When foreign companies engage in business activities in Norway, it is important to early understand how your contract will be classified as this impact obligations related to tax, VAT and labour law regulation in Norway. Correct classification is essential to stay compliant. Let’s have a look at the three contract classification alternatives to choose from.
The three contract classification alternatives
When engaging in business activities in Norway, the classification of your contract basically boils down to the following three alternatives:
- Construction, installation and assembly works (genuine subcontract)
- Service, maintenance and repair works (genuine subcontract)
- Hired labour agreements
The distinction between these alternatives defines tax and VAT positions for the company as well as the tax positions for the employees.
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The difference between genuine subcontracts and hired labour agreements
Both alternative 1) construction, installation and assembly works, and alternative 2) service, maintenance and repair works are so-called “genuine subcontracts” for which your client is paying your company for a certain result or end product. Simultaneously, your company has the economic risk and responsibility for a certain delivery or end product to the client.
For alternative 3) hired labour agreements, your client is paying for the labour, and not a specific result. The work and employees are typically under the client’s “control” in terms of:
- Number of workers needed,
- their working hours, and
- supervision of the workers
Additionally, the client typically also provides the material, tools and equipment needed for the work and is responsible for the workplace where the work is carried out.
Distinguishing between genuine subcontracts and hired labour agreements are not always straightforward as some contracts may point to both. The correct classification depends on an overall and carefully evaluation.
Also read: The importance of a proper contract review when doing business in Norway
Misclassification may lead to unexpected corporate tax
When it comes to tax, it is important to distinguish between the three types of contract classification as they have different ways to trigger so-called “permanent establishment” in Norway for your foreign company. This is important as the starting point is that Norway can only impose tax on business profits from a foreign company with a permanent establishment in Norway.
For construction, installation and assembly works, permanent establishment is normally triggered if the project exceeds a duration of 12 months (6 months according to some tax treaties). The “clock” starts ticking when someone is physically on site and stops when the site is permanently abandoned.
What may come as an unpleasant surprise, is that temporary interruptions will count in the 12-month calculation. For instance, if a project is interrupted or delayed due to progress on site or bad weather conditions, and workers are temporarily sent home, the clock will continue ticking in this period.
Also read: Corporate tax in Norway - The basics for foreign companies in Norway
For service, maintenance and repair works, permanent establishment is normally triggered if the project is regarded as a “fixed place of business” for the foreign company. This presupposes that the place of business is established at a distinct place with a certain degree of permanence. The starting point is that the project should last roughly 6 months to be considered as “fixed”.
For hired labour agreements, the foreign company will normally not have a permanent establishment in Norway. Thus, Norway normally does not have the right to tax the business income in Norway.
If a foreign company is considered to have a permanent establishment in Norway, the company will be liable to pay Norwegian corporate tax (22 percent in 2024) on the business profits attributable to the permanent establishment.
Thus, to avoid unexpected tax and plan well ahead, it is crucial to understand how your contract should be classified and what might trigger tax on the business profits.
Tax positions of your employees
For genuine subcontracts the starting point is that the employees will not have personal tax liability in Norway unless
- the project triggers permanent establishment in Norway, or
- the employees are staying in Norway for more than 183 days within a twelve-month period (or 270 days within a 36-month period).
For hired labour the employees will have personal tax liability to Norway from day one.
To ensure proper payroll administration, the employer should know their employees’ tax positions as this affects the calculation of wages, reporting to the tax authorities and payment of social security contributions etc.
Also read: Taxes in Norway - employee taxation
VAT positions for your company
In relation to VAT, it is important to distinguish between genuine subcontracts and hired labour agreements, as the starting point is that only genuine subcontracts will trigger VAT. Hire of labour from abroad is considered as so-called “remotely delivery services” not triggering VAT.
However, note that if the delivery includes both equipment and labour, this may trigger VAT on both deliveries although hire of labour from abroad normally falls outside the scope.
Thus, for genuine subcontracts, the starting point is that foreign companies selling goods or services exceeding NOK 50 000 over a twelve-month period are obliged to register for VAT in Norway and add VAT on their invoices (unless the goods and services are specifically exempted, such as healthcare, education and social services).
Failing to meet the VAT obligations, may impose a post-calculated VAT on the sales together with additional duties and enforcement fines.
Additionally, foreign companies importing goods or services, may get problems when crossing the Norwegian border without the VAT registration and risk having to pay the VAT at the border to be able to pass. This illustrates the importance of ensuring the correct contract classification early to clarify the related obligations.
Also read: 7 FAQ's about VAT for foreign businesses operating in Norway
Hire of labour is strictly regulated in Norway
As mentioned above, distinguishing between genuine subcontracts and hired labour agreements are not always straightforward. It is wise to know whether your contract is in fact a hired labour agreement as hire of labour is strictly regulated in Norway.
For instance, hire of labour from staffing companies is only allowed in certain circumstances (and in fact prohibited in some counties). Furthermore, the staffing company must be registered and approved with the Norwegian Labour Inspection Authority (the approval is mandatory as of January 1, 2024).
The staffing company also has an obligation of equal treatment of the employees in terms of salary, working hours, holiday etc. as if they were employed by the client.
Hire of labour from other companies (manufacturing enterprises) is also strictly regulated. For instance, the individuals being hired must be a permanent employee with the enterprise and no more than 50 percent of the permanent employees may be hired out.
Thus, a misclassification of your contract may impose that you fail to stay compliant with the labour law requirements and risk that the Norwegian Labour Inspection Authority order a termination of the illegal hire and issue fines for violating the regulations.
Also read: Employee rights in Norway
Disputes and lack of insurance coverage
As the contract classification may impact the responsibility for the result, a misclassification or ambiguous agreement may lead to disputes with the client regarding whom is responsible for any defects or lack of performance with the work performed.
Additionally, the misclassification may lead to issues with your insurance coverage not necessarily covering the economic responsibilities arising from the contract.
Guidance to correctly classifying your contract
Distinguishing between the three types of contract classifications and keeping an eye on the related responsibilities, are rarely straightforward.
If you need help with understanding how your contract should be classified and to identify your related tax and VAT positions, we are happy to assist.
Do you need legal assistance?
Difficult to navigate and understand? We are happy to help, get in touch today!
