Norwegian proposal to change the VAT regulations for cross-border services

The Norwegian Ministry of Finance has issued a proposal to change the VAT regulations on cross boarder services. The proposal will apply for cross-border service flows in companies with establishments in more than one country, e.g., a company with its head office in Sweden and a branch (NUF) in Norway, so-called MLE companies (Multi Location Entities). 

Background for the proposal

The purpose of the changes is to secure the tax base in the future, adapt the rules to a more digitised economy and ensure that the rules realise the destination principle as far as possible. 

According to the destination principle the right of taxation lies with the country where the consumption of the goods or service takes place. This means that services and goods imported to Norway are subject to Norwegian VAT, and export of such goods and services are exempt Norwegian VAT. The principle is to contributes to neutrality in international trade by ensuring that all providers competing in a given market are treated equally in terms of taxation.

MLEs often structure the procurement of services so that the services are purchased by one establishment (e.g., the head office in Sweden), while the services, in whole or in part, are for the use of other establishments (e.g., the branch in Norway). 

In general, the Norwegian Ministry of Finance is proposing that remotely deliverable services purchased by the head office outside of Norway but used by the Norwegian branch will be subject to Norwegian VAT. The VAT should be calculated in accordance with the use of the services in Norway. 

Transactions comprised by the proposal

The proposal will primarily impact business that are not VAT liable or are partly VAT liable in Norway. This will typically be the financial sector, such as businesses within banking, insurance, healthcare, education etc. For such businesses the calculated VAT will entail a final cost.

The proposal is suggested to not have any impact on businesses that are fully VAT liable, as these entities will have a right to deduct the VAT if for use in the VAT liable activity. As these businesses will have a right to deduct the VAT, these businesses are proposed to not be comprised by the proposal.

A consequence of the proposal will e.g., be that if a head office outside of Norway purchases e.g., a software or a marketing service and this service is being used by the Norwegian branch, the Norwegian branch will be liable to calculate VAT on the part of the services which are used by the Norwegian branch. This will also apply if the services are processed by the foreign head office prior to use in the Norwegian branch. Hence, one cannot argue that the purchase has been used by the foreign head office prior to the use by the Norwegian branch. 

Further, the proposal will also compromise of costs that are not directly related to the production of a specific service or product, but which more indirectly support the general operation of the business, e.g. HR-services administrative and accounting services, IT-licences etc. To the extent that such services benefit the establishment in Norway by contributing generally to the business operated in Norway it is suggested that such services should also be considered as used by the Norwegian branch and thus VAT liable. 

At last, the proposal also comprises of sale of services directly from the foreign head office to the Norwegian customer. A possible consequence of the proposal would be that MLEs’ structure their set up with direct sales to the Norwegian customer, this to avoid the Norwegian branch to calculate Norwegian VAT. This will particularly apply for the financial sector. Due to this it is suggested that VAT is to be calculated if a foreign provider of financial services purchases services abroad and these services are for use in their sale of services to Norwegian customers. 

To achieve symmetry in the tax treatment of MLEs’ purchase and use of remotely deliverable services is also proposed to extend the right to deduct (and refund) input VAT on remotely deliverable services that are for use outside the VAT area.

It is suggested that the proposal will take effect on 1 January 2026.