Extended requirements for foreign companies

Introduction

On 1 January 2021, extended requirements were introduced for foreign companies with operations in Sweden. For a long time, it has been the case that a foreign company with a so-called permanent establishment in Sweden is liable to tax on its operations in Sweden and, for this reason, must submit an income tax return in the same way as Swedish companies. From 1 January 2021, an additional specific reporting obligation has been introduced for foreign companies in certain cases. Now, in March 2022, the Swedish Tax Agency has begun to act in accordance with the extended reporting obligation and has sent out income tax returns to a larger number of foreign companies than before, requesting them to file a return or submit specific information about their operations in Sweden.

On 1 January 2021, extended requirements were introduced for foreign companies with operations in Sweden, but in some cases also for Swedish companies doing business with foreign companies. The legislation introduced on 1 January 2021 essentially consisted of three parts.

The most significant aspect of the new legislation is the introduction of a so-called economic employer concept in tax legislation. The implication of the economic employer concept is that employees of foreign companies will be liable for tax on work performed in Sweden to a greater extent than before, and the regulations primarily target the hiring out of labour. Consequently, the foreign company must register as an employer in Sweden and, due to the expanded tax liability for its employees, withhold and report tax.

Another part of the new legislation is an obligation for Swedish companies to make tax deductions when paying compensation for work in Sweden to a foreign company not registered for F-tax. This is, for example, when engaging a foreign company as a subcontractor that is not registered for F-tax. In this case, the Swedish company must withhold 30 % of the invoice amount and pay it to the Swedish Tax Agency.

As a third part of the legislation from 1 January 2021, a special reporting obligation has been introduced for foreign companies operating in Sweden. The purpose of the special reporting obligation is to enable the Swedish Tax Agency to assess whether the foreign company has a permanent establishment in Sweden and, in other words, should pay corporate tax in Sweden. Companies must submit the special information annually, and the reporting obligation applies from 2022. The information should be submitted at the same time as the income tax return.

The special duty of care can arise in three different situations:

If the foreign company is approved for F-tax
Whether the foreign company is obliged to make tax deductions when paying remuneration for work in Sweden
If the foreign company is obliged to provide equipment so that electronic personnel records can be kept on a construction site.

The special tax return obligation does not apply to foreign companies with a permanent establishment in Sweden, as these companies are already obligated to submit a regular income tax return.

The Swedish Tax Agency has sent out income tax returns to more foreign companies this year than in previous years. The reason is the reported new rules that certain foreign companies without a permanent establishment in Sweden must submit special information. The Swedish Tax Agency cannot determine in each individual case whether a foreign company should submit an income tax return or special information, which is why more foreign companies than before have received a pre-printed income tax return. The Swedish Tax Agency will provide further information to the affected foreign companies during March.

Commentary

The extended requirements for foreign companies are a further clear indication that the legislator wants increased control and knowledge of the companies operating in Sweden. This with the fundamental aim of protecting the Swedish tax base.

The tax issues that arise for foreign companies operating in Sweden are often complicated and can, for example, concern the taxation of employees, corporate tax, and VAT. A question that is not infrequently raised for the foreign company is whether the operations result in a permanent establishment, which consequently means that the company will be taxed in Sweden. A question that often requires more thorough investigation.

If among your clients you have foreign companies that might be covered by the extended requirements or if you have Swedish companies paying foreign companies for work in Sweden, it is important to be aware of what the new rules entail. Please feel free to contact one of MOORE's tax lawyers for further guidance.