New Swedish Tax Withholding Rules Incompatible with EU-law?

On 1 January 2021, the economic employer concept was introduced to the Swedish tax code. As such, the scope of tax liability was in general extended to short-term workers working temporarily in Sweden if deemed to be “hired” personnel to Sweden. To get a better control of foreign companies in Sweden and collect preliminary tax, the Swedish legislator also introduced new rules concerning tax withholding for work performed in Sweden.  Please see our previous article in this regard, Confirmed: The economic employer concept is coming to Sweden. 

Prior to 1 January 2021, a Swedish payer of remuneration (sw. utbetalare av ersättning) did not have to withhold taxes on payments for work performed in Sweden by a non-resident company without a permanent establishment in Sweden. However, under the new withholding rules, Swedish (and foreign) companies are now obligated to withhold a preliminary tax of 30 % on payments to foreign companies for work performed in Sweden, unless the foreign company holds a Swedish F-tax certificate (sw. F-skattesedel). The withheld tax is supposed to cover a possible corporate tax obligation for the foreign company and should be paid and reported by the payer via their monthly reporting to the Swedish Tax Agency. 

Since foreign companies (without a PE in Sweden) are interested in getting fully paid from Sweden (in order to pay taxes etc in their home country); the new withholding rules force foreign companies to register for a Swedish F-tax certificate to ensure full payment for any work performed in Sweden for a Swedish contractor. Failure by the Swedish payer to withhold taxes will lead to penalty charges. As such, “registering for F-tax” is a common item on many foreign companies check-list prior to commencing business operations in Sweden. To register, the foreign company must file an application with the Swedish Tax Agency. The registration process can be lengthy, and the foreign company must e.g., provide proof of good standing and valid company registration documents. Many payments from Sweden are therefore delayed while waiting for the mentioned registration.

The new rules are not without criticism and have attracted the attention of the European Commission in Brussels. In July 2023, the Commission launched an infringement procedure against Sweden by formally urging the Swedish government to change the newly introduced tax withholding obligation for Swedish payer of remuneration for work performed in Sweden.  The Commission claims that the new order violates the freedom to provide service and that the rules are therefore not compatible with EU-legislation.

While it is not exactly certain what element of the new withholding rules the Commission is concerned about, it is possible to imagine several scenarios where the freedom to perform services may be hindered by the current F-tax process. A lengthy application process can e.g., be discouraging to foreign companies where the Swedish customer requires a speedy or urgent service.  In some cases, documents required by the Swedish Tax Agency to process the application may not be easily available in all EU-countries. But overall, we expect for the Commission to question Sweden´s right to withhold ´corporate´ tax from foreign companies without them having a taxable presence in our country. 

On the 14^th of September, the Swedish government delivered its response to the Commission. In essence, the government’s position is that the Swedish rules do not forbid, discourage, or make it less attractive for foreign enterprises to provide services on the Swedish market. It holds the view the new rules impose the same administrative obligations to foreign companies that already exists for Swedish companies. As such, the governments argues that the new rules are non- discriminatory.

Further, the government says that preliminary taxes in Sweden are withheld at source and in conjuncture with payments (as the income is earned). As such, it seems like the government argues that the new rules are an extension of already established tax practices in Sweden. Further, the government also emphasizes that the Swedish preliminary tax system benefits the general public and ensures a smooth collection of taxes. Importantly, the government also holds the view that the new rules increase competitive neutrality between foreign and domestic enterprises. It argues that the previous order discouraged Swedish clients from hiring foreign companies as it was harder for the Swedish customers to determine whether a tax withholding was necessary, i.e., if the foreign enterprise had a permanent establishment in Sweden or not. With the new rules, the Swedish client only has to check if the foreign enterprise has an F-tax certificate or not, which is an easy process. 

It will be interesting to see the Commissions response to the Swedish government. With the current legislation, the Swedish legislator has found an effective way to control foreign companies in Sweden. Since we assume that all companies want to get fully paid for the work performed in Sweden, they are forced to get F-tax registered in Sweden even though they do not have employees that are tax liable here (which would also require an employer registration). Otherwise, tax will be withheld for them, which retroactively will need to be reclaimed through a long process with the Swedish Tax Agency. 

If the government’s response is not favorably met by the Commission, there is risk that newly established rules and tax compliance procedures may have to be amended once again for foreign companies doing business in Sweden. 

EY closely monitors any further development and will provide updates on any important news regarding the Swedish tax code. 

Authors:

• Marie Liebich - Director - Global Mobility - 072-573 12 40
• Cecilia Arrhenius - Senior Manager - Global Mobility - 070-290 13 34
  
• Adis Hasic - Senior - Global Mobility - 076-864 38 59