Sweden: Employees of Nonresident Employers Face New Tax Obligation

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By Marcus Hoy

Foreign employees of nonresident companies will be tax liable regardless of the length of time they stay in the country under a draft legal proposal detailed by Sweden’s Finance Ministry May 17.

If, as expected, the proposal becomes law, foreign companies employing workers in Sweden will be required to deduct personal income tax from salaries even if the company does not have a permanent establishment in the nation. Currently, Sweden applies a so-called 183-day rule, under which an employee is tax-exempt if he or she is present in Sweden no more than 183 days in a 12-month period and the employer does not have a PE in Sweden. This applies even if a Swedish company is the beneficiary of the work.

Under the proposed new rules, such employees will become tax liable upon starting work regardless of the length of time they spend in Sweden. The new rules are due to enter into force on Jan. 1, 2019.

Leveling the Playing Field

In a May 22 statement, PWC said the new rules would require affected foreign companies to register with the Swedish Tax Authority, report withholding taxes, and file payroll returns. PWC notes an STA suggestion that foreign companies register a representative in Sweden, such as the domestic company that benefits from the work, to file the payroll return on behalf of the foreign company.

The new tax measure is aimed at creating a more equal playing field in the labor market and broadening the tax base, PWC tax adviser Cecilia Arrhenius told Bloomberg Law May 23.

“The government believes that foreign companies that operate in Sweden but do not have a PE should be subject to the same rules as Swedish and foreign PEs.” Arrhenius said. “Many other nations take a similar view.”

“Foreign companies with a PE in Sweden already have a liability to withhold Swedish tax for employees working for them in Sweden,” Arrhenius said. “The new rules will affect non PEs, including foreign staffing agencies that hire out employees to a Swedish principal, which includes foreign companies with a PE in Sweden.”

Greater Tax Burden

The new rules would affect not only semi-skilled and seasonal workers but also skilled professionals such as IT consultants working on short-term contracts, according to Arrhenius.

This could potentially result in employees on short-term contracts being taxed at a higher rate than they are currently, Arrhenius pointed out, since Sweden’s base income tax rate is currently 32 percent

“Companies subject to this measure should investigate if their employees will be affected as of Jan. 1, 2019, and discuss how they can handle the practical issues such as registration and monthly reporting,” Arrhenius said. “They should also look into what actions to take should their employees be subject to a higher tax burden than in their home country due to being taxed in Sweden.”

The proposal has been presented to Sweden's Legislative Council to confirm its legality, after which it will be presented to parliament, where it is likely to enjoy majority support.

To contact the reporter on this story: Marcus Hoy in Copenhagen at correspondents@bna.com

To contact the editor responsible for this story: Rick Vollmar at rvollmar@bna.com

For More Information

The proposal is available in Swedish here.

For more information on Swedish HR law and regulation, see the Sweden primer.

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