Withholding tax obligation for certain payments to foreign suppliers
On November 4 2020, the Swedish Parliament approved the government's proposal to introduce a withholding tax obligation for Swedish payers when making payments to a foreign company, or to a non-resident person , for work carried out in Sweden, unless the recipient of the payment is approved for F-tax. The proposal will enter into force on 1 of January 2021. In practice, the new legislation means that foreign service providers having Swedish customers for which they are carrying out work in Sweden, will have to register for tax purposes to obtain necessary approvals.
The proposal in brief
Under current legislation, there are no withholding obligations when making a payment from Sweden to a foreign entity for services and work carried out in Sweden, unless the foreign entity is considered to have a permanent establishment in Sweden.
After the new legislation has entered into force, the withholding will not be linked to the foreign entity having a permanent establishment in Sweden.
From 1 January 2021, taxes should be withheld at a rate of 30 percent if the payment refers to work (i.e. services) that the foreign entity, or a non-resident person, has carried out in Sweden, unless the recipient of the payment is registered and approved for F-tax or has obtained a decision on exemption from withholding tax from the Tax Agency. The tax deduction constitutes a preliminary tax and is paid and reported to the Swedish Tax Agency by the Swedish payer of the invoice. It is credited to the foreign entity, or non-resident person, in connection with the final tax assessment the year following the payment, why it make take a year before any tax is refunded.
The amendment also contains an extended definition of what is considered to be "work carried out in Sweden". Work carried out abroad that is within the framework of activities carried out in Sweden is also considered as work carried out in Sweden. These may be business trips or work carried out for a short period of time at home or in the office abroad.
There is no exception for intra-group services or intra-company invoicing. It should also be noted that the tax withholding obligation arises as from the first day of work in Sweden.
The new legislation means that more foreign companies than before need to register with the tax authority and be approved for F-tax, alternatively obtaining a decision on relief from withholding tax, in order to secure that tax withholding is not made. Note that registration for F-tax does not mean that the foreign entity is taxable in Sweden. The rules on determining a permanent establishment in Sweden have not changed.
Special annual filing obligation - additional reporting responsibility for foreign companies
The new legislation also includes an additional reporting obligation for foreign companies and non-resident persons.
A foreign entity, or person, who is approved for F-tax or is registered for payroll purposes in Sweden, will have a special annual filing obligation under the new legislation. This in order for the Tax Agency to be able to assess if the foreign entity, or person, is taxable under the Income Tax Act. The special filing obligation does not exist if the foreign entity is required to file an ordinary income tax return The due date for filing the special information is the same as the date for filling ordinary income tax returns.
A typical example of a situation covered by the new rules is if a Swedish company hires a foreign company for service or maintenance work and the foreign company sends a repairer to Sweden. In this situation, the Swedish company has an obligation to withhold 30 % tax from the payment of the invoice.
In practice, the amendment to the law introduces a preliminary withholding tax for foreign companies providing services in Sweden also in situations where the foreign companies are not taxable in Sweden.
To avoid ending up in this situation, the foreign company should register and apply to be approved for F-tax. In order for the foreign company to be approved for F-tax they must carry on, or intend to carry on, business activities in Sweden. Further requirements are that taxes and fees should have been paid in accordance with law in the home country. A certificate from the home country to ensure that the company has no tax debts should also be provided. As mentioned, the registration does not mean that the company is tax liable in Sweden. If the foreign entity is approved for F-tax, they should be aware of that they will have an annual reporting obligation. As for the alternative on obtaining a decision on exemption from withholding tax, there is at this stage no further information or guidelines from the Tax Agency. But this may very well be a more suitable option for some service providers.
According to the legislator, the purpose of the amendment is to increase competitive neutrality between Swedish and foreign companies and to simplify the assessment for Swedish companies for when tax deductions are to be made. Since the obligation rests with the Swedish payer, the change in the law results in an increased administrative burden for Swedish companies, not least within international groups with intra-group activities that entail movement of staff across national borders. In our opinion, the law change rather increases the complexity for a large proportion of Swedish companies. The legislator has overlooked many of the practical aspects that Swedish companies now face when hiring foreign suppliers.
Both Swedish companies and foreign service providers face a challenge in the coming weeks before the law change takes effect. In a short time, companies need to implement new routines, processes and find system support to handle the extended obligation that rests with the companies. Deloitte has developed a concept and action proposal to adapt the business's routines to the change in the law.
Please contact us for further discussions.