Hiring-out of labor vs. Contract work: Avoid tax risks

Misclassifying a contract as a construction assignment instead of hired labor — or vice versa — can lead to significant tax consequences in Norway. That’s why it’s essential to understand the difference between hiring-out of labor and a construction and assembly contract. The classification affects whether Norway has the right to tax the income of foreign employees or companies, especially when personnel are staying in Norway for short periods.

In general, if a contract is not considered hiring-out of labor, and the employee stays in Norway less than 183 days, the working state often cannot tax the income — unless there is a permanent establishment in Norway. 

What does hiring-out of labor mean?

Hiring-out of labor occurs when a lessor provides personnel to perform work for another enterprise, while the lessor retains no responsibility for the results of the work.

In the case of hiring-out of labor, the tax treaties have special provisions allowing the working state to tax the employees’ income from the first working day.

Construction and assembly contracts

Construction and assembly contracts are characterized by the contractor’s responsibility for delivering a specific result, typically as part of a defined service — for example, designing and developing a particular product.

If the contract can’t be classified as hiring-out of labor, the working state normally can’t tax the income if the employees stay in Norway less than 183 days. Exemptions are made if the company is considered to have a permanent establishment in Norway.

Tax consequences for the employees

Salary from a Norwegian employer for work carried out in Norway is always subject to Norwegian income tax.

Individuals with foreign employers who are not fully tax liable and hired-out to work in Norway are subject to Norwegian income tax from the first day of work. If the individual is working for a company which has a construction and assembly contract, the tax treaties may limit the Norwegian tax liability if the worker stays in Norway less than 183 days during a 12-month period.

Also read: RF-1198 and RF-1199 reporting for foreign businesses

Tax consequences for the company

Foreign companies that hires-out labor in Norway are liable for Norwegian corporate taxes from the first day according to Norwegian tax legislation.

Tax treaties between Norway and other countries may relieve the Norwegian corporate tax liability on company income derived from activity in Norway.

For construction and assembly assignments, the tax treaties limit the working state’s right to tax company income if the activity does not exceed a certain period of time. These time limits vary from industry to industry, and from tax treaty to tax treaty.  

The time limits range from 6 to 12 months. Assignments on the Norwegian Continental Shelf (NCS) are regulated separately in some tax treaties such as the UK – Norway-treaty. Pursuant to the NCS-limit, assignments with a duration less than 30 days can be exempted from Norwegian tax liability.

Foreign companies that hires out labor from abroad to Norway often have a permanent establishment abroad and manages the business from the other country. Thus, the foreign company will normally not have a permanent establishment in Norway. This means that Norway normally does not have the right to tax the business income in Norway. 

Also read: PAYE tax scheme in Norway

How do you determine whether a contract is hiring-out of labor or not?

The following criteria suggest that labor is being hired-out:

• The client is responsible for managing the work.
• The client is responsible for, or bears the risks relating to, the results of the work.
• The client is responsible for the workplace where the work is carried out.
• An hourly rate or time-based price has been set.
• The client's materials and tools are used during the performance of the assignment.
• The lessor does not unilaterally determine the number of employees or their qualifications.

An example on hiring-out of labor

Company A has been given a construction assignment, and sends a request to Company B to take on work for company A.

A contract with responsibility for the result is based on the provision of a specific service, such as designing and developing a specific product. If Company B is responsible for the result of the work performed, the agreement is typically a contractual agreement and not hiring-out of labor.

Hiring-out of labor is characterized by the fact that the lessor, Company B, is not responsible for the work performance of the employees. The only responsibility Company B undertakes is to make personnel available to Company A.

The classification of the contract is crucial to determine the tax liability both for the company and the employees.

Also read: Do the right things when doing business in Norway

Correct classification matters

Whether you're a foreign company operating in Norway or a client engaging contractors, misinterpreting the nature of your contract can trigger unexpected tax liabilities — for both your company and your employees.

If you're unsure how your contract will be assessed, or whether you may be subject to Norwegian tax rules from day one, our legal team can help.