A proposal to introduce the term Economic Employer in Swedish domestic tax legislation has been presented to the Swedish Parliament. Should the draft proposal be accepted the possibilities to obtain tax exemption in Sweden under the 183-day rule will be reduced. The proposed changes will have significant impact on both employers and employees and are expected to be in force earliest as from 1 July 2019.
Under current Swedish legislation employment income from a foreign employer to an employee for work carried out in Sweden may be exempted from employee income tax in Sweden under the so called 183 day-rule. The rule is also included in most of the bilateral income tax treaties that Sweden has.
For the domestic 183 day-rule to be applicable the following three criteria must be met:
- The employee’s stay in Sweden may not exceed 183 days during a twelve-month period.
- The employment income is paid out by an employer without permanent establishment in Sweden, or on their behalf.
- The cost for the employment income is not borne by a permanent establishment the employer has in Sweden.
The Swedish Government´s proposal
The Swedish Government proposes that an employee who is non-resident in Sweden for tax purposes and working temporarily in Sweden for a foreign employer with no permanent establishment in Sweden, will be liable to pay income taxes in Sweden as from day one.
The determining factor for if the employee is liable to pay taxes in Sweden is if the economic employer is a Swedish entity which benefits ultimately from the employee’s work. This way to determine tax liability is more commonly used internationally, ie substance over form than the concept of formal employer which is used in Sweden today.
If the employee is subject to Swedish tax under the new rules, the foreign (formal) employer shall register for employer reporting purposes in Sweden, withhold employee preliminary tax and file a monthly payroll return.
The foreign employer should also submit relevant information to the Swedish Tax Agency (STA) for the assessment of the company’s Swedish tax liability, if any.
The foreign employer will need to obtain a tax identification number (TIN) and a CIT bill (Sw: F-skattsedel) to verify that the Swedish Tax Agency have made an assessment of the foreign entity’s tax status in Sweden. Without the CIT bill, the Swedish customer to the foreign entity will have to withhold 30% from the invoice amount.
Exemptions for intra-group situations
Since the initial proposal a complementary proposal has been filed suggesting exemptions for intra-group situations (as defined in legislation) if the work for an employee does not exceed five consecutive days at a time and 30 days in total per year.
Consequences of the changes
The proposed legislative changes will have substantial impact on foreign employers as well as their employees, both increased cost as well as an increased administrative burden for foreign companies.
The changes will require certain competence in the Swedish tax system, foremost considering that the foreign employer must register with the STA as a foreign employer, request a CIT bill, manage employee tax withholdings and file a monthly payroll return on an individual level.
The foreign employee, who is taxed in Sweden on income paid out from the home country, may face a cash-flow problem due to the withholding both in Sweden and in the home country. The employee may also need assistance with the home country tax return to claim tax relief for the taxes paid in Sweden.
What will happen next?
The intention was that the legislative changes should be effective from 1 January 2019. However, due to the unclear political situation with no new Government the Parliament’s vote on the proposal has been postponed. At the earliest the changes may come into force as from 1 July 2019 but more likely as from 1 January 2020.