Still unclear when the new tax treaty with the U.S. will be signed

Outdated tax agreement

The current tax treaty between Norway and the US is from 1971 and is outdated on several topics. The United States is one of Norway’s most important trade partners. We have extensive business with the United States and several Norwegians live in the United States or have moved to the United States. There are also many Americans who live in Norway or have moved here permanently.

Both for businesses and for private taxpayers, the current situation is in many cases unsustainable. Many tax issues are not solved in the tax treaty, and the current treaty is also too complicated for individuals to deal with it.

The Minister of Finance’s response does not give hope for a quick clarification.

Written Questions for Vedum

The written question from the member of the Parliament is dated 12 September 2024 and was as follows:

“Can the Minister of Finance give a status on the tax treaty between Norway and the U.S. and whether there is any ongoing work to renegotiate the treaty?”

The member of the Parliament referred to the fact that the applicable tax treaty is not updated and is not covering the situation today.

As mentioned, the applicable tax treaty is signed in 1971, and there has been a development that obviously justifies the question to Mr. Vedum.

Vedum confirms in its response from September 18 that Norway and the U.S. are negotiating a new tax treaty. This was already well known among advisors. Apart from that, there are little news.

What is a tax treaty?

The tax treaties shall avoid double taxation. For example, if a taxpayer residing in Norway receives a dividend from a company in another state, the other state may impose tax on dividends under internal law. This tax is called withholding tax. If Norway also taxes the same dividend, the taxpayer will be taxed in both states and then the tax treaty between Norway and the other country in question may have rules that avoid double taxation. One method of avoiding double taxation is that the taxpayer is entitled to deduct withholding tax in the Norwegian tax. This is also referred to as the credit method and is the most common method in modern agreements. Another method is that the state of residence exempts income from taxation.

Norway has tax treaties with several countries. The Nordic tax treaty is a tax treaty between several countries, but this is the exception. As a main rule, the tax treaty is signed with a specific country. However, the treaties are normally based on the OECD's guidelines, and accordingly many of the same principles remain in the different treaties.

The U.S. Tax Treaty

There are several reasons why Americans in Norway are in a special tax position. If a U.S. citizen is domiciled in Norway for tax purposes, he will be taxable to both states because the U.S. taxes citizens according to the principle of citizenship, while Norway taxes taxpayers according to the principle of domicile. When both states have the right to tax an income, double taxation may occur, which the tax treaty as mentioned shall avoid.

The tax treaty between Norway and the United States is over 50 years old. As mentioned, it was signed in 1971, and a lot has happened in society since the convention came into effect. Although there have been some so-called additional protocols since signing, these are also getting old. We must go back to the 80s to find the most important protocols.

The current tax treaty is outdated on several points, and it is very complicated. Especially for US citizens moving to Norway, the current situation creates problems, but there are also unresolved issues for the businesses. Norwegian companies that send employees to the US or establish subsidiaries or affiliates in the US face challenges with the current tax treaty.

Different classification of income and pensions.

For example, for many Americans, established pension schemes under U.S. rules create major challenges. In the U.S. these are taxed according to U.S. pension rules, but this taxation does not necessarily correspond to the Norwegian taxation. When two states tax differently, double taxation can occur. The current tax treaty does not have regulation of several types of US pensions because the current pension scheme follows a system established in the US after the tax treaty was signed. The two states have not signed any protocol clarifying the taxation of US pensions. Such clarification has been made by other states. In Germany, for example, clarification has been made that Americans who move to Germany will not be double taxed.

Different classification creates unclarity for Americans in Norway. It is also a challenge for the Tax Administration that a very important tax treaty has not been updated with the development of society.

Taxpayer’s responsibility?

Mr Vedum confirms in its response that the two states are negotiating a new treaty. This is not new. It has been well known that the treaty will be renegotiated. Beyond this, it is not much news from the Minister of Finance. He refers to the fact that it has taken time, among other things, because of international processes and the U.S. tax system. There is no expectations for when we can expect a new tax treaty. Until further notice, the present outdated treaty applies.

Especially for US citizens who are also tax liable to Norway, the situation is difficult. The different classification of income by the two states and the special Norwegian wealth tax can make the total tax pressure unsustainable when double taxation also occurs due to the current tax treaty. Given the respond from the Minister of Finance it seems that it is the tax payer who must challenge the unclarity through complaint, lawsuit or a so-called MAP (Mutual Agreement Procedure) according to the treaty. Until a new tax treaty is signed, the Minister of Finance should give some statements to clarify some of the challenges Americans in Norway are facing.