Tag: taxes in sweden

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.

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Contact us using the contact form, call or send an e-mail. We will answer you as soon as possible.
  • Write us about your wishes or the problem you are looking for a solution to.
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Swedish taxes – when to pay and on what basis

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.

Get in touch

Contact us using the contact form, call or send an e-mail. We will answer you as soon as possible.
  • Write us about your wishes or the problem you are looking for a solution to.
  • In most cases, our consultant will contact you to ask some clarifying questions or invite you to a meeting.
  • After receiving the necessary information, we will prepare a non-binding offer for you, which we will send by e-mail.

Tax Changes for Estonian Entrepreneurs Operating in Sweden (as of 2021)

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.

Get in touch

Contact us using the contact form, call or send an e-mail. We will answer you as soon as possible.
  • Write us about your wishes or the problem you are looking for a solution to.
  • In most cases, our consultant will contact you to ask some clarifying questions or invite you to a meeting.
  • After receiving the necessary information, we will prepare a non-binding offer for you, which we will send by e-mail.