As for many other countries, the focus for Sweden in Spring 2020 has been to combat the outbreak of Covid-19. The Swedish government has introduced a wide range of measures to mitigate the detrimental economic effect of the pandemic. These measures include inter alia deferrals for certain tax payments, including employer paid social security contributions, preliminary wage tax and value-added tax (VAT), as well as rent discounts for corporations in specifically vulnerable sectors.
It should also be noted that the government has announced that it will propose additional measures targeted at corporations suffering from decreasing revenues of 30% or more compared to the same period last year amid the Covid-19 outbreak. According to the proposal, corporations will be entitled to a contribution of between 22.5 and 75% of the corporation’s fixed expenses (excluding salaries) up to 150 million kronor ($15 million). As this measure may be important for many corporations, we recommend corporations active in Sweden to stay updated in this regard.
The most relevant recent developments in Swedish taxation for multinational corporations includes available rules for reduction of employer paid social security contributions in connection with the Covid-19 outbreak, reduction of employer paid social security contributions for employees working with research & development (R&D), the implementation of DAC 6 and the proposed implementation of the economic employer concept.
Reduction of Social Security Contributions for Employers
As part of the measures to combat the economic effects of Covid-19 for corporations, a reduction of the employer paid social security contributions has been introduced. In general, Swedish social security contributions amount to approximately 31% of the gross salary paid and consist of several fees, including health insurance and parental insurance fees.
The reduction of the employer paid social security contributions entails that only the retirement pension fee (10.21% of the gross salary) shall be paid. The reduction is applicable for all corporations. However, several restrictions apply:
· the reduction is limited to 30 employees, i.e. corporations with more than 30 employees can apply the rules to that number of its employees;
· the reduced rate of 10.21% of gross salary paid is limited to remunerations of 25,000 kronor per employee and month, meaning that the reduced rate is not applicable to the part exceeding 25,000 kronor;
· the reduction is currently valid for payments between March 1 and June 30, 2020.
If there are several employing corporations within a company group, each employing corporation may use the reductions for 25 employees. All corporations must apply for reductions, i.e. the reductions will not apply automatically. The application shall be made in connection to the filing of the payment declarations. The rules entered into force on April 6, 2020. Corporations which had already filed their payment return for the relevant months will thus need to file a request for reconsideration of the payment return to apply for the reduction.
Regardless of the size of the corporation, the reduced social security contributions may be essential to minimize expenses at this pressuring time. It is important to note that the reductions are applicable for all corporations and that all employing corporations within a group may apply for the reductions. This measure may subsequently be of significance for large company groups, especially if several corporations within the group are employers.
Increased Reduction of Social Security Contributions for R&D employees
As of April 1, 2020, social security contributions for employees active in research and development (R&D) activities have been further reduced. In 2014 Sweden introduced reductions for R&D employees up to 10% of the total social security contributions, limited to 230,000 kronor per month. The further reduction entails a maximum reduction of 20% of the total contributions limited to approximately 900,000 kronor per month per company group.
For the employer to be granted a reduction, the employee must perform R&D duties at least 75% of his/her working time and at a minimum of 15 hours each month.
Aggregated reductions for corporations within a group are computed with regards to the other group members’ reductions. Primarily, reductions shall be granted to the parent corporations, meaning that if a company group reaches the cap, reductions are firstly restricted for subsidiaries within a group.
Social security contributions are dependent on the level of the annual employer paid social security rates. The limitation of 20% of the total social security contributions may thus be decreased for separate years. For 2020, reductions will be limited to 19.59% of the total social security contributions paid. The limitation is expected to remain at approximately 20% for future years.
These increased reductions for corporations active in R&D may be of significant value. The increased limitation entails that reductions may be worth over 10 million kronor each year. Hence, further reductions may be of considerable effect for company groups engaged in R&D activities.
Implementation of DAC 6
The Swedish government has proposed a new act to implement DAC 6 (Directive 2018/822 of 25 May 2018[YL1] [JK2] ) as regards mandatory exchange of information in the field of taxation for reportable cross-border arrangements. The purpose of DAC 6 is to enhance transparency in the field of taxation and improve national authorities’ possibilities of discovering potential aggressive tax planning arrangements.
The proposed act entails that certain cross-border arrangements must be reported to the Swedish Tax Agency (STA). An arrangement is defined broadly and includes transactions, schemes, plans and agreements, whether legally enforceable or not. In general, if any participant is domiciled in another EU member state or a non-member state, the arrangement is considered cross-border.
Furthermore, the arrangement shall involve any of the hallmarks set out in the proposed act to be covered by reporting obligations. Hallmarks are certain attributes indicating an increased risk for tax avoidance. The hallmarks are divided in categories, meaning that arrangements involving some of the hallmarks must only be disclosed should the main benefit or one of the main benefits of the arrangement be to obtain a tax advantage. Arrangements involving certain other hallmarks may trigger reporting obligations regardless of the incentives.
Reporting responsibilities are primarily targeted at intermediaries who design, market, organise or manage implementation of cross-border arrangements. Tax advisers, lawyers, financial advisors and accountants are examples of potential intermediaries in the proposed act. In addition, users of arrangements may be subject to reporting obligations in certain cases.
For multinational corporations active in Sweden, the proposed act entails reporting obligations in certain cases, depending on the actions carried out. In addition to corporations own reporting obligations, it should also be noted that Swedish intermediaries will be obliged to disclose certain cross-border arrangements to the STA.
The act is proposed to enter into force on July 1, 2020. An essential feature of the proposed act is that the act will have effect retroactively: cross-border arrangements carried out after June 25, 2018 may be subject to reporting obligations. According to the proposal, reportable arrangements carried out between June 25, 2018 and June 30, 2020 are to be reported before September 1, 2020. Arrangements carried out after the act has entered into force must be reported within 30 days after the arrangement was made available, ready for implementation or commenced. It should be noted that the proposed deadlines may change due to the Covid-19 outbreak.
Corporations active in Sweden should thus contemplate whether it has been part of an arrangement subject to reporting obligations during the last two years. Failure to fulfil reporting obligations will result in fees amounting to 7,500–315,000 kronor governed by revenue and when the obligation is fulfilled. Fees will be higher for intermediaries compared to users of arrangements under reporting obligations.
Implementation of Economic Employer Concept
The Swedish government has announced that it aims to implement the economic employer concept for employees temporarily working in Sweden. The economic employer concept stems from the commentary to the OECD Model Tax Treaty and is commonly used in jurisdictions around the world. The economic employer concept entails that another entity than the formal employer may be considered the actual employer, when interpreting the 183 days rule in the tax treaties.
Currently, the formal employer, i.e. the entity paying salary to an employee and with whom the employee has an employment contract, is generally seen as the employer from a Swedish perspective. Employees of foreign entities temporarily based in Sweden are not subject to taxation for income from employment if:
· the employee resides in Sweden at maximum 183 days during a 12-month period (calendar year according to some treaties);
· the remuneration is paid by an employer not resident in Sweden, or on behalf of such employer; and
· the cost for the remuneration is not carried by a permanent establishment of the employer in Sweden.
The formal approach has led to situations where employees performing work in Sweden, to the benefit of Swedish entities, have not been tax liable in Sweden.
According to the expected proposal, the entity benefiting from the work will be considered the employer, in simplified terms. The proposal in detail will be delivered at a later stage. However, the Swedish government has held that the proposal is intended to enter into force by January 1, 2021. Exceptions for certain intra group situations may be included in the proposal. The proposal is also expected to include extended reporting obligations for foreign corporations with personnel operating in Sweden.
If you have any questions about this, you are most welcome to contact us at Skeppsbron Skatt.