Swedish tax withholding rules challenged by the European Commission

The European Commission requests Sweden to amend its rules on preliminary income taxation of foreign contractors.

On 1 January 2021, the Swedish legislator introduced the confirmed-the-economic-employer-concept-is-coming-to-swedene economic employer concept to the Swedish tax code. With this, the scope of tax liability was extended to short-term workers working temporarily in Sweden if deemed to be seen as “hired” personnel to Sweden. To get a better control of foreign companies in Sweden and collect preliminary tax, the Swedish legislator also introduced new rules concerning tax withholding for work performed in Sweden (see our previous article).

Under the new withholding rules, Swedish (and foreign) buyers of goods and services are obligated to withhold a preliminary tax of 30 % on payments to foreign companies for work performed in Sweden, unless the foreign company holds a Swedish F-tax certificate (or has an applicable exemption confirmed by the Swedish Tax Agency).

In July 2023, the European Commission launched an infringement procedure against Sweden claiming that the new order violates the freedom to provide service and that the rules are therefore not compatible with EU-legislation.

The Swedish government delivered its response to the Commission holding the view that the new rules impose the same administrative obligations to foreign companies that already exists for Swedish companies. As such, the governments argues that the new rules are non-discriminatory .

Bringing in line with EU Law

On 23 May 2024, the European Commission decided to send a reasoned opinion to Sweden requesting it to bring its legislation on preliminary income taxation into line with EU law requirements.

The Commission maintains that the obligation to withhold preliminary income tax in situations where foreign contractors have no Swedish permanent establishments and therefore no income tax liability in Sweden, oversteps the freedom to provide services according to article 56 of the TFEU.

Accordingly, The Commission has decided to issue a reasoned opinion to Sweden. The Swedish government now has two months to respond to the opinion and take the necessary measures. Otherwise, the Commission may decide to refer the case to the Court of Justice of the European Union.

EY comment

In our view, it is unlikely that the Swedish government will agree with the assessment made by the European Commission. We believe that the Swedish government will defend the rules and continue to maintain that the withholding rules are not discriminatory towards foreign companies as Swedish companies also have to register for F-tax in order to avoid a preliminary tax withholding of 30 %.

It will be interesting to read the response by the Swedish government and the suggested measures to offset the perceived discriminatory effects of the tax withholding rules. Will they perhaps suggest an amended administrative process surrounding the F-tax certificate for foreign companies, or perhaps introduce a simplified way for foreign companies to get an exemption approved by the Swedish Tax Agency? We believe a simplified solution is needed for the Commission to accept the current legislation as it is.

EY will continue to monitor the situation and update in case of any new developments.

Summary

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Authors:

• Marie Liebich, Director - Global Mobility - 072-573 12 40
• Cecilia Arrhenius, Senior Manager - Global Mobility - 070-290 13 34
• Adis Hasic, Senior - Global Mobility - 076-864 38 59