Permanent Establishment in Sweden and Income Tax Obligation – Luck or Failure

Estonian companies operating in Sweden are often faced with the situation of whether to admit that they have established a permanent place of business in Sweden or not. Income generated in Sweden must be paid to the Swedish state in the event of a permanent establishment. Therefore, entrepreneurs in Estonia and other countries where corporate income is not taxed try to avoid registering a permanent place of business in Sweden. However, this often leads to certain risks and may raise questions for the Swedish tax authorities.

The following article provides an overview of the grounds on which a permanent place of business is established and what taxes it entails. The article helps to assess how practical it is to avoid the creation of a permanent place of business in Sweden.

What constitutes a permanent establishment in Sweden and how is it determined?

When determining the permanent place of business, it is based on where the permanent business activity takes place. Obligations are defined through the permanent place of business, among which the most important are the declaration of income and expenses and the payment of income tax. A permanent place of business can be created in several ways, but initially three basic criteria must be met:

1. The main business activity takes place at this location. Example: A software solutions company rents an office and hires a salesperson to sell products to Swedish customers - this is the main business in Sweden. On the other hand, if there are data analysts working in the office and there are no sales in Sweden, it is a supporting business activity and no permanent place of business is created in Sweden.
2. The action takes place in the same geographical point
3. The activity is permanent (lasting more than 6 months)

Initially, it is worth checking whether the company fulfills these three criteria. If it fills, it is a permanent place of business. If the criteria are not met, then exceptions should also be considered. For example, a permanent place of business can be created when seasonal work (picking berries) is carried out for less than 6 months a year, but for several years in a row. Another example is from the forestry sector, which concerns the location of the activity. A permanent place of business is created in Sweden also when the company carries out work on several different sites, but the customer is always the same.

Permanent place of business in Sweden and income taxation

When a permanent place of business is established, the income and expenses related to the Swedish activities of the company must be declared once a year. When a profit is made, income tax must be paid, which is 20.6% in Sweden from 2021. There is no corporate income tax in Estonia, and income taxation occurs only when the company decides to distribute dividends. At first, it may seem that you have to pay double tax on income earned in Sweden, but in reality the countries have concluded a double taxation avoidance agreement with each other. This allows an Estonian company, which has paid income tax on the company's profit in Sweden due to its permanent establishment, to offset it with income tax on the dividend (see here). In Estonia, the total cost of dividend income tax for private individuals is ~25%. If the entrepreneur wants to withdraw the profit from the company as dividends, he has to pay income tax in Estonia only to the extent of the given difference.

However, if an Estonian company with a permanent place of business in Sweden wants to invest the profit in the development of the company's activities, the situation is different. There is no flexibility similar to the Estonian business environment, as income tax must be paid in any case.

Doing business in Sweden is related to Swedish business practices, opportunities and also obligations. If the Swedish tax authority decides that the permanent place of business is still in Sweden, it has the right to collect income tax retrospectively. When determining a permanent place of business, it is therefore necessary to proceed from the specifics of a particular company and to carefully consider the risks related to the business plan.

We recommend involving a consultant with whom to discuss the issue of a permanent place of business. Wisecounter specialists will be happy to help you with this matter. The first consultation with us is free, feel free to contact us.