In a decision published on August 24 2023 (case SKNS1-2023-54), the Norwegian Tax Appeal Board considered a company’s tax liability under the tax treaty between Norway and Germany, with particular reference to Article 5 No. 3 regarding permanent establishment. As work performed in Norway on four ships was considered one joint assignment that exceeded 12 months, the Tax Appeal Board concluded that the activity constituted a permanent establishment in Norway under the tax treaty.
Background
The taxpayer (a German company) installed ship equipment on four Norwegian ships owned by company B. The installation work was to take place from 2019 to 2023 at a Norwegian shipyard. The equipment was to be installed on one ship at a time, and the work on one ship was to be completed before the work on the next ship began. Settlement would be paid after each partial delivery.
The installations were to take place for a limited period, which would imply several short periods of stay and activity in Norway. The work on the first ship took place over a period of just under six months. In 2019, the company spent 34 days in Norway spread over 14 periods. The work on the second ship resulted in 11 days of activity in Norway, with a planned completion within a 12-month period.
The Norwegian Tax Appeal Board’s judgment
The company was liable to tax in Norway under the domestic rules (see the Norwegian Tax Act, Section 2-3, first paragraph, letter b).
The main question was whether the tax treaty between Norway and Germany prevented Norwegian taxation as there was no permanent establishment in Norway (see Article 7 in the tax treaty; also Article 5). It was uncontested that the situation was regulated by Article 7 where qualifying construction and installation projects constitute a permanent establishment when the work lasts for more than 12 months (see Article 5 No. 3).
The first question the Tax Appeal Board had to assess when considering if there was a permanent establishment was whether the installation work on the four ships should be considered as one joint or more separate assignments.
The work was regulated in a contract and the Tax Appeal Board concluded that there was a commercial and geographical unit between installations (partial deliveries), which indicated that the work should be considered as one assignment. It was underlined that the work was carried out at the same place, that the work was for the same client, and that the work had the same or approximately the same content, even if it was carried out on different ships. The fact that the agreement was divided into partial deliveries did not change the assessment.
The next question in these types of cases is how the months should be counted under the permanent establishment rule for construction and installation work. The Tax Appeal Board referred to the tax office’s decision regarding this question. The company had stated that it had only been present in Norway for a few days and that there were periods when the company was not present, which implied that the periods when the company was not in Norway were to be excluded from the counting of the 12-month requirement. This was rejected with reference to the OECD comments to include temporary cessation of work and work stoppage due to weather conditions, material conditions, or other factors when counting the construction time. This meant that the time between installations also had to be included.
Since the installation work was planned, and agreed, to be carried out over several years, it was clear that the 12-month requirement was met. Consequently, the Tax Appeal Board concluded that the company had a permanent establishment in Norway and thus was liable to tax on its activities.
Key takeaway
The Tax Appeal Board decision shows that once there is a strong connection between deliveries, it is challenging to argue that “the work is completed or permanently abandoned”, which can stop the counting of the 12-month period, according to the OECD comments.
