Estonian entrepreneurs operating in Sweden often lack a precise overview of Swedish taxes, including when and based on what these taxes need to be paid. We frequently receive inquiries from entrepreneurs wondering why certain tax obligations have arisen and what could have been done differently. Therefore, it is beneficial for every entrepreneur to thoroughly understand the tax obligations they will have towards the Swedish state before commencing operations in Sweden. For foreign companies, there are three primary tax obligations: paying corporate income tax on profits, paying value-added tax (VAT), and paying taxes for employees.

In the article tax changes for Estonian entrepreneurs operating in Sweden, we clarified under what circumstances an employer becomes obligated to pay taxes for employees in Sweden. Now, we will briefly discuss Swedish taxes, namely the corporate income tax and value-added tax (VAT) obligations.

The obligation to pay corporate income tax arises when a company has a permanent establishment in Sweden. Entrepreneurs who aspire to conduct business in Sweden in the future have likely come across the term "permanent establishment" during their data collection process. Once a permanent establishment is established, the company is required to declare its income and expenses in Sweden and pay corporate income tax on its profits. The corporate income tax rate varies each year but is generally between 20-22%. As of 2021, the corporate income tax rate is 20.6%.

Swedish taxes vs. "Permanent Establishment"

A "permanent establishment" must meet three criteria:

1.  Business activities are conducted at a fixed location.
2. The location is used continuously.
3. The location is used primarily or entirely for the company's core business activities.

Different situations may have different nuances, but in most cases, if an entrepreneur conducts their core business activities at a specific location in Sweden for more than 6 months, a permanent establishment is deemed to exist. It is essential to understand that once a permanent establishment is established, it remains in place until the business activity is terminated.

Examples of "Permanent establishment"

Example 1: AutoMechanic LLC rents a workshop in Stockholm and maintains trucks for 10 months. AutoMechanic LLC also performs car repairs in Estonia, which is its core business. Since the company has a fixed location where it conducts its core business activities for more than 6 months, a permanent establishment is established, and the company must declare its revenues and expenses earned in Sweden, paying corporate income tax on its profits.

Example 2: AutoMechanic LLC rents an office in Stockholm for its accountant. The accountant resides in Stockholm and performs bookkeeping for the company throughout the year. As the activities in Sweden are not the company's core business, there is no permanent establishment, even though the company has a presence in Sweden for more than 6 months at the same address.

There are situations where the existence of a permanent establishment can bring advantages, such as when sending employees to work in Sweden for an extended period and having to pay income tax on their salaries. Foreign companies with a permanent establishment can use Swedish tax tables to calculate income tax. Depending on the salary, the income tax rate ranges from 20% to 25% based on the tax table. However, if the company does not have a permanent establishment, a flat rate of 30% must be used, regardless of the salary amount.

The term "permanent establishment" often appears in various tax regulations, but the matter is more complex than it may seem initially. The Swedish Tax Agency uses two expressions, "fast driftställe" and "fast etableringsställe," which can be translated as "permanent establishment" and "permanent establishment for setting up," respectively. It is crucial to keep these two concepts separate, as their criteria for establishment and the obligations that come with them are different.

"Permanent establishment for setting up"

A "permanent establishment for setting up" determines whether a foreign company operating in Sweden is obliged to add Swedish VAT to its sales invoices and declare and pay taxes to the Swedish Tax Agency.

To establish a "permanent establishment for setting up," the following three criteria must be met:

1. The company has employees working in Sweden.
2. The company manages technical resources in Sweden.
3. The company has a sufficiently stable location to operate from in Sweden.

Interpreting these criteria can be more ambiguous than determining the existence of a permanent establishment. The presence of employees is straightforward to interpret: if the company has employees whose work allows it to carry out its core business activities, this criterion is met. Technical resources refer to the equipment, accommodation, and even smaller resources, such as servers used for an e-commerce store. The company does not necessarily have to own these resources; renting them is sufficient to meet the criterion. The final criterion, having a sufficiently stable location, is the most unclear. It means that the company has the capability to independently sell services and/or goods and purchase services and/or goods. Additionally, a "stable location" can refer to having long-term accommodation for employees where customers and suppliers can contact the company, for example, by visiting the location or sending invoices there.

If it is known that there will be costs in Sweden on which VAT can be reclaimed, it is a good idea to submit an application to the Tax Agency, explaining why you want to declare sales in Sweden and pay VAT on them. This simplifies the process of reclaiming VAT from Sweden and also helps to solve liquidity-related issues more quickly.

Examples of "Permanent establishment for setting up"

Example 1: ForestWork LLC performs forestry work in Sweden. The company has sent its employees to Sweden, along with its machinery, and receives ongoing instructions from its client's office, which is a Swedish forestry association. The presence of employees and machinery fulfills the first two criteria, and the forestry association, as the client, agrees that their office can be used as a contact point for anyone wishing to get in touch with ForestWork LLC. Additionally, ForestWork LLC is entirely capable of independently providing the service and purchasing the necessary goods and services for service delivery. Thus, a "permanent establishment for setting up" exists, and ForestWork LLC should issue invoices to its client in Sweden with Swedish VAT, which will be declared and paid in Sweden.

Example 2: Welders LLC rents 10 employees to a pipe manufacturing factory in Sweden. The factory is located in Gothenburg, and the work lasts for 8 months. The Swedish client provides accommodation and all necessary tools and machinery for the workers. Welders LLC has personnel present in Sweden and a "stable location" (a place where they can provide services and where suppliers can contact them), but since the company has not directly acquired accommodation or machinery, the technical resources criterion is not met. As a result, the company does not have a permanent establishment for setting up, and invoices to the client should be issued with reverse charge VAT, and the sale should be declared as a sale made in Estonia (as an intra-EU supply).

Exceptions

There are a few exceptions regarding the establishment of a permanent establishment and a permanent establishment for setting up, especially in the construction sector. The exception regarding the establishment of a permanent establishment means that each project is analyzed separately. If a company performs, for example, three consecutive projects, the first one taking 3 months, the second 7 months, and the third 4 months, only the revenues and expenses from the projects lasting more than 6 months need to be declared. This exception is specified in tax treaties with each EU country, and different countries have different time limits for the establishment of a permanent establishment, especially in the construction sector. Estonia's limit is 6 months, but, for example, Poland's limit is 12 months.

The second exception concerns the VAT liability for construction companies. Since construction companies sell their services to other construction companies with reverse charge VAT, the tax authorities may not issue a VAT number because the foreign company does not carry out sales with VAT. This can become problematic, as Swedish clients may not cooperate with foreign companies that do not have a VAT number. However, it is entirely possible to obtain a VAT number since there are another set of rules that stipulate that construction services related to a real estate object are considered, under certain conditions, as services provided in Sweden, i.e., as domestic sales.

Analyze future jobs before making registrations

As you can see, it is not always straightforward to know in advance what tax obligations may arise. In many situations, it is not clear whether a permanent establishment or a permanent establishment for setting up will be established or something else. It is recommended to conduct proper preliminary research and make the necessary registrations for the company immediately. Otherwise, there might be delays in collaboration with clients. Not having made the correct registrations or facing retrospectively imposed obligations or taxes by the tax authority may occur.

As the Swedish Tax Agency does not decide directly on behalf of the entrepreneur whether taxes need to be paid, it is the entrepreneur's responsibility to gain a clear understanding of how to conduct business. It is essential to explain as precisely as possible to the Tax Agency what obligations the company will have. When the business activity has been ongoing in Sweden for some time and it is necessary to declare activities, the Tax Agency compares whether the obligations have been fulfilled or not. This may lead to the Tax Agency retrospectively imposing additional obligations or taxes that were not initially considered.

If you want to be sure that the correct registrations are made and avoid potential issues in the future, feel free to contact us - we can review the situation together.