PROBLEM AREA 3

Taxation of salary income from work in another Nordic country

The relief method used for double taxation when a Nordic citizen takes employment in another Nordic country varies. At the same time, the complicated set of rules makes it difficult to assess where the citizen should pay tax.

The barrier can be removed by simplifying the rules so that, with very few exceptions, taxation of salary takes place in the employer’s country, and the country of residence always provides relief with the exemption method.

The barrier to mobility

If a Nordic citizen takes a job in another Nordic country, income from work performed in the country of employment is generally taxed in the country of employment. Salary for work performed in the country of residence or in a third country is generally taxed in the country of residence. However, there are a number of exceptions, depending on, inter alia, whether you are a:

Private sector employee
Artist or sportsperson
Public sector employee

Depending on which group you belong to, you may be subject to different bilateral agreements on exceptions to the general rule. At the same time, the method of relief depends on which group you belong to.

Below are separate issues for private sector employees, artists and sportspeople, and public employees.

FACTS

What relief means

Relief occurs when a citizen becomes taxable in both the employer's country and the country of residence. Here, the country of residence can tax the citizen's entire global income. However, the country of residence must compensate for the tax already paid on earned income in the employer's country.

Depending on the individual's situation, the relief method used by the country of residence varies.

For some, the so-called exemption method is used. Here, no tax is payable in the country of residence on income taxed in the country of work.

For others, relief is given according to the so-called credit method, where the country of residence taxes the entire income, but provides a reduction of the lesser of the following two amounts: 1) The tax paid in the country of work or 2) the tax calculated in the country of residence on the income in the country of work. For the individual, the credit method has negative financial consequences if the country of residence has a higher tax rate than the country of employment.

Private sector employees

Private sector employees are taxed according to Article 15 on personal services in the Nordic Tax Treaty. Here, the main rule is in line with the OECD Model Tax Convention – i.e. income from work performed in the employer's country is generally taxed in the employer's country, while income from work performed in the country of residence or in a third country is generally taxed in the country of residence.

This means that a person living in Norway but employed by a Swedish employer in Sweden will generally pay their tax in Sweden. If the person works partly from home in Norway, a corresponding part of the salary income is taxed in Norway. Income from work performed in third countries – e.g. in connection with business trips – is taxed in the country of residence, Norway.

There are several exceptions to the general rule, including cross-border rules between Norway and Sweden, Norway and Finland, and Finland and Sweden. In addition, there is the former cross-border rule between Denmark and Sweden

The border crossing rule between Denmark and Sweden was abolished with effect from 1 January 1997. However, certain individuals covered by the rule can continue to use it as long as the conditions are met. However, this does not apply to residents of Denmark.

. Common to all these cross-border rules is that, contrary to the main rule in Article 15, all earned income is taxable in the country of residence and not in the country of work

To be thorough, it should be mentioned that there are special provisions for the taxation of salaries for work performed on board a ship in international traffic or on board an aircraft. These two categories are not discussed further in the report.

Another significant exception is the Danish-Swedish cross-border agreement, the Øresund Agreement. According to the Øresund Agreement, under certain conditions, salaries must be taxed in the country of work, even if it is partly performed in the country of residence or a third country. The agreement means that if the conditions are met, the entire salary income is taxed regardless of where the work is performed in the country of employment

Unfortunately, today there are challenges associated with the various bilateral agreements:

Border crossing rules between Norway and Sweden, Norway and Finland and Finland and Sweden
Taxation of earned income in the country of residence instead of the employer’s country can have disadvantages for some groups. The cross-border commuter rule from Sweden to Norway applies to job commuters who are covered by Norwegian social security, which means that a social security tax of 8% of the salary is deducted in Norway. The commuter does not receive a deduction directly in the Swedish tax with the social security tax, but instead a deduction for the social security tax in their Swedish tax return with a lower tax value. This means that cross-border commuters are worse off from a tax perspective than a Swedish employee who also resides in Sweden but not in a municipality where the cross-border commuter rule applies.

According to reports to the Secretariat of the Nordic Council of Ministers, the cross-border commuter agreements with the country of residence taxation also entail some administration that is perceived as cumbersome for the individual citizen covered by the rules

"Sammanställning av granshinder med anknytning till det nordiska dubbelbeskattningsavtalet” (Summary of border obstacles related to the Nordic double taxation treaty), NMRS, 18 August 2016.

In the Øresund Institute's analysis "Upplevda konsekvenser av det Nordiska skatteavtalet” (Perceived Consequences of the Nordic Tax Agreement), commissioned by Grensetjänsten Norge-Sverige, Granstjansten Sverige-Finland-Norway and Øresunddirekt, the general perception among cross-border commuters and employers is that the exemption of taxation in the country of residence leads to a worse and less predictable tax situation with unclear rules, where it is difficult to get a correct answer. The rules also entail a significant increase in administration

Perceived consequences of the Nordic Tax Agreement, Øresundsinstituttet, 2018.

In the Øresund Institute's analysis from 30 November 2018, the border crossing rule between Norway and Sweden states that some people who live in a border municipality in Sweden choose not to work in a border municipality in Norway because they are subject to the border rule, which is both difficult to understand and financially unfavourable.

An example is further cited that people who live in a border municipality in Sweden and want to work in a border municipality in Norway pro forma register in a "non-border municipality" in order to avoid the cross-border commuter rule.

The Øresund Agreement
Before COVID-19, the Øresund Agreement has generally functioned as intended. In other words, it has ensured easy administration and a predictable tax burden for most private sector employees. However, the pandemic meant that many people who normally work across Øresund did not fulfil the requirements for taxation solely in the country of employment due to lockdowns, repatriations and encouragement to work from home. This is because it is a requirement that at least half of the working hours in a continuous three-month period must be performed in the employer's country.

The category that was hit hardest was employees living in Denmark who normally worked and paid tax on their salary income exclusively in Sweden. Due to the pandemic, many of these employees have been working from home in Denmark and therefore have to pay tax on their salary in Denmark instead of Sweden. In terms of taxation, this was a hard blow to their personal finances – among other things, the marginal tax rate increased by up to 30 per cent. Due to lockdowns and repatriations, Swedish employers' contributions to a Danish cross-border commuter's Swedish pension scheme also risked being taxable as earned income in Denmark at the time of contribution and again in Sweden at the time of payment in connection with retirement.

Danish cross-border commuters, who had organised their private finances based on Swedish taxation in accordance with the Øresund Agreement, received a tax penalty unless they disobeyed the authorities' recommendations and continued to commute. For cross-border commuters living in Sweden and working in Denmark, it was often a tax advantage that not all income was taxed in Denmark.

Artists and sportspeople

Employed artists and sportspeople are generally taxed according to Article 17 of the Nordic Tax Treaty

Note that remuneration for publicly employed artists and sportspeople is covered by Article 19, except in the case of public professional activities.

. Here, the main rule for the right of taxation is the same as for private sector employees described above. The problem for this category of commuters arises because of the relief method used in Article 17.

As the country of residence can tax the employee's global income, i.e. also salary for work performed in the employer's country, the country of residence has an obligation under the Nordic Tax Treaty to provide relief for the double taxation situation that arises.

The relief method used by the country of residence to eliminate double taxation of earned income differs depending on which article of the Nordic Tax Treaty applies. The exemption method is generally used for personal services (Article 15) and income from public sector employment (Article 19).

Exemption relief means that no tax is payable in the country of residence on income taxed in the country of work.

On the other hand, the relief method for Article 17 income is the so-called credit method. The credit method means that double taxation is eliminated by reducing the tax calculated in the country of residence by the smaller of the following two amounts:

Tax paid in the country of work
The tax calculated in the country of residence on the income in the country of work

The method results in a credit/deduction being given for the entire tax paid in the country of work when the tax in the country of work is lower than the tax in the country of residence. And then the country of residence charges tax on the difference between the tax in the country of work and the country of residence.

However, the maximum credit is an amount equal to the country of residence's calculated tax on the income in the country of work, i.e. if the tax in the country of work is higher than the tax in the country of residence, no deduction is granted in the country of residence.

The fact that the credit method is used for commuting artists and sportspeople leads to tax discrimination. It can also be added that there is discrimination depending on whether the cultural worker is employed by a public or private institution. A public sector employee typically has the more favourable exemption relief, whereas the private sector employee has the credit relief described above.

Example

A soprano who is permanently employed by Malmö Opera and lives in Denmark pays A-SINK tax on 15% of her salary in Sweden. Danish authorities also calculate ordinary Danish income tax on the salary, with deductions for the tax paid in Sweden.

An employee at the Malmö Opera box office, who is also resident in Denmark, pays regular SINK tax in Sweden at 25% and pays no tax in Denmark. If they both have a gross salary of SEK 600,000 per year, the cultural worker's net salary per year will be approximately SEK 56,000 lower than the net salary of the regular employee, despite the fact that they both have the same salary and the same workplace

This is an example from the NMRS "Sammanställning av granshinder med anknytning till det nordiska dubbelbeskattningsavtalet" [Compilation of border obstacles related to the Nordic Double Taxation Agreement] from 2016.

Public-sector employees

According to the general rule, income paid by a contracting state, a political subdivision, a local authority or a public law institution of a contracting state to an individual for the performance of duties for that state, subdivision, authority or institution shall be taxable only in that state. This means that if an employee lives in Sweden and works for a public Danish employer, the salary is taxed in Denmark and vice versa.

However, the general rule does not apply to salary income for work performed in the country of residence if the person is a citizen of the country of residence (or did not become a resident of the country of residence for the sole purpose of performing the profession). This means that most public sector employees are not covered by the general rule.

If the main rule does not apply, the part of the salary that relates to work performed in Denmark is taxed in Denmark, and salary income for work performed in Sweden is taxed in Sweden.

The scope of the barrier

The area is considered a problem of great magnitude, as it is assumed that many citizens at some point in their working life live in one country and work in another. In addition, the administrative burden is expected to be high – for citizens, businesses and authorities alike.

Solution

Considerable simplification of the rules is recommended to avoid favouring certain groups and to make it much easier to navigate. Specifically, it is proposed that taxation of salary take place in the employer country, and the country of residence provides relief with the exemption method. This is regardless of whether they are private employees, cultural workers or public employees. Working from home in the country of residence must be equated with working in the country of employment. The same applies to business trips and other temporary work in the country of residence and third countries.

The above assumes that the employee's work from home does not constitute a permanent establishment in the country of residence – see more on this in the section on the permanent establishment issue above.

If the above is considered too far-reaching a proposal, it may also be considered whether the provision should only come into play when a predominant part, e.g. 50% of the work is performed in the employer's country

If deviating from the internationally-recognised distribution reflected in Article 15 of the Nordic Tax Treaty is considered too big a step, the employer country's right to tax the entire income may be limited. For example, it may be a prerequisite that at least 50% of the work should be performed in the employer's country in order for the employer's country to be entitled to tax the entire salary income.
However, such a provision should not be modelled on the Øresund Agreement, where there is a requirement that at least half of the working time in a continuous three-month period should be performed in the employer's country. If the employer country's right to tax all earned income is to be limited with a requirement that, for example, at least 50% of the work must be performed in the employer country, it should be measured over a full tax year. To prevent commuters from having issues, one possibility when dealing with external causes, e.g. closed borders due to COVID-19, is to equate working from home in the country of residence with working in the country of work.

Similarly, it can be considered that the employer country's right to tax the entire income depends on whether the employee is also covered by the employer country's social security system according to the choice of law provisions in EU Regulation 883/2004. This is to avoid speculation in combining low taxes in one country with low social security contributions for the employer in another country

In this part, inspiration can be drawn from an agreement between Försäkringskassan and Udbetaling Danmark (formerly Den Sociale Sikringsstyrelse). Here, it has been agreed on the basis of the EU regulation that, under certain conditions, up to 50 per cent work from the country of residence is permitted without the applicable social security legislation shifting from the country of work to the country of residence.

Benefits for citizens/businesses

The recommended solution will give Nordic citizens more predictable rules when working for an employer in another Nordic country. The proposed solution also shifts the administration from employers and employees to the tax authorities. Furthermore, it shifts the responsibility for the distribution of tax revenue away from the individual taxpayer to the competent authorities.

This allows for greater flexibility for remote working and reduces the risk of employees running into tax issues in the event of closed borders like during COVID-19.

Implications for the Nordic countries

As the proposed solution implies that taxation takes place exclusively in the employer's country, a fair equalisation scheme must be implemented. It is proposed that the equalisation scheme be based on the same principle as the general rule. This means that it follows Article 15 of the Nordic Tax Treaty and is in line with the internationally recognised distribution regarding the number of working days outside the country of work – see the implementation of the common electronic calendar.

It is likely that it will primarily be Swedish municipalities with many cross-border commuters to Norway, who are currently covered by the cross-border commuter rules, that will lose some of the revenue they currently have. The proposed equalisation scheme may be designed with special consideration thereto.

The shift from credit to exemption for Article 17 income for artists and sportspeople will reduce tax revenue in the country of residence, but this category of employees is estimated to be so small that it will not have a significant effect.

With an updated Nordic Tax Withholding Agreement combined with a common digital calendar, the authorities – see recommendation in the section on unnecessary registration for companies – will also experience a reduced administrative burden compared to the challenges the authorities face today.