Complaint conserning tax treatment of workers working on the Norwegian continental shelf and residing in another EEA State

Dear Sir/Madam,

Complaint conserning tax treatment of workers working on the Norwegian continental shelf and residing in another EEA State

Reference is made to your letters of 2 May 2006, 25 November 2005, 27 September and of 7 February 2005, and to the letters of the Norwegian Government of 18 March 2005, 31 October 2005 and 22 December 2005.

According to the letter of 2 May 2006, the Authority has received an amendment to the complaint of 16 January 2006 with regard to the new Norwegian rules applicable as from 1 January 2006 and concerning tax deductions to non-resident workers.

The Authority invites the Norwegian authorities to clarify and provide more information regarding the right to deduction for non- resident workers on basis on the allegation presented by the complainant in his letter of 16 January 2006.

Parenting deduction (child deduction) for non-resident workers who earn all or almost all of their income in Norway
Non-resident workers who earn all or almost all of their income in Norway have as from 1 January 2006 the same right to deductions as resident workers, cf. the Norwegian Tax Act § 6-71 (1). As noted by the Authority in footnote 1, the complainants reference to point 9.2.2 of Ot.prp. nr. 1 (2005-2006) Skatte- og avgiftsopplegget 2006 – lovendringer, concerns the legal situation before the amendments were adopted. Before the amendments were adopted, the right to deduction was limited for non-resident workers who chose the “net-deal method”.

The amendment implies, among other things, that a non-resident worker who earns all or almost all of his income in Norway has the same right to deduction for expenses regarding childcare (parenting deduction) as a resident worker. The parenting deduction is not limited to expenses regarding children living in Norway. Both resident and non-resident workers (who earn all or almost all of their income in Norway) can claim parenting deduction for children living abroad.

Deduction of debt interest
In the Norwegian tax system there is a connection between the rules for deduction for debts when calculating net wealth tax and the rules for deduction for debt interest when calculating income tax. There is also a connection between deduction for debt interest derived from immovable property in another State and the tax liability to Norway for income in conjunction to the property.

Individuals liable to tax on their total income in Norway do not get deductions for debts connected to immovable property and other belongings in another State in the assessment of net wealth, provided that Norway cannot impose tax on these possessions according to a Tax Treat with this other State. This principle is pursuant to the Tax Act section 4-31 (1). According to the Tax Act section 6-40 (4), the right to deduct debt interest in taxable income, is restricted correspondingly. This means that individuals who are liable to tax to Norway on their total income are not entitled to deduct debt interest in conjunction to immovable property in another State, when the property is exempt from income-tax in Norway.

Correspondingly, there is a connection between the tax liability to Norway for tax to non residents and their right to deduct debt interest. Individuals who are not liable to Norway on their total income are only entitled to deduct debt interest in conjunction to debt established for the furtherance of activity taxable in Norway, c.f. the Norwegian Tax Act section 6-40 (4). This rule is based on the same motives as the rule concerning residents, which is that the deduction of debt and debt interest only come into consideration if the connected properties or/and income are taxable in Norway.

In the Ministry’s opinion this is compatible with Community law, including the freedom of establishment and the free movement of capital and persons. We would like to emphasize that the rule regarding deduction of debt interest is based on a principle of symmetrical treatment of wealth/income and connected debt interests that applies both for residents and non residents. This legislation is therefore necessary to ensure the fiscal coherence in the national tax system.

The Case C-152/02 Ritter-Coulais can not lead to another evaluation. The facts of this case distinguish from the present issue on substantial parts: Firstly, the persons in Ritter-Coulais had tax liability to Germany on their total income, while the present issue concerns persons with limited tax liability to Norway. This clearly weakens the judgement’s relevance for this issue, as consequence of the fiscal differences of these situations. Secondly, the Ministry has noted that Germany in Ritter-Coulais treated negative income deriving from use of immovable property in another State differently than positive income from the same source. Hence, the treatment of income and cost from the same source was not symmetrical. The Norwegian fiscal system for deduction of debt interest, on the other side, is based on symmetrical treatment of income and debt interest.

“Net-deal method” for non-resident workers who do not earn all or almost all of their income in Norway
As the Authority has pointed out, the standard deduction has been reduced to 10 percent and a maximum of NOK 40 000 per year has been introduced, as from 1 January 2006. This is based on the fact that the standard deduction was relatively high, and gave some taxpayers a higher deduction than deduction for actual costs would have given them. The increase of the minimum allowance from NOK 57 400 in 2005 to NOK 61 100 in 2006, also substantiates the reduction to 10 percent and the introduction of a yearly maximum. Both workers who choose the “net-deal method” and workers who choose the “gross-deal method” are entitled to the minimum allowance, even though the minimum allowance and the standard deduction are given to compensate for some of the same expenses. The amendments in the standard deduction must also be seen in conjunction with introduction of the same right to deduction for actual costs for workers who earn all or almost all of their income in Norway as for residents.

We would like to point out that the amendment regarding the size of the standard deduction does not alter the rules concerning the possibility to choose between the “net-deal method” (deduction for actual costs) and the “gross-deal method” (the standard deduction) for non-resident workers who do not earn all or almost all of their income in Norway. This means, as correctly outlined by the Authority, that non-resident workers who choose the “net-deal method” are not liable to taxation for expenses paid by the employer covering commuting travel. This also means that the standard deduction is not available.

Deduction for travel expenses cf. the Norwegian Tax Act section 6-44
The deduction for travel expenses, founded in the Norwegian Tax Act section 6-44 (1), is not a social deduction. This is an income related deduction that workers who have annual expenses regarding commuter travels that exceed NOK 12 800 are entitled to. This applies for both resident and non-resident workers, as accounted for in the letters of 18 March and 31 October 2005 (but may results in a different taxation if the non-resident worker chooses the standard deduction, witch the resident worker is not entitled to).

The rules that are adopted by virtue of section 6-44 (2) regulate the classification of commuter travels and business travels. The classification shall be utilized for both the rules regarding tax deduction and the rules regarding taxation of travel expenses covered by the employer.

Travels between the residence and permanent workplace and travels between different permanent workplaces are according to the Regulation 1158/1999 section 6-44-12 considered as commuter travels. For employees working on the continental shelf, both residents and non-residents, the heliport is considered as a permanent workplace. This means that the travel between the employee’s residence and the heliport are considered as a commuter travel (except the first and the last travel between the workers residence and the heliport regarding a new work situation, which due to administrative practise are considered as business travels). The travel from the heliport to the offshore platform is always considered as a business travel, cf. the Regulation section 6-44-13 letter g.

The Regulation and the description of the rules in the guidelines made by the taxation authorities (Lignings-ABC 2005) are enclosed.

Yours sincerely,

Jon Tingvold e.f.
Deputy Director General

Jørgen Winsnes
Legal Adviser

Enclosure