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The Multilateral Convention to counter tax evasion will from 1 January 2021 have effect for 17 of Norway's tax treaties. This implies more wide-ranging definition of agency PEs and the introduction of the principal purpose test in some tax treaties. Other tax treaty news include the entry into effect of a protocol with Switzerland and a tax treaty with Ghana.
The Multilateral instrument (MLI) was one the 15 actions introduced by OECD in 2015 to counter tax evasion and profit shifting opportunities of multinational companies. The MLI allowed for a swifter implementation of several actions. The work with the multilateral instrument resulted in a multinational convention (the “Convention”).
Norway has tax treaties with more than 90 states, but the Convention will only apply to 28 of Norway's tax treaties.(1) The Convention will have effect for 17 tax treaties(2) from 1 January 2021, including Australia, India, Ireland, Japan, the Netherlands, Poland, Portugal, Russia and the United Kingdom. The most important amendments are outlined below.
Tax treaty abuse - Principal Purpose Test
Norway has adopted the principal purpose test to counter abuse of tax treaties, cf. Article 7 of the Convention. According to the test a taxpayer may not claim treaty benefits if one of the principal purposes of a transaction or arrangement is to exploit benefits under the treaty. Such abuse of the tax treaties could e.g. be the establishment of a letter box company in a state to benefit from exemptions or reductions in source taxation on royalties, dividends or interests in a tax treaty this state has with another state.(3) The threshold seems low, but OECD has stated that the principal purpose test should not lead to a substantial increase in cases where treaty benefits are denied. The Norwegian tax authorities have not yet issued any guidance on the application of the principal purpose test.
The Convention enters into effect for 17 of Norway's tax treaties from 1 January 2021, and the principal purpose test will have effect for these tax treaties. Further, in relation to Russia Norway has accepted to include also a limited benefit test to counter tax avoidance.
Permanent Establishment criteria – dependent agent rule and construction PE
Permanent establishment ("PE") is the threshold under tax treaties for when a state may tax a foreign company's business. Norway has adopted the recommended changes to prevent the artificial avoidance of PE, including the agency PE, splitting-up of contracts for construction PE and the clarification of the list of PE exemptions, cf. the Convention Article 12, 13 and 14.
According to the current agency PE rule, a dependent person (e.g. an employee) may create a PE for the foreign company provided he/she has an authority to conclude contracts in the name of the foreign company. Under the new dependant agent rule following of the Convention article 12, it is sufficient to create a deemed PE if the person regularly acts on behalf of the foreign company and has a principal role in the conclusion of contracts. According to the OECD Commentary (2017)(4) these activities would typically include actions convincing the customer to enter into a contract including the presentation of terms and prices.
The new dependant agent PE will have effect from 1 January 2021 for the following tax treaties:
The new dependent agent PE has also been adopted by Argentina, Chile, Mexico and Romania, but for these treaties the new rule will at the earliest be effective from 1 January 2022.
Article 13 of the Convention clarifies that the listed activities exempt from a PE status (e.g. facilities for storage of delivery, facilities for purchase of goods or collection information) only applies if the activities are of a preparatory or auxiliary nature and not a core activity of the foreign company. An example could e.g. be a warehouse of an internet company that forms an essential part for the distribution of products. The following tax treaties will be updated with the new text (with effect from 1 January 2021):
Article 14 includes provisions to counter the splitting up of contracts to avoid a construction/installation PE. The period of time for construction/installation PE of 12 months (some treaties have 6 months) will under the new rule include all contracts in excess of 30 days undertaken by a related company. The tax treaties with Australia, the Netherlands and Serbia will be updated with the new construction PE effective from 1 January 2021.
Mutual agreement procedure
Norway has also adopted the Convention's update of the mutual agreements procedure. A taxpayer who has been subject to double taxation, or will be subject to double taxation contrary to the tax treaty, may claim to initiate a mutual agreement procedure with the aim to avoid double taxation. The states may also enter into agreements on the general interpretation of regulations of the tax treaty. The majority of Norway's tax treaties have provisions on mutual agreements procedure that essentially correspond to the provisions of the Convention. Nevertheless, Norway has through the Convention adopted the amendments and the tax treaties with Chile, Mexico and Portugal will be updated accordingly.
Norway has entered into a protocol with Switzerland to implement the minimum standards of the BEPS recommendations covered by the Convention., The tax treaty's preamble will be updated reflecting that the purpose of the tax treaty is to avoid double taxation without creating opportunities of non-taxation or reduced taxation through taxon or avoidance, including through treaty shopping arrangements.
The principal purpose test has been adopted under a separate article entitlements to benefits. According to the test, a taxpayer may not assert treaty benefits relating to income or capital if one of the primary purposes of a transaction or arrangement is to exploit benefits under the treaty.
The mutual agreement procedure (MAP) in article 25 has also been updated. According to the new regulation a taxpayer claiming to be subject to double taxation may request a MAP in both states, not only in the state of tax residency. Further, the protocol has an exception to arbitration in article 26 regarding hard to-value intangibles(5) where the tax authorities have made a corresponding adjustment according to the tax treaty article 9 (1).
The protocol entered into force in October 2020, and will have effect from 1 January 2021.
On 20 november 2020 Norway signed a tax treaty with Ghana. Norway has not previously had a tax treaty with Ghana. The tax treaty is based on the UN model tax treaty(6), which implies to some extent that greater taxing rights are allocated to the source state(7) compared to the OECD model tax treaty.(8)
The threshold for creating a permanent establishment ("PE") is lower, as the tax treaty includes a services PE. The furnishing of services through employees or personnel engaged by an enterprise constitute a PE if the services relating to one or connected projects is carried on for a period exceeding 183 days in any twelve-month period.
Dividends are taxable in the source state at 15%, but a reduced rate of 7% applies if the beneficial owner of the dividends is a company which holds directly at least 10 % of the capital of the company paying the dividends (365 days holding period required).
Interest and royalty payments are also subject to withholding taxes in the source state. Withholding tax on interest payments to the beneficial owner of the interest is limited to 7%. Royalty payments are subject to 10% withholding tax. Royalty includes payments for the use or right to use intellectual property rights, copyright, trademarks, patent rights and trade secrets as well as payments for the use of or the right to use industrial, commercial and scientific equipment.
Payment for services is subject to source state taxation. The withholding tax on services is limited to 12% of the gross payments. Payment for services is defined as any payment for any administrative, technical or consultancy service.
In line with Norwegian tax treaty policy, offshore activities carried out in connection with the exploration or exploitation of the seabed or subsoil are regulated in a separate provision.
The principal purpose test has been adopted to counter abuse of the tax treaty.
The tax treaty has not yet entered into force. The Norwegian Government submitted a proposition to the Norwegian Parliament to adopt the tax treaty on 13 December 2020. It is expected that the entry into force at earliest will take place in 2021 and that the tax treaty will have effect from 1 January 2022.
(1) The states have chosen which of their tax treaties the Convention shall apply to ("Covered Tax Treaties). In order for a specific treaty to be amended both states need to include the other state as a Covered Tax Treaty.
(2) Australia, Bulgary, Chile, Georgian India, Ireland, Japan, Cyprus, Latvia, Lithuania, Luxembourg, Malta, Mexico, the Netherlands, Poland, Portugal and Russia.
(3) Final Report Action 6 Preventing the Granting of Treaty Benefits in Inappropriate Circumstances page 17
(4) OECD Commentary (2017) to Article 5 (5) par. 88 – 90.
(5) OECD Transfer Pricing Guidelines chapter VI D.4 and later amendments of the guidelines.
(6) United Nation's Model Double Taxation Convention for tax treaties between developed and developing states.
(7) United Nations commentary on model tax conention par. 3: "The United Nations Model Convention generally favours retention of greater so called “source country” taxing rights under a tax treaty—the taxation rights of the host country of investment—as compared to those of the “residence country” of the investor. This has long been regarded as an issue of special significance to developing countries, although it is a position that some developed countries also seek in their bilateral treaties."
(8) Norway's tax treaties are based on the OECD Model Tax Treaty.