Norway: Supreme Court judgment on the interpretation of the ‘offshore’ clause and the taxation of employees
Anette Fjeld and Lene Bergersen of Deloitte Norway explain the Norwegian Supreme Court judgment in the case between six sea workers and Poseidon Personnel Services SA on one side and the Norwegian state on the other side.
The judgment of June 8 2021 concerns the interpretation of the offshore clause in the double tax treaty between Norway and Belgium and Norway and Spain regarding the taxation of employees. The outcome is however also relevant for companies carrying out business activities offshore. The Norwegian Supreme Court decides on the territorial scope of the offshore clause and how to count the 30-day requirement applicable to employees.
The taxpayers were employees of a staffing company, working onboard a foreign ship that was used to transport a platform deck from an oil platform on the continental shelf to a shipyard in Norway for dismantlement. The ship was in Norway for 17 days, while the employees spent between 12 to 25 days on the mission in Norway, at sea.
The parties agreed that the work was taxable to Norway under Norwegian domestic law. The question was whether the offshore clause in the tax treaties prevented Norwegian taxation. According to this provision, tax is payable to Norway for business activity and/or wage work performed ‘offshore’ for 30 days or more during a 12-month period.
The court had to decide on two separate questions: Firstly, on the understanding of the term ‘offshore’ and secondly, on whether paid days off settled abroad shall count under the 30-days requirement.
Where does the inner border of the offshore clause go?
It is already established that the external border of the term ‘offshore’ is where the Norwegian continental shelf ends, therefore the disagreement concerned the inner border. The taxpayers argued that the shore was on the baseline, so that ‘offshore’ meant off the baseline. The state however argued that ‘offshore’ meant off the land.
The Supreme Court agreed that the common meaning of the term spoke for an inner border outside land, but that the ambiguity of the term opened for disregarding the common meaning of the term. The court argued that because parts of the taxable activities under the offshore clause were mobile, the inner border should be set closer to land than the baseline. Legal policy considerations were also put forward, although these considerations could speak for both sides. However, some specific administrative practice, etc. supported the view of the state. Thus, the state ended up winning at this point, meaning that ‘offshore’ encompasses the area all the way from land to the continental shelf.
Should paid days off settled abroad count in the 30 days?
The parties also disagreed on whether paid days off settled outside of Norway should count in the 30 days.
The Supreme Court ruled that the wording should be understood so that only active working days should count i.e., that it was incorrect of the tax authorities to count paid days off earned in Norway but settled abroad. A different view would have led to the employee's rotation scheme (i.e. how many paid days off the employee receives for each working day) being decisive for the tax liability. This interpretation is in line with the main rule on income from employment in Article 15 (1) of the OECD Model Tax Convention, basing tax liability on income-creating activity/active days in the other state.
Consequences of the judgment
Relevant for a vast number of employees
As a result of the judgment, the Tax Appeal Board’s decision was overturned for several of the employees being part of this case. The case was however brought as a pilot case, meaning that the judgment also affected 190 other taxpayers in cases that were put on hold pending the outcome of this case.
Furthermore, employers and employees covered by the offshore clause should review previous tax returns to consider if there could be grounds for changes. In Norway, a taxpayer has access to change the information in the tax return three years following submission.
Relevant for companies
The judgment is also relevant for companies carrying out business activities ‘offshore’. This is because the relevant Article in the tax treaties also concerns the existence of an ‘offshore’ permanent establishment.
It is likely the term ‘offshore’ for companies will have the same meaning as for employees. This means that the activities carried out within the baseline would be covered by the offshore clause in the tax treaties.
Criticism of the Supreme Court’s interpretation of the term ‘offshore’
Regarding the ‘offshore’ criterion, the Supreme Court has – with this judgment – ruled that large parts of the Norwegian coast are located ‘offshore’.
One consequence of the ruling is that the term ‘offshore’ does not have an independent meaning in the offshore clause. Thus, it is no longer necessary to distinguish between offshore clauses in tax treaties with and without ‘offshore’ explicitly included in the provision.
Considering that the presumption is that parties to a bilateral treaty do not agree on terms without substance, it is our view that the common understanding of the term ‘offshore’ should have outweighed the other arguments, including the coastal state’s desire to tax income from mobile petroleum activities.
Partner, Deloitte Norway
Associate, Deloitte Norway