The Swedish Government has released a proposal to introduce the economic employer approach at the start of 2021. If passed, these changes will have a significant impact on the way foreign companies and employees operate in Sweden. Organizations may face a large increase in the number of employees liable to pay tax and we may also see a dramatic rise in the number of foreign companies that will need to register to make tax deductions. Also, because reporting and tax withholdings are to be made concerning the percentage of work that the employee performs in Sweden, this will mean an increase in tracking employees’ working patterns in Sweden.
The government’s proposal
Here are the main highlights of the proposed changes:
- Foreign entities will be required to register with the Swedish Tax Agency for PAYE purposes when their employees are regarded as hired in Sweden. The so-called 183-day rule is not applicable due to the presence of an economic employer in Sweden.
- Swedish entities will be required to withhold 30% of tax on payments to foreign entities who carry out business activities in Sweden – directly or indirectly (via their employees) and are not yet registered for corporation tax purposes in Sweden, i. e. these are foreign entities who do not hold the F-skatt certificate.
- Foreign entities carrying out business activities in Sweden will be required to provide the Swedish Tax Agency with specific information after the year end. This will then be used by the Agency to determine whether a permanent establishment exists in Sweden or not.
Change 1 – economic employer
Sweden currently operates the formal employer approach meaning that an employee can spend up to 183 days in Sweden during a twelve-month period and not be liable to pay taxes on their employment income if:
- The remuneration is not paid by or on behalf of an employer domiciled in Sweden, i.e., paid by the formal foreign employer.
- The remuneration is not borne by a permanent establishment that the foreign employer has in Sweden.
Under the proposed legislation changes, employees who work temporarily in Sweden will be seen as hired in Sweden if they 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, tax obligations would arise from day 1 of working in Sweden, since the exemption under the 183-day rule would no longer be applicable. In short, the Swedish entity is determined as the economic employer, i.e., the employer that benefits from the work performed.
An exemption has been proposed to exclude those employees who carry out their employment duties in Sweden for a limited number of days. If no more than 15 workdays in a row or a maximum of 45 workdays in a calendar year are spent in Sweden, in general, no tax liability will arise. Non-workdays, e.g., weekends and holidays, are not counted towards those thresholds.
If a tax liability arises due to an existing 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 obtained) should be paid and reported monthly.
Change 2 – withholding of tax from invoices
A general obligation will be introduced to withhold 30% of invoices to foreign entities/subcontractors who, via their employees, carry out business activities in Sweden and who are not yet registered for Swedish corporation tax purposes (F-skatt). Overpaid taxes will be reimbursed after the final tax reconciliation has taken place.
Change 3 – obligation to provide specific information to the Swedish Tax Agency
The fact that a foreign entity has employees working in Sweden indicates that they are performing or intend to perform business activities in Sweden. In those cases, the Swedish Tax Agency will have to evaluate each case separately to establish whether the activities could form a permanent establishment in Sweden. Consequently, the foreign entity will be liable to corporation tax in Sweden.
For the Tax Agency to complete this evaluation, all foreign entities with employees taxable in Sweden are obligated to provide specific information. Foreign entities that already have a permanent establishment in Sweden do not fall under this category.
What penalties will organizations face?
Late filing fees will be imposed if corporate and/or individual tax returns, specific information, and other mandatory data are not filed in a timely manner.
Tax surcharges if false/insufficient information has been provided and if tax has not been withheld.
What should employers do to prepare for these proposed changes?
It is crucial for companies conducting business in Sweden to investigate the following as soon as possible:
- Identify who is responsible for overseeing the process
- Keep in mind that cooperation may be needed across functions within your entity
- Prepare an analysis of the current situation to become so that you are fully aware of risks at hand if you do not meet compliance, such as:
- Are there any employees present in Sweden who may become liable to tax?
- Are there contractors who are currently not registered for Swedish F-skatt?
- Is your TP-policy in line with the proposed changes?
- Set up an internal process to ensure compliance with the changes coming into force.
- Look into internal information processes to ensure that the correct person has access to the right information
- Raise awareness within the organization
If you have any questions about these changes coming in 2021, please reach out to our Tax Team.