Allocation of profit to branches

Norwegian companies with a branch abroad are tax liable to Norway and may be subject to taxation in the branch country. Foreign companies with a branch in Norway or on the Norwegian continental shelf may be tax liable to Norway. The profit you allocate to the branch according to the domestic law of the country and any tax treaty forms the basis for the taxation of the branch.  

All tax liable companies and branches must file a tax return and relevant topics in the business information. 

Innhold på denne siden:

Who does this apply to?

A company can become tax liable in a country either by being tax resident in the country or by conducting business in the country. This applies to: 

  • Norwegian companies with activities abroad, and 
  • Foreign companies conducting business in Norway or on the Norwegian continental shelf. 

When foreign companies carry out business activities in Norway, we refer to it as a branch. Similarly, business activities carried out by Norwegian companies outside of Norway are referred to as branches. 

Income and costs allocated to the branch according to the country's domestic law and any tax treaty form the basis for the taxation of the branch. We refer to this as allocation. 

If you have business activities in two or more countries, this can lead to double taxation. This means that the business’ profits are taxed in more than one country. 

We use the term permanent establishment (PE) for branches that meet the criteria for a permanent establishment under a tax treaty. 

Foreign company with a branch in Norway

When you have a branch in Norway, you must allocate the income and expenses from this branch's business activities to Norway. We refer to this as direct allocation. Norwegian tax law determines whether the income or expenses should be part of the tax basis for the foreign company. 

The foreign company is the taxable entity (tax subject). The branch is not a separate tax liable entity. A foreign company conducting business through a branch in Norway is taxable for income from activities here or on the Norwegian continental shelf. We refer to this as limited tax liability under section 2-3 of the Taxation Act and section 2 and 1 of the Petroleum Taxation Act. The scope of the tax liability may be limited by a tax treaty. 

Illustration showing foreign company with branch in Norway.

Norway can only tax the income in the branch that results from the branch’s business activities. Correspondingly, only expenses related to the activities of the branch are deductible. 

The Norwegian Tax Administration Act regulates whether foreign companies must submit a tax return and what information the company must include in the tax return.  

You must keep separate accounts related to the economic activities in the branch. These branch accounts serve as the basis for determining the profit you should allocate to the branch. For temporary assignments in Norway, the project's accounts are often the basis for determining the branch's profit. 

If there is a tax treaty between the company’s home country and Norway, the allocation of profit should be carried out according to the provisions in the tax treaty. 

A tax treaty can limit Norway's right to tax certain incomes.  

Where there is a tax treaty, you must: 

  • determine which income and expenses should be allocated to the branch 
  • determine whether the tax treaty limits Norway's taxation rights 

If there is no tax treaty between the company’s home country and Norway, you must examine the rules in the home country to avoid potential double taxation. 

More on this topic: 

When there is a tax treaty, you need to consider:

  • what the specific tax treaty states, and
  • internationally recognised guidance for interpreting the specific tax treaty

Tax treaties are not all the same – they are entered into at different times, negotiated between different countries, and may have different wording. You must refer to the specific tax treaty relevant to the branch to determine if and how the tax treaty limits Norway's taxation rights.

Tax treaties are usually based on model treaties developed by the OECD or the UN. Article 5 of these model treaties describes the circumstances under which a permanent establishment is established. Article 7 contains provisions granting the source state the right to tax income attributable to the permanent establishment. 

Norway does not tax income from the branch based on the tax treaty. There must be a legal basis in Norwegian law for the income to be taxed in Norway. 

When articles in the tax treaty are based on the OECD model tax convention, you find guidance provided in the OECD's commentary to the model convention. Similarly, you use the UN's commentary for treaties based on the UN model convention. 

Further guidance on the allocation of profit to permanent establishments can be found in the two OECD reports from 2008 and 2010 where the "Authorized OECD Approach" (AOA) is presented. These are often referred to as the “AOA reports.” The AOA provides general guidance for allocation and offers guidance for specific areas like banking, insurance, and other financial institutions. Read more about bank branches and branches of other financial institutions under Banking and Financial Services (in Norwegian only). 

Most of the tax treaties Norway has signed follow the OECD's model tax convention and the AOA report from 2008, also known as the limited AOA. Some treaties follow guidelines given in the AOA report from 2010, also known as the full AOA. This includes the treaties with the UK, the Netherlands, Belgium, Germany, and Cyprus. The guidance in the reports is comprehensive. The differences between the model tax convention with comments and the AOA reports from 2008 and 2010, respectively, are significant for determining which transactions you should price according to the arm's length principle. 

Types of limited tax liability for foreign companies with a branch in Norway 

Type of limited tax liability 

Tax liability 

Reporting obligation 

Method of profit allocation 

No tax treaty 

Yes 

Yes, tax return and business information 

Direct allocation 

No permanent establishment under the tax treaty 

No 

Exemption from submission upon application 

Not applicable 

Tax treaty and permanent establishment - OECD model tax convention 2008 

Yes 

Yes 

Direct allocation with the application of limited AOA 

Tax treaty and permanent establishment - OECD model tax convention 2010 

Yes 

Yes 

Direct allocation with the application of full AOA 

 

The table provides an overview of the frameworks applicable to foreign companies with a branch in Norway. We distinguish between four types of cases that affect the company's tax liability, duty of disclosure, and choice of method for allocating profit to the branch. 

Some temporary projects related to construction, installation or assembly can meet the conditions in tax treaties to establish a permanent establishment referred to as "Construction PE." 

This type of permanent establishment arises only when the activity lasts beyond a certain period. In the OECD model tax convention, this is 12 months, but the period can be longer or shorter in individual tax treaties. 

To determine taxable income in Norway, you must generally base it on the received contract remuneration. Then you adjust for the portion of the income related to activities performed outside Norway, such as remuneration for planning, purchasing, and prefabrication. Taxable income is thus limited to compensation for activities taking place at the permanent establishment in Norway. Taxable activities include all activity performed at the company's risk, including activities undertaken by subcontractors. 

You can deduct costs related to income-generating activities at the permanent establishment. This requires an assessment of whether the costs are incurred for the purpose of the PE. 

For permanent establishments with limited duration, such as "Construction PE's," questions may arise about deductions for costs incurred before the establishment of the permanent establishment or after its termination. 

Both preparatory costs and subsequent costs may be fully or partially deductible. This needs to be assessed on a case-by-case basis. The key factor for the assessment is whether the cost has arisen due to the execution of the project in Norway. Preparatory costs before establishing the permanent establishment can include tender costs, preparation costs, or transportation costs. Subsequent costs may include repair and maintenance costs, warranty work, etc.

Allocating profit to a branch in Norway

The separate entity approach and the arm's length principle are important principles when allocating profit to a branch. 

The separate entity approach means that you should consider the branch or permanent establishment an independent entity when allocating profit to the branch for tax purposes.

Determination of profit for the branch can therefore result in: 

  • a profit that is taxed in Norway, even if the company's overall accounts in the same period show a loss, or 
  • a loss in Norway even if the company's overall accounts in the same period show a profit

The arm's length principle will apply to the pricing of certain transactions between the branch and the headquarters.

When allocating income and expenses to the branch, it is important to understand the economic activity that takes place through the branch. All activities in Norway or on the Norwegian continental shelf will be considered the company's own business. This also includes activities performed by subcontractors. 

You must analyse and describe which functions are performed at the branch, which assets the branch uses, and what risks are associated with the branch. Since assets, risks, capital, rights, and obligations legally belong to the company, the analysis must show which of these are attributable to the branch for tax purposes. This is referred to as a functional and factual analysis. This analysis is similar to the clarification of controlled transactions described in the OECD Transfer Pricing Guidelines. 

The analysis forms the basis for the direct allocation of income and expenses to the branch accounts.

If you are subject to documentation obligation, this analysis must be part of the documentation.

You must describe all functions performed by the branch. The functions carried out by the branch will determine which assets and risks belong to the branch.

Functions that are essential for risk management and decision-making in the business are referred to as significant people functions (SPF). You need to assess what constitutes SPF on a case-by-case basis.

Key points in this assessment include:

  • the extent to which the branch manages risk
  • which key decisions are made by persons associated with the branch 
  • how these decisions affect value creation in the branch

Functions will have significance and value for the company even if they are not designated as SPF. Therefore, it’s important to describe all functions in the branch.

You must identify which assets the branch is the economic owner of. The branch is the economic owner of an asset when it has the right to the income and is responsible for the obligations (costs/losses) associated with the asset. This can include, for example: 

  • the right to income from the use of the asset 
  • the right to receive royalties 
  • the right to claim depreciation deductions 
  • the right to any capital gains from sales 
  • the obligation to bear development costs 

For tangible assets, economic ownership is linked to the place where the asset is used in income-generating activities (place of use). For intangible assets, economic ownership is related to where the SPF is performed.

Risk always follows function. This means that when the branch has a function, you should allocate the risks associated with that function to the branch.

Examples of risk include:

  • market risk – changes in the market that have economic consequences for the business, such as lower demand 
  • inventory risk – obsolescence, damage to inventory 
  • credit risk – risk of losses on receivables 
  • operational risk – risks arising from operations, such as damages or errors occurring at the construction site 
  • product risk – risk that the product does not function or does not meet contractual requirements 
  • currency risk – changes in exchange rates

Rights and obligations arise from agreements that the company has entered with other parties. This applies to agreements with both independent and related parties. Such agreements may, for example, grant the company the right to compensation and/or the obligation to deliver goods or services.

To determine which rights and obligations belong to the branch, you must base your assessment on the branch's functions, assets and risks. This follows from the functional and factual analysis.

The branch must have adequate financing, including equity capital (free capital), to support the rights and obligations it holds.

You need to include all income and expenses allocated to the branch in your branch accounts. The branch accounts in this context are purely tax accounts that form the basis for reporting to the Norwegian Tax Administration. This applies to agreements you have with:

  • independent companies 
  • related companies (controlled transactions) 

Additionally, you need to include income and expenses resulting from transactions between the branch and headquarter in your branch accounts.

For the pricing of controlled transactions, use the guidance in the OECD Transfer Pricing Guidelines.

For determining compensation for dealings, use the guidance in the commentary on Article 7 and the AOA reports.

The branch accounts provide the basis for the allocation of profit to the branch. Which will include such items as:

Branch accounts 

Income from independent companies 

+ Income from controlled transactions 

+ Income from internal transactions (dealings) 

= Total income 

Costs from independent companies 

÷ Costs from controlled transactions 

÷ Costs from internal transactions (dealings) 

= Profit/loss at permanent establishment 

 

Reporting for foreign companies with a branch in Norway

When reporting for a branch in Norway, you need to address several general questions:

  • Is the branch liable to tax? – Read more about the Scope of tax liability.
  • Is there a tax treaty between Norway and the country where the company is domiciled? – Read more about Important provisions in tax treaties.
  • How do you report in the country where the company is domiciled? – This should be checked against the domestic law of the country of residence.
  • How do you allocate income and expenses to the branch according to Norwegian domestic law? Read more about How to allocate profit to a branch in Norway.
  • What and how must the branch report to Norway? – Read more about this in the sections below.

Foreign companies are subject to an accounting obligation when they conduct or participate in business activity within the Norwegian tax area and are liable to taxation in Norway. 

You may also be subject to an audit obligation. Foreign companies become subject to audit the year after their turnover exceeds NOK 7 million.

You must prepare documentation for the activities of the branch. The documentation must show the economic events in the branch and provide an accurate representation of the branch's activities.

Where you do not have agreements and invoices, you must substantiate in other ways that the dealing is a real event of economic significance. Accounting materials or other internal documentation can substantiate that a dealing has taken place, that is, a transfer of risk, obligations, and rights between different parts of the company. You should prepare such documentation when the dealing occurs. However, the documentation alone is not decisive. You clarify dealings through the functional and factual analysis and determine whether there is an actual event of economic significance. In the analysis, the execution of functions and the behaviour of the parties are central to assessing whether there is a dealing.

Correct reporting and documentation reduce the risk of double taxation. Complete reporting makes it easier for us to assess the risk of errors in the tax return, thereby reducing the risk of a tax audit.

You may be subject to documentation obligation when you have transactions that must be priced according to the arm's length principle.

From and including the 2023 income year, all companies must submit the tax return and business information through an accounting or annual accounts system. You can find further guidance on specific topics in the overview of the contents in the tax return.

Read more about the tax return for companies and deadline for submitting the return.

Foreign companies can apply for an exemption from the obligation to submit a tax return for business activities in Norway if there is a tax treaty and the activities are not defined as a permanent establishment under the treaty.

You can find an overview of reporting obligations on my page for businesses. To log in to this page, the company must have a Norwegian organisation number.

There are several topics in the tax return that are relevant for reporting when you have activities through a branch in Norway. In addition, you must fill out additional information in the business information. 

Under the topic "Information about the taxable entity – Specification of matters that are relevant for taxation – Information on the company," the following fields are relevant for branches: 

Under "Ownership": 

  • Name of the head office enterprise
  • Country of the head office enterprise
  • Do the branch accounts cover all income, expenses, assets and liabilities for both the head office and the branch?
  • Number of subsidiaries and/or branches abroad where the entity owns or controls at least 50 percent

Under "Description of assignment for foreign contractor":

You fill out the relevant fields under the description of assignments for a foreign contractor.

When operating in Norway through a branch, you must fill out the topic "Income statement – Branch accounts income and expenses" in the business information. Here you should report income and expenses from transactions with independent parties, transactions with related parties, and identified transactions with other parts of the company. The branch accounts should show the branch's result from these transactions. 

You should fill out the topics "Branch accounts income and expenses " and " Specification of profit and loss accounts for foreign enterprises with limited tax liability." The fields under the topic should only contain tax values. The timing of income and expenses should be in accordance with the rules in Chapter 14 of the Taxation Act. As a rule, you should use the realisation principle (Realisasjonsprinsippet – in Norwegian only) when timing income and expenses for accounting purposes. 

It may also be relevant for the company to fill out other topic cards, such as "Tax treatment of fixed assets," if depreciation costs have been deducted in the branch accounts. The company must make a specific assessment of which topic cards must be filled in. 

Under the Topic "Income statement" in the business information 

Branch accounts income and expenses 

In the branch accounts, you report all income related to the activities in Norway. Here you also indicate the portion of income that is not taxable in Norway. You allocate income and expenses by entering them under the correct code in the income and expense categories for branches in the income statement. You determine the branch's result as if the branch is an independent business. 

Activities performed in Norway and/or on the Norwegian continental shelf for the company's risk are part of the company's own business. This also includes activities performed by your subcontractors. This means you must report your income generated by your subcontractors in the branch accounts. 

You can deduct expenses related to subcontractors who have performed work in Norway or on the Norwegian continental shelf. For the expenses to be deductible, they must have sufficient connection to taxable income at the branch. This also includes costs for work performed outside Norway if they are connected to taxable income in Norway. To ensure correct allocation, you must distinguish between costs for work in or outside Norway in the business information. 

You can claim deductions for expenses abroad that have benefited the business activity of the branch, such as administrative costs. 

If the branch uses the company's physical assets, the main rule is that the branch is the economic owner of the assets for tax purposes, with the right to claim deductions for depreciation. If the branch uses leased assets in its business, you deduct the actual rental/leasing costs in the branch's tax accounts. 

The deduction amount (the depreciation amount) should be submitted under "Branch account expenses," while in the topic card "Tax treatment of fixed assets," the company should show how they calculated the amount recorded as a deduction under "Branch account expenses." 

For a share of leasing costs for hired assets, these are deducted as rental costs under "Branch account expenses," and the topic card "Tax treatment of fixed assets" is not used. 

Special considerations for fabrication contracts

Fabrication contracts are agreements to produce or manufacture something, to construct plants etcetera, at a fixed price where the contractor has performance responsibility. Fabrication contracts must follow specific rules for work-in-progress (Contract Completed Method) for income and expense recognition in the Taxation Act section 14-5, to defer the recognition of profit until completion of the contract. 

You can divide the manufacturing contract into independent subcontracts. In such cases, you must perform a tax settlement for each subcontract. 

Income from fabrication contracts

Profits from fabrication contracts should be taxed in the year the contract is completed. For fabrication contracts, you should report invoiced amounts under "Income statement – Branch accounts income and expenses – Branch account income." 

When calculating "Invoiced work-in-progress at the beginning of the income year" in the code list, sum up the invoiced amounts from manufacturing contracts that are not completed by the beginning of the tax year. This amount should match the amount reported as "Invoiced work-in-progress at the end of the income year" in the business information for the previous year. 

Similarly, calculate "Invoiced work-in-progress at the end of the income year " by summing up invoiced amounts from manufacturing contracts that are not completed by the end of the accounting year. 

Read more about fabrication contracts and their valuation in the guide Skatte-ABC (in Norwegian only). 

Example 

An example of how a fabrication contract spanning over 2 years should be entered in the business information, where some of the income is not taxable in Norway. 

The example is made to illustrate how income should be recognised over time, and therefore, it does not include cost fields. 

The fields to be filled in can be found in the business information under the main topic "Income statement" in the group "Branch accounts income and expenses " and the subgroup "Branch account income". 

Start Date: 1 January 2022 
End Date: 1 May 2023 

Duration of the assignment:

 

Year 2022 

Year 2023 

Invoiced 

120 

180 

Of which not taxable in Norway 

20 

30 

AMOUNT 

Text in code list 

Year 1 

Year 2 

Goods and services delivered in Norway/on the Norwegian continental shelf invoiced to the client 

120 

180 

Income that is not taxable to Norway 

-20 

-30 

Invoiced work in progress at the beginning of the income year 

0 

100 

Invoiced work in progress at the end of the income year 

-100 

0 

Total income in the branch accounts (calculated) 

0 

250 

This example illustrates how to handle the recognition of income across multiple income years, accounting for which portions of the invoiced amounts are not taxable in Norway.

 

Costs from fabrication contracts 

You should enter fabrication costs continuously in the branch accounts. You must distinguish between direct and indirect fabrication costs. 

Work-in-progress at the beginning of the accounting year is the sum of direct costs related to fabrication contracts that are not completed at the beginning of the accounting year. Work in progress at the end of the accounting year is the sum of direct costs related to fabrication contracts that are not completed at the end of the accounting year. 

The reporting in these fields ensures that the portion of costs subject to capitalisation is not deducted until the contract is completed and the contract income is recognized. 

Costs subject to capitalisation include raw materials, semi-finished goods, power, fuel, and other auxiliary materials used directly in the production. The same applies to production wages, including holiday pay and employer contributions, for the period employees are involved in the actual production. 

Other indirect costs, such as administration and maintenance, are not included. Neither are research and development costs related to the development of goods considered costs to be capitalised. You must record such costs as soon as they are definitively incurred, regardless of whether they are capitalised for accounting purposes. Depreciation on production equipment is also not included. 

You can read more about costs required to be capitalised in the guide Skatte-ABC (in Norwegian only). 

Specification of income statement accounts for a foreign company with limited tax liability 

Certain income and expense fields in the branch accounts require further details under "Specification of profit and loss accounts for foreign enterprises with limited tax liability." This applies to the following fields: 

  • Specification of income that is not taxable to Norway - Specification of other salary/remuneration for work not performed in Norway/on the continental shelf  
  • Consultants and subcontractors that have performed work in Norway/on the Norwegian continental shelf  
  • Specification of other direct expenses  
  • Specification of share of expenses not directly related to contracts

You should enter all dealings as income and expenses in the business information under the group "Branch accounts income and expenses," within the topic of the income statement.

In addition to reporting in the business information, all dealings that are priced according to the arm's length principle must be reported under the topic "Controlled transactions/dealings and liabilities" in the tax return.

Dealings between branch and headquarters

Dealings are real and identifiable economic events ("transactions") between the branch and other parts of the company, for example the company headquarters. Dealings can, for example, be the supply of goods or provision of services. You determine the value of dealings to be included in the branch’s total taxable income. You price these dealings in accordance with ordinary market conditions and the arm's length principle.

Identifying dealings is part of the process of determining profit for a permanent establishment. The OECD presents their “Authorised OECD Approach” as a two-step process in their reports on the attribution of profits to permanent establishments from 2008 and 2010. The figure below illustrates this two-step method.

For tax purposes, dealings must: 

  • be of economic significance to the business 
  • correspond to a transaction that could have been conducted between independent parties at arm's length terms.

You identify dealings by analysing the economic activity of the branch through a functional and factual analysis. You must describe the dealings and explain their economic effects.

Companies do not use written agreements for dealings since they occur between different parts of the company and not between independent parties. Since there are no written agreements, you must document the dealings in other ways. Such documentation should preferably be prepared when the dealings occur.

You must identify and price each individual dealing. You can price dealings of the same nature collectively (aggregation). 

When pricing dealings, use the principles outlined in the OECD Transfer Pricing Guidelines.

The applicable tax treaty affects which dealings you can price in accordance with the arm's length principle. We distinguish between limited AOA (Model Tax Convention 2008) and full AOA (Model Tax Convention 2010). Read more about important provisions in tax treaties.

The figure below illustrates the main differences between full AOA and limited AOA. With limited AOA, there are fewer dealings you can price in line with the arm's length principle. Services provided by other parts of the company should then be entered at actual cost.

Dealings 

Full AOA 

Limited AOA 

Transfer of goods for resale 

Arm's length principle 

Arm's length principle 

Services 

Arm's length principle 

Charge services at actual cost 

Administrative services 

Arm's length principle 

Charge services at actual cost 

Use of company's intangible assets 

Arm's length principle 

Charge at actual cost 

Use of company's tangible assets 

Depreciation 

Depreciation 

 

Limited AOA – services 

When using limited AOA, services and administrative services should initially be charged at actual cost. However, if you provide these types of services to third parties as part of your regular business activity, you should still price such dealings at an arm's length price. The price of the dealings should then be equivalent to the price you charge third parties.

Norwegian companies with branches abroad

Norwegian companies that carry on business activities abroad are subject to tax in Norway for income from these activities (global tax liability). 

The allocation of profit to the branch abroad must be done according to the rules in the country where you have business activities, and limitations as may follow by the relevant tax treaty.

The Norwegian company is the taxable entity (tax subject). A Norwegian company conducting business through a branch abroad is, in principle, liable for tax in Norway for all income earned in Norway and abroad. This follows from the global income principle for taxation, as stated in the section 2-2 (6) of the Taxation Act.

Illustration showing Norwegian company with branch abroad.

You allocate profit to the branch according to the rules in the country where the branch is located. To allocate the profit, you need to look into the branch country's regulations.

Tax treaties between Norway and the branch state regulate how to avoid or reduce double taxation on profits from the branch. If there is such a treaty, the allocation of profit must according to the provisions of the tax treaty.

If you carry out business activities in multiple countries, this can lead to double taxation. This means that the business' profit is taxed in more than one country. 

Tax treaties have two methods to avoid double taxation: 

  • Credit method: Norway reduces the calculated tax by the tax paid in the other country. 
  • Exemption method: Profit outside Norway is exempt from taxation in Norway. 

Norwegian companies with branches abroad can avoid double taxation by claiming a credit for taxes paid abroad. In cases where the tax treaty uses the exemption method, the company can claim income taxed abroad to be exempt from taxation in Norway. 

If there is no tax treaty between Norway and the branch country, you can claim a credit according to the rules in the Tax Act. 

You can read more about the credit deduction for companies domiciled in Norway in the guide Skatte-ABC (in Norwegian only), U-20-4 Kredittmetode, and Kreditfradrag for skatt betalt i utlandet.

You can read more about the use of the exemption method for companies domiciled in Norway in the guide Skatte-ABC (in Norwegian only), U-20-2 Fordelingsmetoden (unntaksmetoden).

From and including the income year 2023, companies are required to submit the tax return and business information through an accounting or annual accounts system. More about: 

Relevant fields in the tax return

Norwegian companies with branches abroad are tax liable for all income in Norway and must report all income to Norway. You should provide information about branches abroad in the tax return under the topic "Information about the tax subject." 

The relevant fields are: 

  • Does the company have activity with a permanent establishment/branch abroad? 
  • Number of subsidiaries and/or branches abroad where the company owns or controls at least 50 percent 
  • Branch abroad 

Norwegian companies with branches abroad are not required to submit separate branch accounts in Norway. 

More on this topic