On June 23rd, the Swedish Government finally released the legislative proposal for introducing the economic employer concept after several postponed releases due to political crisis and Covid-19. The proposal consists of three parts, which imply that foreign employees may become tax liable in Sweden and employers’ reporting obligation will increase as well as their exposure towards corporate tax liabilities. The purpose of the rules is to create conditions for a healthy and fair competition in the labour market. The following is a summary of the changes;
1. An obligation for foreign entities to register with the Swedish Tax Agency for PAYE-purposes in a situation where their employees can be regarded as hired out to a Swedish entity, i.e. the so called 183-day rule is not applicable due to the presence of an economic employer in Sweden
2. An obligation for Swedish entities to withhold 30% upon payment of invoices from foreign entities who have business activities in Sweden via personnel and are not yet registered for corporate tax purposes in Sweden, i.e. foreign entities that do not hold a so called F tax certificate (Sw: F-skatt).
3. An obligation for foreign entities who have business activities in Sweden to provide the Swedish Tax Agency with specific information the year after the income year in order for the Agency to decide whether a permanent establishment is at hand or not.
Change 1 – Economic employer
Currently, Sweden adopts a formal employer concept meaning that an employee can spend up to 183 days in Sweden during a twelve-month period and not become tax liable here on his/her employment income if:
- The remuneration is not paid by or on behalf of an employer who is domiciled in Sweden, i.e. paid by the formal employer.
- The remuneration is not borne, or should have been borne, by a permanent establishment that the foreign employer has in Sweden.
The legislation change implies that personnel that work temporarily in Sweden can be seen as hired out to a Swedish entity if the employees perform work as an integrated part of the Swedish company’s business in Sweden and are under the Swedish company’s control and management. In these situations, taxation could arise from day 1, since the exemption under the 183-day rule would no longer be applicable. This as the Swedish entity would be seen as the economic employer, i.e. the employer that benefits from the work performed.
An exemption has been proposed to exclude those who work few days in Sweden. If no more than 15 workdays in a row or a maximum of 45 workdays in a calendar year are spent in Sweden, it would not be regarded as hiring out of labour and no tax liability would in general arise. Non-workdays, e.g. weekends and holidays, are not to be included in the 15/45 days.
If a tax liability arises due to an economic employer in Sweden, the foreign entity, i.e. the formal employer, must register for PAYE-purposes in Sweden. Wage tax of 30% (25% if the employee has a decision from the Tax Agency regarding non-tax residence taxation, SINK) and social security contributions (unless there is a certificate of coverage at hand) should be paid and reported on a monthly basis.
Change 2 – withholding of tax from invoices
A general obligation will be introduced to withhold 30% upon payment of invoices from foreign entities/subcontractors who, via their personnel, have business activities in Sweden and who are not yet registered for Swedish corporate tax purposes (Sw: F-skatt). Overpaid taxes will be reimbursed after the final taxation has taken place.
Change 3 – obligation to provide specific information to the Swedish Tax Agency
The fact that a foreign entity has personnel in Sweden indicates that they are performing or have the intention to perform business activities here. It is therefore in the Swedish Tax Agency’s interest to evaluate in arrears whether the activities could form a permanent establishment in Sweden with the impact that the foreign entity is liable for corporate taxation here. In order for the Tax Agency to make this evaluation, all foreign entities who have personnel that become tax liable in Sweden, based on “hiring out of labour”, are obligated to provide specific information. Foreign entities who already have a permanent establishment in Sweden do not fall under this obligation. The below three categories of entities should provide the information to the Tax Agency;
- Entities who are registered for F-skatt (Swedish corporate tax).
- Entities who are obliged to withhold wage taxes and/or pay social security due to business activities in Sweden.
- Entities who are obliged to provide equipment so that an electronical personnel ledger can be kept at a building site.
- Late filing fees will be imposed if corporate and/or individual tax returns, specific information and other mandatory data are not filed in timely manner.
- Tax surcharges if false/insufficient information has been provided and if tax has not been withheld.
Unless an inventory has already been made it is crucial to look into the following:
- Identify who is responsible for the matter.
- Keep in mind that a cooperation may be needed across functions within the entity, i.e. Finance, HR, Travel etc.
- Make an analysis of current status to become aware of risks at hand if you do not meet compliance, such as;
- Which affiliates/ subcontractors have personnel present in Sweden who may become tax liable?
- Which subcontractors are currently not registered for Swedish F-skatt?
- Is your TP-policy in line with the proposed changes?
- Set up an internal process.
- Look into internal information flows. Does the right person have access to the right information?
- Raise the awareness within the organisation. Which actions need to be taken?
Please feel free to reach out with regards to the legislation changes as well as if you need support in setting internal processes in order to ensure that you and your affiliates/ subcontractors are compliant.