By now, it's probably not unnoticed by any active Estonian entrepreneurs operating in Sweden that new tax changes for foreign entrepreneurs came into effect from January 2021. New rules for taxing labor were introduced, including the concept of "economic employer" or "actual employer." This new concept aims to limit the abuse of the 183-day rule by foreign companies to avoid paying taxes in the country where the work is performed, namely Sweden. The tax changes in Sweden have led to many foreign companies having to pay income tax in Sweden for their employees much earlier than before. Additionally, the obligation for foreign companies to register for F-tax has been strictly enforced, putting the responsibility on Swedish companies to withhold 30% of payments made to non-registered companies. As a result, Swedish companies are reluctant to collaborate with any firm that lacks F-tax registration.

Employee Income Tax in Sweden or Estonia - How to Proceed?

Many foreign companies sent employees to work in Sweden and did not pay income tax in Sweden, relying on the 183-day rule, which allows foreign companies to continue paying income tax to their home country as long as the employee does not spend more than 183 days in Sweden. However, the new tax changes in Sweden now require the Swedish Tax Agency (SKV) to consider that if the "actual employer" is a Swedish company to whom a foreign company sells its services, the 183-day rule cannot be applied. Since January, the actual employer is determined based on the following criteria:

• Actually bears the payroll costs
• Provides tools and work materials to employees
• Determines the number of employees used for the work and their qualifications
• Has the authority to decide who is allowed to perform certain tasks and who can terminate the collaboration
• Determines vacations and work schedules
• Has the authority to discipline employees

Based on these criteria, it seemed that there were quite a few situations where Estonian companies sending their employees to Sweden could be considered the actual employer. The Swedish client orders a service and the desired outcome is the Estonian company's responsibility, but the Swedish client has minimal involvement in organizing the work.

However, this year, the actions and enforcement of various agencies (SKV, ID06, trade unions) have created a situation where all the above criteria are of little importance when determining the actual employer.  From the beginning of the new year, a criterion will be used, which changes the situation where it is almost impossible for an Estonian company to consider itself an actual employer.

According to the new criteria, the actual employer is the company responsible for the workplace where the work is performed

SKV argues that the main determiner, who is the actual employer, is the one who owns, is responsible for, or benefits from what is done at the workplace where he has hired a foreign company to do the work. The old criterion "who determines who does what work" is interpreted by SKV to mean that the Swedish company still indirectly chooses who will do the work on its site, even if the service provider chooses who does what from among its employees. The Swedish client indirectly chooses all employees of the Estonian company to work on their site/object. The new rules have made it nearly impossible for foreign companies to avoid taxation in Sweden.

RULE: If the Swedish client is the actual employer, the foreign company providing services to the Swedish client (performed on Swedish territory) must declare and pay income taxes for its employees from the 46th workday, except if the work lasts for more than 15 consecutive days. Each calendar year, each employee can work a maximum of 45 workdays before becoming subject to tax. This means that days when no work is performed (e.g., weekends) are not counted.

Which registrations are needed?

Many Estonian companies that operate in the construction, forestry, and other sectors where work is physical and on-site need to apply for the following registrations in 99% of cases:

• F-tax: Proof that the company pays its own employees' taxes. This shows the Swedish client that they don't have to worry about SKV demanding the payment of income taxes and social taxes for the purchased services.
• Employer registration: Allows the Estonian company to declare and pay labor taxes in Sweden.
• A-tax or SINK-tax: These registrations are required for each individual employee and allow the company to pay the employee's income tax in Sweden. An A-tax registration is made for employees staying in Sweden for more than 6 months within a 12-month period. The A-tax rate is based on the Swedish tax tables (i.e., according to Swedish standard conditions) if the company has a permanent establishment. If the company doesn't have a permanent establishment, the rate is 30%. SINK-tax is applied to employees staying in Sweden for less than 6 months. For SINK-tax, the rate is 25% with a permanent establishment, and 0% without one. In the latter case, no integration into the Swedish tax system takes place, and thus, no temporary personal identification number is issued, making it difficult to apply for ID06 cards. Both A-tax and SINK-tax registrations (taking into account the permanent establishment condition) lead to the Swedish Tax Agency issuing a temporary Swedish personal identification number for the employee, which allows for the declaration and payment of the employee's income tax.

For companies operating in other sectors, similar registrations are often required, but depending on the situation, there may be other nuances.

Tax changes in Sweden - what are the exceptions?

Foreign companies that are hired in Sweden to provide services to another foreign company that does not have a permanent place of business can, in most cases, operate according to the old 183-day rule and continue to pay income tax in Estonia, but there are also important nuances that must be taken into account.

Tax Changes in Sweden - What Does It Mean for Estonian Entrepreneurs?

Many try to avoid the situation where they have to familiarize themselves with the tax regulations, accounting practices, and other circumstances of two different countries. This is understandable because operating in two countries and complying with the bureaucratic rules entails both financial and time costs. However, the clearer enforcement of the new rules makes the situation more transparent, as there are fewer gray areas and less uncertainty about how to proceed.

Our recommendation for Estonian entrepreneurs is to consider that with each passing day, the Swedish Tax Agency becomes increasingly efficient, and any entrepreneur planning to enter the Swedish market should consider it self-evident that they have to comply with Swedish legislation when operating in Sweden. This requires careful planning before entering the Swedish market, as several registrations need to be made before commencing work to ensure proper operation.