US-Norway Tax Treaty: Key Provisions

The United States and Norway share a tax treaty to prevent the same income from being taxed by both countries. This agreement provides rules for individuals and companies with financial ties to both nations, determining which country has the primary right to tax specific income. The treaty defines who qualifies as a resident for tax purposes and establishes a framework for cooperation between the two countries’ tax authorities.

A key step in applying the treaty is determining residency. This is important for individuals who might be considered residents of both countries under their respective domestic laws. The treaty provides “tie-breaker” rules to assign a single country of residence, resolving conflicts and deciding which nation has the primary right to tax worldwide income.

Determining Tax Residency Under the Treaty

The U.S.-Norway tax treaty defines a “resident of a Contracting State” as any person liable to tax in that state due to domicile, residence, or similar criteria. This broad definition can result in an individual being considered a resident of both the U.S. and Norway. For instance, the U.S. taxes its citizens on worldwide income regardless of where they live, while Norway may consider someone a tax resident after 183 days of presence in a 12-month period.

When an individual is a resident of both countries, the treaty uses a sequence of four tie-breaker tests to determine a single country of residence for tax purposes.

• The first test is the “permanent home” test, which assigns residency to the country where the individual has a continuously available home.
• If a permanent home is available in both countries or neither, the “center of vital interests” test examines where the individual’s personal and economic ties, such as family, social relations, and business, are closer.
• If the center of vital interests is indeterminate, the “habitual abode” test looks at where the individual more frequently stays over a sufficient period.
• The final tie-breaker, if all previous tests are inconclusive, is citizenship; the individual is deemed a resident only of the state of which they are a citizen.

How the Treaty Affects Taxation of Income

The U.S.-Norway tax treaty allocates taxing rights between the two countries for various income categories to prevent double taxation.

Business Profits

The business profits of an enterprise are taxable only in its country of residence. The other country, or source state, may only tax profits attributable to a “Permanent Establishment” (PE) within its borders. A PE is a fixed place of business, like an office or factory. Activities related to exploring or exploiting seabed mineral resources are considered a PE if they continue for more than 30 days in any 12-month period.

Dividends, Interest, and Royalties

The treaty limits the tax that a source country can impose on dividends, interest, and royalties paid to a resident of the other country. For dividends, the source country’s tax is limited to 15% of the gross amount. While the treaty provides for an exemption from withholding tax on interest and royalties, this can be limited by domestic law. For example, Norway imposes a 15% withholding tax on such payments to related parties in low-tax jurisdictions.

Income from Employment

For employment income, the treaty includes a “183-day rule.” Income from services performed as an employee in the source state by a resident of the other country is exempt from tax in the source state if three conditions are met:

• The employee is present in the source state for less than 183 days in the tax year.
• The remuneration is paid by an employer who is not a resident of the source state.
• The remuneration is not borne by a permanent establishment of the employer in the source state.

Pensions, Annuities, and Social Security

Pensions, similar remuneration, and annuities paid to a resident of one country are taxable only in that country of residence. A U.S. resident receiving a private pension from a Norwegian source would pay U.S. tax on that income. Social security benefits are taxable only by the country that pays them. The obligation to pay social security taxes is governed by a separate “Totalization Agreement” between the U.S. and Norway, which prevents dual liability.

Income from Real Property and Capital Gains

Income a resident of one country derives from real property in the other country may be taxed where the property is situated. This applies to income from direct use, letting, or any other form of use. Capital gains from the sale of real property are also taxable in the country where the property is located. For other capital gains, such as from the sale of shares, Norway’s tax treatment is more complex, with an upward adjustment on the general 22% income tax rate.

The US Savings Clause Explained

A fundamental component of the treaty is the “Savings Clause,” which allows the United States to tax its citizens and certain former citizens as if the treaty did not exist. Because the U.S. uses a citizenship-based taxation system, this clause preserves its right to tax the worldwide income of its citizens, even if they are residents of Norway. Consequently, a U.S. citizen in Norway generally cannot use most treaty provisions to reduce U.S. tax.

Despite its broad application, the Savings Clause has several exceptions that represent the tangible benefits of the treaty for U.S. citizens in Norway. The most significant exception is the article on “Relief from Double Taxation.” This ensures U.S. citizens can still claim foreign tax credits for income taxes paid to Norway. Other exceptions include provisions for social security payments and mutual agreement procedures, which help resolve treaty-related disputes.

Relief from Double Taxation Methods

The U.S.-Norway tax treaty provides mechanisms to alleviate double taxation, which are explicitly exempted from the U.S. Savings Clause. For the United States, the primary method is the foreign tax credit (FTC) system. A U.S. citizen or resident who pays income tax to Norway on Norwegian-source income can claim a credit for those taxes against their U.S. income tax liability.

The credit is limited to the amount of U.S. tax that would have been due on that same foreign-source income and is claimed by filing IRS Form 1116. This ensures the taxpayer’s total tax burden on their Norwegian income does not exceed the higher of the two countries’ tax rates.

Norway also provides relief for its residents who earn income from the United States. The treaty allows Norway to use a credit method, where a Norwegian resident can claim a credit against their Norwegian tax for U.S. taxes paid on U.S.-source income. In some cases, Norway may apply an exemption method, where income taxable in the U.S. is exempt from Norwegian tax.

Required Forms and Disclosures

To benefit from the U.S.-Norway tax treaty, taxpayers must often complete specific forms. Failing to file these documents can result in the denial of treaty benefits and potential penalties.

Form 8833, Treaty-Based Return Position Disclosure

A taxpayer who takes the position that the treaty overrules or modifies a provision of the Internal Revenue Code, reducing their U.S. tax, must disclose this by filing Form 8833. This form is attached to the taxpayer’s U.S. income tax return. It provides the IRS with information about the specific treaty provision being relied upon and is intended to ensure transparency.

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner

Form W-8BEN is not filed with the IRS but is provided by a foreign person, such as a Norwegian resident, to a U.S. withholding agent like a bank. The form’s purpose is to establish that the person is a foreign beneficial owner and to claim a reduced rate of, or exemption from, U.S. tax withholding on certain U.S.-source income. A Norwegian resident receiving dividends from a U.S. company provides this form to have tax withheld at the reduced treaty rate.