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In 2014 this additional final tax cost may be a reality for many British and Dutch employees working in Norway.
Norwegian tax resident individuals are subject to net wealth tax of up to 1% of their world-wide net wealth.
With effect from 2014, UK and Dutch residents that e.g. commute on a weekly basis to Norway may have to pay net wealth tax to Norway. The wealth tax will represent an additional and final tax cost for the commuters. These commuters are now in the same situation as commuters from certain other European states such as Denmark, Sweden, Finland, Poland and the Czech Republic.
The reason for this is that net wealth tax is not covered by the new tax treaties Norway has entered into with the UK and the Netherlands.
Norwegian net wealth tax
Norway levies 1% net wealth tax on a person’s global net wealth, i.e. irrespective of where the assets are situated.
The tax is triggered on net wealth exceeding NOK 1 000 000 – approximately GBP 100 000 or Euro 125 000.
The basic rule is that the assets should be valuated at fair market value at the end of the calendar year. Thus, the net wealth tax base of e.g. bank savings and investment in shares must be valuated at December 31 each year.
Note that debt is generally deductible in the net wealth tax base.
Further, note that certain assets are included in the net wealth tax base at a value less than fair market value. This is in particular the case for the person’s permanent residence which commonly is reduced to around 30% of fair market value.
The tax treaties and tax resident in two states
Norway has tax treaties with approximately 90 states. The main purpose of these treaties is to abolish double taxation.
A practical situation of double taxation may occur if a person is regarded as tax resident in two countries at the same time. For instance, a UK tax domiciled person with a permanent home and family in the UK who commutes to work in Norway on a weekly basis, may also be regarded as a tax resident of Norway. In such cases the tax treaty will normally decide that the person should be regarded as a tax resident only in the country where the permanent home and family is situated (centre of vital interests), i.e. in the UK in this case.
When the tax treaty covers net wealth tax, the basic rule is that it is the country where the person is a tax resident, as defined in the tax treaty, that has the right to levy net wealth tax on the persons world wide assets. In the above mentioned case this would be the UK.
However, when the tax treaty does not cover the net wealth tax, Norway may levy net wealth tax based solely on the provision of Norwegian domestic tax law and irrespective that the person has a home and family in the other state. This may be the situation for British and Dutch residents that commute weekly to Norway or is seconded to Norway on short term assignments exceeding one year.
Tax residency in Norway according to domestic law
Individuals that are present in Norway for a period or periods exceeding in aggregate 183 days in any 12-month period or 270 days in any 36-month period are considered to be resident for tax purposes.
When counting the number of days of presence in Norway the arrival day and the departure day are both considered as a full day in Norway.
If the period runs past a calendar year, the person becomes a tax resident as from January 1 in the year the person fulfils the qualifications.
The impact on commuters from the UK or Netherlands
Employees working in Norway will still have to pay Norwegian tax on income derived from the work performed in Norway. Other income may be protected from Norwegian tax according to the provisions of the tax treaty.
The new tax burden is related to the net value of the world wide assets of the employee.
Provided the employee according to Norwegian domestic law is regarded as a tax resident of Norway, the employee will become subject to the 1% net wealth tax of the world wide assets. This implies taxation of the value of e.g. home and cars in the home country, bank savings and shares in private or public companies.
In case the assets are situated in a third country Norway will normally be entitled to levy net wealth tax on e.g. bank saving and shares. This implies that bank accounts in e.g. Switzerland, Lichtenstein, the Channel Islands, or elsewhere shall be included in the net wealth tax base.
It is the individual that is responsible to report the world wide net wealth when filing the annual tax return. As the new Norwegian tax treaties with the UK and Netherlands are effective as from January 1, 2014, the first time the net wealth tax on world wide assets should be reported in the tax return for 2014 to be filed in the spring of 2015.
Note that the Norwegian tax office may levy penalty taxes for non compliance, and there are cases where individuals have been sentenced to imprisonment for net wealth tax evasion.
Foreign commuters to Norway from countries with tax treaties that no longer give protection from Norwegian net wealth tax should analyse their net wealth position in order to determine the potential additional cost of the Norwegian net wealth tax.
It is the resident tax status at December 31 that is decisive for the net wealth tax liability. Thus, individuals that wish to avoid paying the net wealth tax for 2014 must consider the Norwegian tax residency status as of December 31, 2014. It may e.g. be possible to monitor and reduce the number of days in Norway in the remaining of 2014 to avoid being tax resident in Norway.
A more radical decision would be to terminate the employment in Norway within the end of the year. Note however, in case the employee has been a tax resident of Norway for more than 10 years he or she may remain subject to Norwegian net wealth tax until 2017 even in the case the employment is terminated in 2014.
Other tax planning ideas would be to invest in assets with a net wealth tax baseless than fair market value, ref above.