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Taxation and reporting obligations for temporary work in Sweden – The Swedish Tax Agency proposes a change from a legal employer concept to an economic employer concept
The Swedish Tax Agency has delivered a memorandum to the Department of Finance in which they have proposed a number of important amendments that will increase the obligations for foreign employers and for non-resident employees on temporary assignments to Sweden.
The most important amendment that is being proposed is a change from the existing legal/formal employer concept that is applicable in Sweden today to an economic employer concept. This means that the company that benefits from the performed work will be regarded as the actual employer rather than the company that pays the salary – a rule applicable both according to the tax treaties and internal legislation.
According to current internal Swedish legislation, a tax non-resident individual will be taxed in Sweden only if the individual works in Sweden and is employed by a Swedish company or a foreign company with a permanent establishment in Sweden. However, an individual will not be taxed in Sweden in accordance with the 183 day rule if the person is employed by a foreign company that does not have a permanent establishment in Sweden and if the following conditions are fulfilled:
- The stay in Sweden does not exceed 183 days during a consecutive 12 month period,
- the remuneration is paid by an employer that does not have a permanent establishment in Sweden, and
- the costs related to the remuneration are not recharged or are in any way borne by a company with a permanent establishment in Sweden
The 183 day rule is found in both Swedish internal legislation and in tax treaties. When it comes to the assessment of who is regarded as the actual employer there are two different ways to interpret the employer concept that varies depending on each country’s internal legislation. According to Swedish internal legislation, the employer is the one that is legally responsible for the employee and pays the salary. This is the formal employer concept. However, many other countries already have a different view on which company is regarded as the employer and instead use the economic employer concept.
Based on the Swedish interpretation of the employer concept the 183 day rule has been applicable in situations when a foreign employee works for and receives remuneration from a foreign employer without a permanent establishment in Sweden – even in situations where the costs for the work have been recharged to and borne by the Swedish company for which the actual work is performed.
Memorandum from the Swedish Tax Agency
In their memorandum, the Swedish Tax Agency propose that a tax liability for the individual and a reporting obligation for the company should arise also in situations when a tax non-resident individual works for very short periods in Sweden for a foreign company without a permanent establishment in Sweden. Hence, it is no longer of importance who pays out the remuneration but for who the actual work is performed. Therefore, the assessment will be based on an economic employer concept rather than the existing formal employer concept. Further, the Swedish Tax Agency propose a registration obligation for individuals working in Sweden that are not and have not been registerered in the Swedish civic registration or do not have a Swedish co-ordination number.
The purpose behind the proposed changes is to increase the neutrality of competition between individuals hired by a Swedish company and individuals hired by a foreign company but performing work for a company with a permanent establishment in Sweden.
Further, the Swedish Tax Agency present three other concrete amendments that concern foreign companies:
- A foreign payer without a permanent establishment in Sweden is obliged to withhold taxes on remuneration paid for work performed in Sweden by their employees. The extension of this will be that the payer will have an obligation to register with the Swedish Tax Agency as an employer and complete monthly PAYE-returns
- The exemption that a Swedish payer should not withhold any taxes on remuneration paid to a foreign company without a permanent establishment in Sweden is removed
- Foreign companies with partial business in Sweden shall provide certain information in order for the Swedish authorities to be able to assess their tax liability
Provided that the proposal is passed by the Department of Finance and accepted by the Government, the proposed amendments will come into force 1st of January 2019.
The proposal has been referred to numerous committees, organizations and authorities and comments should be submitted by 2nd of October 2017 at the latest.
Comments from Deloitte
The proposal will lead to a large change for foreign employers with outbound employees performing work in Sweden on behalf of a Swedish employer. The change to an economic employer concept would lead to individual taxation of remuneration for work performed in Sweden for a Swedish company from the first day in Sweden. This would apply irrespective of whether the employment is with a foreign company and the remuneration is paid out from this foreign company without a permanent establishment in Sweden.
In practice, this means that individuals working temporarily in Sweden but who are hired by a foreign employer without a permanent establishment in Sweden are taxed on their employment remuneration from the first day if the employee is working for an establishment or business in Sweden. Even though the memorandum from the Swedish Tax Agency distinctly refers to tax non-residents, the changed employer concept appears to be applicable for tax residents as well.
When determining whether the 183 day rule is applicable or not, Sweden will in the future use the economic employer concept. Therefore, the individual will, going forward, need to declare the received income as subject to taxation in accordance with the legislation for special income tax for non-residents. In cases where the assignment exceeds six months, a regular tax return will need to be filed.
Foreign employers without a permanent establishment in Sweden will be obligated to withhold taxes on remuneration paid out to individuals performing work in Sweden. In practice, this means that foreign companies with employees in Sweden must be registered as an employer with the Swedish Tax Agency and file monthly PAYE-returns and provide information for each individual working in Sweden. The suggested changes will therefore lead to a neutralization between foreign companies with small scale business in Sweden and regular Swedish companies.
The administrative work will increase for both employers and employees if the proposal is approved. Due to the proposed changes, Deloitte therefore recommends that Swedish companies receiving frequent business travelers, should carefully go through their processes, particularly if they are working for the benefit of the Swedish company. This also concerns foreign companies that regularly send business travelers to Sweden.
Further, Deloitte’s recommendation is that companies make sure that they have a process for tracking the foreign individuals working in Sweden.
Finally the proposal will increase the requirements for both the employers and the employees when it comes to providing information as a result of the new obligations. This is both in terms of registration requirements and increased scope of taxation in Sweden which may result in more double tax situations to be handled. .
Deloitte will continue to monitor the progress of the proposal and updates will be provided going forward.