, and when employees are going to be working onshore only, we would recommend comparison calculations are carried out to understand which reporting regime is more beneficial.

However, critically, the scheme does not apply for foreign seafarers and offshore workers, or workers that have business income or taxable income from property in Norway.

RATE OF TAX

For 2019, the flat tax rate is set to 25%; however, the rate will be stipulated by parliament on an annual basis.  The tax rate includes Norwegian social security contributions (actual ordinary rate for employees: 8.2 percent).  Hence, the effective tax rate can be reduced in cases where foreign workers have kept their membership in the Social Security scheme in their home country and can provide a Certificate of Coverage to the Norwegian authorities.

CONDITIONS

One precondition for applying the flat rate tax is that the foreign worker will not become a resident of Norway for tax purposes, i.e., his or her physical presence in Norway must be rather limited and will not exceed certain thresholds.

However, the tax regime can also be applied in the first calendar year the worker becomes a tax resident of Norway provided his or her own personal capital income in Norway and other countries will does exceed NOK 10,000 for 2019.  Capital income means, for example, dividend, interest income and income from letting property.

If such incomes exceed the income limit, the foreign worker must be taxed under the general tax rules for all income and wealth for the entire income year.

WHO CAN APPLY

Foreign workers can apply for the new tax regime when applying for a Norwegian tax card.  In addition, workers can obtain a tax card with the reduced tax rate if a Certificate of Coverage will be available.

If you do not want your foreign workers to be taxed under the PAYE scheme, but rather prefer the general tax rules, they can opt out of the scheme. This would be done when applying for a tax deduction card.

MECHANICS OF NEW TAX REGIME

The tax rate will be applied to gross employment income; thus, no tax deductions will be granted in Norway.  The tax will be deducted at source by the employer and the withholding tax deducted from the employee's gross employment income will be considered as the final tax payment. 

Foreign workers eligible for the new regime will therefore not be required to file an annual Norwegian tax return.

Another precondition for qualification is that gross employment income should not exceed the lower limit of the 3rd bracket applicable for Norwegian bracket tax. This limit will equal NOK 617,500 for 2019.

If you’re not sure how much income the foreign worker will earn, then you would start with the flat rate PAYE regime and then, if necessary, opt out later on in the income year. The tax office will issue a new tax deduction card when they exceed the income limit if they do not receive a notification.

If a foreign worker earns more than the income limit, the entire income will be taxed under the general tax rules.

The Norwegian tax authorities request that they be informed if the worker has been granted the simplified tax regime but the preconditions for qualification are no longer fulfilled. 

For more information please contact Charlotte Edwards (charlotte.edwards@aab.uk) or your usual AAB contact.

To find out more about Charlotte and the Payroll and Employment Taxes team, click here.

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