As a main rule, Norway can only impose tax on business profits from a foreign company with a permanent establishment in Norway. Accordingly, it makes sense that the term “permanent establishment” is much-discussed amongst tax advisors in Norway.
During the last 15 years, Magnus Legal has assisted numerous foreign companies doing business in Norway. In many cases, it’s obvious that the Norwegian activity of the foreign company has constituted a so-called “permanent establishment” in Norway, for instance where the foreign company has established an office in Norway or participates in a construction or installation project lasting more than twelve months.
Subject to Norwegian corporate tax
A foreign company with a “permanent establishment” in Norway should, based on the tax treaties Norway has with approximately 90 countries, be subject to Norwegian corporate tax (tax rate 2022: 22 percent) on business profits attributable to the permanent establishment.
Also read: Corporate tax in Norway - the basics for non-Norwegian enterprises
3 «grey areas» based on practical experience
In other cases, it’s not obvious that the Norwegian activity of the foreign company constitutes a permanent establishment in Norway. Based on our experience, there are quite a few grey areas related to the length of construction or installation projects, often called the “twelve-month test”, such as:
- The start date of the construction or installation project
- Temporary interruptions
- The termination date of the construction or installation project
Please note that some tax treaties operate with a shorter time-period than 12 months, such as the tax treaty between Norway and the Czech Republic (6 months).
1) Regarding the start date
A question we often encounter is whether preparatory activity, such as sales meetings, business meetings, on-site inspections etc. should be included when doing the “twelve-month test”. The so-called OECD-commentary gives us a few starting points:
“A site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established, e.g. if he installs a planning office for the construction”.
From our point of view, it is rather clear that sales meetings and short business meetings are not enough to get the clock ticking. The same should be the case when the foreign company is handling formalities, such as attending an ID-control at the tax office.
However, when the Norwegian activity is closing in on project management, the picture gets blurrier.
In our opinion, it should not be enough that representatives from the foreign company visits the future building site, for instance inspecting or taking pictures relevant for the engineering phase. However, the length of the inspection (should not exceed a couple of days), and the time-period between such preparatory activities and the start of the physical construction work, are relevant factors. If the inspection is carried out close to the start-up date, it could indicate that the days of inspection should be included in the twelve-month test.
The formal contract period is also relevant. If preparatory activities are carried out within the formal contract period, it could indicate that the clock should start ticking before start-up of the physical construction work.
The recommendation to our foreign clients is to be observant to this issue. Ideally, the foreign company should be able to document or substantiate the nature of the preparatory activity in Norway. This will give us better cards on our hands if we should end up with discussions with the Norwegian tax authorities.
Also read: Do the right things when doing business in Norway
2) Regarding temporary interruptions
Unexpected incidents are quite common in construction projects. In Norway these are often caused by bad weather conditions. The OECD-commentary points out the following:
“Seasonal or other temporary interruptions should be included in determining the life of a site. Seasonal interruptions include interruptions due to bad weather.”
Here is a practical example. A foreign company participates in a construction project, planned for 8 months, in Northern Norway. The work starts in May 2022. Having not forecasted the harsh weather conditions, the company is “forced” to leave the place of work in September 2022. The company returns the following summer season, finalizing the project between May and July 2023. The company’s total physical presence in Norway is just eight months. However, if we include the interruption period between September 2022 and May 2023, the total project exceeds 12 months, and therefore constituting a permanent establishment in Norway.
It’s fair to say that these cases are “uphill battles”. However, if the interruption period is substantial, it would be possible to argue that the foreign company has “permanently abandoned” the place of work during the interruption period.
A small piece in a larger puzzle
In some cases, a foreign company is just a small piece in a larger puzzle, being dependent on the progress of a main client. Let’s say the foreign company should handle one rather short-lived operation at the start of a project, and another rather short-lived operation towards the end of a project.
If unexpected incidents occur within the main client’s area of responsibility, it seems unfair that the interruption period, where the foreign company is back in their homeland, should be included in the twelve-month test. In such cases, we would argue that the foreign company has indeed “permanently abandoned” the place of work after finalizing their first operation.
Again, our recommendation is that our foreign clients are observant to this issue, especially when planning projects in areas of Norway subject to harsh weather conditions.
Also read: Register a company in Norway
3) Regarding the termination date
As a main rule, the site “continues to exist until the work is completed or permanently abandoned” (quote from the OECD-commentary). This will also include time used to clean up the building site. Some time ago, we worked on a case where the foreign company used a few days, miles away from the building site, to pack up their gear and finalize paperwork before leaving Norway.
From our point of view, these days should not be counted when doing the twelve-month test. Also, in some cases, our foreign clients will spend time testing their installation. As a main rule, the time of testing should be included in the twelve-month test.
Being aware of the 12-month rule is essential and makes it possible to plan ahead. As always, Magnus Legal can be a sparring partner on every step of the way.
Find out more about Magnus Legal’s tax services on our webpage: Corporate tax in Norway