Tax for Americans in Norway

(We have previously written a general article about tax rules when moving to Norway. Read the article here: Moving to Norway?)

 

Why are Americans in a special position? 

There are several factors that make Americans in a special position. American tax law is based on the principle of citizenship. This means that Americans who emigrate to, for example, Norway remain liable to pay tax to the United States if they maintain their citizenship. This means that the taxpayer must submit both Norwegian and US tax returns.  

In the United States, there are also special rules that mean that you can choose whether a company should be taxed as a separate tax entity (corporation) or whether the entity should be taxed as a partnership. Such a choice does not exist in Norway. Ownership taxation in Norway may therefore be different from that in the US.  

There is also a completely different pension system in the United States, which can make it challenging for an American who moves to Norway if they do not prepare for a Norwegian tax regime.  

From a legal point of view, there is a challenge because the tax treaty is older and should be revisited for an audit. Here you can read about the status of the new tax treaty: The tax treaty with the United States is still in the blue. 

Although relocating to Norway may present some challenges, it may also offer opportunities. Planning before emigration is therefore important. Below are some key points to consider. 

1. The Tax Treaty 

Norway and the United States have entered into a tax treaty with the aim of avoiding double taxation. If a US citizen, who is tax resident in Norway, experiences that an income is taxed to both states, the warning lights must be flashing. In principle, this should not happen.  

Most tax treaties are based on the credit method. In practice, this means that a person who is resident in Norway under Norwegian tax rules and under the tax treaty is entitled to a credit in Norwegian tax for the tax paid abroad (withholding tax) on the same income.  

The US tax treaty is special because it is based on the exemption method. The starting point is therefore that if a US citizen is resident in Norway according to Norwegian rules and the tax treaty, Norway must exempt the foreign income from taxation in Norway in the event of double taxation. The US will then have exclusive taxation rights.  

Furthermore, there are exceptions to the main rule about the exemption method that are very difficult to access in the tax treaty, and here we see that many people make mistakes. However, the Ministry of Finance has made some clarifications regarding tax dividends. If the American receives dividends from US companies, Norway will provide a credit for US tax. 

Exceptions to the exemption method beyond tax on dividends are, in our view, highly unclear.  

Another special rule in the Norwegian American tax treaty is that the United States can tax its citizens as if the treaty had not entered into force. Norway does not have a similar right. In practice, this means that you must have local American clarification of the tax consequences in the US to decide on taxation in Norway. 

2. Pension 

The pension system in the U.S. is completely different from that in Norway, as Americans can set aside money in a so-called IRA (Individual Retirement Account). This is a tax-incentivized retirement savings scheme offered by investment firms in the United States. 

The challenge with IRAs is that, in some cases, the Norwegian tax authorities have concluded that the IRA is a capital investment that should be included in the taxpayer`s wealth, and that the profit authorized should be taxed on an ongoing basis as capital income. In our opinion, this is incorrect, as it may result in double taxation of the U.S. citizens in violation of the tax treaty. In the United States, withdrawals from the IRA account can be taxed as a pension according to U.S tax rules. If these funds are already taxed as capital income in Norway, the funds will be taxed twice which is in violation of the tax treaty. In our view, this also constitutes discrimination against U.S. citizens in violation of the tax treaty.  

3. Wealth Tax 

In contrast to many more recent tax treaties, the tax treaty between Norway and the United States includes wealth tax. This is important for many Americans, particularly those who own real estate in the United States. As a state of residence, Norway has accepted that real property in the United States is exempt from Norwegian wealth tax.  

4. Proposed Exit Tax Changes

The Tax Commission has proposed changes to the exit tax that may have an impact on foreign nationals who move to Norway. If, for example, a US citizen moves to Norway and becomes liable to pay tax on their global income and wealth, they might be liable to pay exit tax on financial investments later. Such taxation will prevent labour market mobility. An American who wants to move to Norway for the sake of the labour market may risk a significant exit tax if he or she later moves back to the United States. The Commission proposes that exit tax should not apply to persons who have only been temporarily resident in Norway. An exemption from the tax is proposed if the taxpayer has only been resident in Norway for up to 7 of the last 10 years. This corresponds to the same scheme as in Denmark.  

The Commission also proposes a step-up rule on input values at the time of residency. If an American moves to Norway with shares acquired before the move, he will be able to claim the input value set at market value at the time of moving in, according to such a rule. This means that only the increase in value in Norway will be taxed.  

The wealth tax is a key challenge for Americans moving to Norway. Wealth from U.S. sources held at the time the individual becomes tax resident in Norway will be taxed, and no changes to these rules have been proposed. 

5. Routines for Tax Returns 

To ensure double taxation is avoided, it is important to coordinate the reporting to Norway and the United States. In many cases, it is possible to take measures in advance to avoid tax risk and inconvenience when moving to Norway.