Taxation of investment accounts for US expat during stay in Norway

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Taxation of investment accounts for US expat during stay in Norway

Post by wineandplaya »

We're looking into moving from the US to Norway for a period of two years to allow DW to take a job in academia there. I'm trying to understand the consequences for our US investment accounts if we become Norwegian tax residents.

From what I've gathered so far, Norway doesn't recognize IRAs and consider them regular brokerage accounts, cf. https://www.skatteetaten.no/rettskilder ... ra-konto2/ (in Norwegian). Does this also apply to funds in a 401(k)? What about a solo-401(k) account?

On the other hand, this might not be as bad as it first sounds, since Norway also doesn't tax capital gains or dividends until you withdraw them from the account (is this correct?). This at least according to this website: https://www.nordnet.no/blogg/dette-bor- ... a-utbytte/ (in Norwegian). So I probably don't have to worry about paying upwards 32 % tax on dividends, if I reinvest them inside the same accounts.

As a corollary, does the taxation only at withdrawal from accounts mean that we could realize capital gains inside our (taxable) brokerage account without tax consequences in Norway? This could be interesting if the foreign earned income exclusion (FEIE) could be used to exclude our Norwegian income, putting us in the 0 % capital gains bracket. Not sure it makes sense for us since I think it would also disqualify us from the child tax credit, but it could be worth contemplating.

Finally, Norway has a wealth tax ("formuesskatt") which applies after a meager 1.5M NOK ($172k) exclusion amount. The tax is 0.85 % which applies after a 25 % value discount for shares, so effectively a 0.6375 % tax (= 0.85 * 0.75) above the exclusion amount. Does this apply to all our investment accounts, including IRAs, (taxable) brokerage and 401(k)?
SeaScape
Posts: 21
Joined: Sun Jul 11, 2021 5:16 pm
Location: Norway

Re: Taxation of investment accounts for US expat during stay in Norway

Post by SeaScape »

The tax treaty between the US and Norway is ancient, from 1971. Recognized pensions on the Norwegian end is basically only payments from defined benefit plans. Both IRA and 401(k) are treated as taxable brokerage accounts in Norway. The valuation of the holdings is included in the wealth tax at 75% of market price on 31 Dec.

You are taxed on capital gains for any trades in these accounts. It is not tax sheltered. You pay the tax in the year the trade tax place. Capital gains is effectively 31%. You incur this tax whether or not you take a distribution from the account. If you take a distribution, then the US income tax paid on the distribution will be applied to your capital gains in Norway. The tax basis for the gains is the price paid on purchase (even if the purchase date was before you came to Norway) converted to NOK using the exchange rate from Norges Bank on the date of purchase. The sales price is the date the trade settles and is also converted to NOK using the exchange rate on the settlement date. You risk paying tax on phantom currency gains. FIFO method is mandatory in calculating gains.

The above is for stocks and mutual funds with 80%+ stock. Bond funds are treated as bonds, and dividends taxed as personal income. 100% of the value of bond funds are included in the wealth tax.

The wealth tax exclusion is 1.5M NOK per person. Spouses are treated as one in calculating wealth tax, so a couple effectively has an exclusion of 3M NOK. All debt is deducted from net worth before calculating personal wealth for tax purposes.

Please do not be scared off. The Norwegian tax system is actually much easier than the US, and you get a lot for your taxes. And Norway is a wonderful place for children. That said, if you come you should sell all your stocks and funds in your 401(k) shortly before you leave for Norway to lock in the higher tax base, put them in index funds and don't touch them while you are taxable in Norway.

You should also look at Article 15 in the US-Norway tax treaty to determine whether DW will pay income tax on salary. If you use the social security agreement to avoid paying Norwegian social security contributions, you will not be eligible for Norwegian social benefits, e.g child allowance.
Topic Author
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Taxation of investment accounts for US expat during stay in Norway

Post by wineandplaya »

OK, thanks SeaScape for explanations. So one thing we can do is to realize all capital gains inside the 401(k)/IRA before expatriating. Does that not give us a good opportunity to generate a capital loss (in the eyes of the Norwegian tax agency) while in Norway? If the IRA/401(k) goes down a few percent after moving, we can generate a capital loss big enough to offset the dividends at least?
SeaScape wrote: Wed Jul 14, 2021 12:25 pm You pay the tax in the year the trade tax place. Capital gains is effectively 31%. You incur this tax whether or not you take a distribution from the account.
Are you sure about this? It doesn't match what I read here: https://www.nordnet.no/blogg/dette-bor- ... a-utbytte/ [NO]. Freely translated (I speak Swedish, so maybe I've misunderstood something):
Aksjesparekonto Brokerage account
In 2018 it was the case that gains from sale of stocks etc. in the account was not taxed at the realization, but first when the funds were withdrawn from the account. For dividends was it, on the other hand, not possible to have the taxation deferred.

Effective 2019, the system was expanded, so that it also includes postponed taxation of dividends. This means that dividends from securities in a brokerage account is not taxable continuously when received, but will be included in the account and be taxed when the funds are withdrawn from the account.
This is also the information directly from Skatteetaten: https://www.skatteetaten.no/person/skat ... konto-ask/

Edit: I was assuming that "aksjesparekonto" just referred to a regular brokerage account, but I might have been wrong about that. It looks like it's a special tax-advantaged account with certain restrictions. So a US brokerage probably isn't classified as a "aksjesparekonto".
Topic Author
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Taxation of investment accounts for US expat during stay in Norway

Post by wineandplaya »

According to Nordnet, Norwegian wash-sale rules aren't very precisely defined, but you are supposed to wait "at least a week" until you buy the same stock or fund: https://www.nordnet.no/faq/1374-er-det- ... egory=1363

I guess that this is good to know if you want to realize capital losses inside a US IRA or 401(k).
SeaScape
Posts: 21
Joined: Sun Jul 11, 2021 5:16 pm
Location: Norway

Re: Taxation of investment accounts for US expat during stay in Norway

Post by SeaScape »

wineandplaya wrote: Wed Jul 14, 2021 3:10 pm Edit: I was assuming that "aksjesparekonto" just referred to a regular brokerage account, but I might have been wrong about that. It looks like it's a special tax-advantaged account with certain restrictions. So a US brokerage probably isn't classified as a "aksjesparekonto".
The Nordnet article is referring to an "aksjesparekonto". The "aksjesparekonto" is a tax-sheltered brokerage account, where you can trade as much as you want, but capital gains and tax on dividends are paid only when you withdraw the gains. It is like a 401(k) in that regard. Any withdrawals you make, you withdraw the initial investment first. However you can only invest in equity funds or individual stocks with a home in the EEA. If you want to invest in US companies, then you need to use one of the Norwegian S&P 500 index funds. Neither bonds, nor bond funds are permitted in these accounts.

Neither an American 401(k) nor brokerage account will be treated as an "aksjesparekonto" because it doesn't comply with the rules that stock and mutual funds must be based in the EEA.

If you can generate capital loss, you will receive a tax deduction that you can use to offset dividends. You should also be able to realize gains before moving to Norway, and saving your losses for after you move to Norway. Again, keep in mind that you must calculate exchange rates as part of the transaction

By the way, I also have a 401(k) in the US. These are the rules I have to follow.
SeaScape
Posts: 21
Joined: Sun Jul 11, 2021 5:16 pm
Location: Norway

Re: Taxation of investment accounts for US expat during stay in Norway

Post by SeaScape »

wineandplaya wrote: Wed Jul 14, 2021 3:34 pm According to Nordnet, Norwegian wash-sale rules aren't very precisely defined, but you are supposed to wait "at least a week" until you buy the same stock or fund: https://www.nordnet.no/faq/1374-er-det- ... egory=1363

I guess that this is good to know if you want to realize capital losses inside a US IRA or 401(k).
The issue with wash-sales in Norway are that you must have taken a risk when selling and buying. If the price changes after you have sold and before you buy, then you are ok. These trades are only scrutinized if you are audited. Wash-sales are not reported as such to the Tax Office. However, to be on the safe side, you can always buy a different mutual fund or equity that may perform equivalently.
Topic Author
wineandplaya
Posts: 306
Joined: Fri Sep 14, 2018 9:42 am

Re: Taxation of investment accounts for US expat during stay in Norway

Post by wineandplaya »

So the conclusion is basically that there might be some ways to offset the 31-ish % tax on dividends by realizing capital losses. These losses might take place inside a 401(k) or IRA with no tax consequence in the US. Can these losses (in the eyes of Skatteetaten) be used to offset other taxes too? For example, can they offset wealth tax (formuesskatt) or income tax? My presumption is that they cannot.

Wealth tax (formuesskatt) appears to be unavoidable, even for 401(k) and IRAs, but the silver lining is that in absolute terms it's probably quite modest. If a married couple has a $1M stock portfolio, wealth tax comes out to about $2k per year according tohttps://www.smartepenger.no/kalkulatore ... kalkulator.

Probably the best way to limit the tax hit of moving to Norway is to limit your regular income tax and social security tax ("trygdeavgift"). I should have some freedom to do since I'm self-employed. For example by avoiding getting too high income any single year by timing my invoices or maybe retain profits in the business. I can also max out on elective pension ("innskuddspensjon") and maybe "Individuell pensjonssparing (IPS)", although I'm not sure if the fees/hassle negate any advantages of the latter. From what I can tell, the marginal tax rate becomes very high once your per-person income reaches around $80k/yr. At that point you're subject to higher income tax (13.2 % or 16.2 % on top of the 22 % tax everyone pays) and any additional income will not contribute to your future state pension. In the US, you don't have to pay Social Security tax for incomes above ~$140k-ish, but it doesn't look like Norway works like that.

We will have two kids in daycare, so we'll probably save between $20k/yr and $30k/yr in daycare fees compared to the US. So there is that too.
oslocal
Posts: 144
Joined: Sat May 21, 2016 5:30 pm

Re: Taxation of investment accounts for US expat during stay in Norway

Post by oslocal »

Seeing this old thread, I can definitively confirm that in my case, a substantial capital loss (coinciding with the temporary drop during early pandemic) generated inside of IRA and Roth IRA accounts offset nearly my wife's entire earned income for 2020. As of 2023, a capital loss of $1,000 is grossed up to $1,720. All income and losses are taxes at 22% in Norway, so a $1,000 loss generates about $378 tax shield. Note that we still had to pay "bracket tax" on earned income, which is a separate income tax levied on earned income and pension income.

As recommended, before moving in early 2020, we sold everything and bought back index funds at higher basis.

A new exit tax regime was implemented late last year with immediate effect (Norway has learned from the US). For the purposes of this tax regime, whatever unrealized gains upon leaving the country is locked in as taxable income. So that is likely to pose some challenges to this strategy.
Post Reply