With effect from January 2019, the Norwegian tax authorities have introduced a Source Tax system based on the ‘Pay As You Earn’ (PAYE) principle for individuals who are temporarily staying in Norway.
The system is inspired by the UK PAYE and the Swedish SINK model. Whilst the Norwegian tax authorities will reap the same benefits as Sweden and the UK, employers and employees will also benefit from reduced administration and a simpler tax system.
The new PAYE system is a fixed tax rate system (25% where social security is due and 16.8% where the individual is exempt from social social security contributions). Under this new system, whilst no deductions may be claimed against taxable income, individuals will not be required to file a tax return.
The PAYE system is restricted to those individuals who are tax non resident in Norway and/or in the first year of tax residence. Seafarers and workers on the continental shelf can not choose PAYE.
In addition, only those individuals who have income below a threshold can opt for this system (in 2019, NOK 617 500). If this threshold is exceeded, the individual must file under ‘Ordinary Taxation’ (a progressive tax rate system, where deductions can be claimed against taxable income and tax returns must be filed). The earnings threshold is not affected by the length of stay in Norway (unlike ordinary taxation where deductions and progressive tax is based on applicable months in Norway).
If an employer covers the costs of commuting, the relevant amount should be included as taxable income. Therefore when determining an individual’s total income for the purposes of the PAYE threshold, all cash and non-cash benefits provided for the commuting arrangement should be considered. The exception is if the cash and non-cash benefits have been provided for a business trip and other stays of shorter duration, in this case, the coverage can be excluded from taxation.
PAYE is default as long as the conditions are fulfilled. Individuals can opt to be taxed under Ordinary Taxation when applying for their tax card. It is not necessary for spouses to file under the same system. An individual can change from PAYE to ordinary taxation however, it is not possible for an individual to change from ordinary taxation to PAYE.
When applying for a tax card, provided an A1 Certificate or Certificate of Coverage can be presented at the tax office, or is already registered with the Norwegian social security authorities (NAV), the individual will be exempt from social security contributions in Norway and the tax rate is reduced to 16,8%.