Swedish withholding tax regulations challenged at the EU Court

The EU Commission holds Sweden accountable for not adapting the regulations to EU law.

The EU Commission holds Sweden accountable for not adapting rules regarding the withholding of preliminary tax to EU law. On May 7, the EU Commission announced that Sweden would be held accountable by the EU Court due to the failure to align existing rules on preliminary tax deductions with EU law's requirements for the free movement of services. The Commission argues that the current requirement for Swedish companies to withhold preliminary tax on invoices from foreign companies without a permanent establishment in Sweden may create difficulties for foreign companies in offering their services to Swedish customers.

Since 2021, there has been a requirement for Swedish clients to withhold 30% preliminary tax on payments to foreign companies operating in Sweden, who are not registered Swedish F-tax. The requirement includes withholding preliminary tax from compensation that Swedish companies pay for work performed in Sweden and also applies to foreign companies that lack a permanent establishment in Sweden (and thus are generally not liable for the compensation paid by the Swedish client). To avoid tax withholding, the foreign contractor must apply for F-tax registration or request a refund of the withheld tax at a later stage through a special process/request an exemption.

The Commission argues that the process of requesting a refund of withheld preliminary tax is lengthy and can take up to two years, which can lead to significant liquidity problems for the foreign company. The administrative requirements for obtaining F-tax approval and the processing times at the Tax Agency for an F-tax application are also described as additional potential barriers for foreign contractors' ability to provide services in Sweden. Overall, the withholding requirement is considered a restriction on the freedom to provide services in the internal market.

EY Comment

If the EU Court agrees with the Commission's criticism, Sweden will need to change the rules regarding preliminary tax deductions to meet the requirement for the free movement of services. In such a situation, it is difficult to predict whether the adaptation to EU law will occur through, for example, simplified administrative processes or by abolishing the absolute withholding obligation for payments to companies without F-tax. Based on the Commission's views, it is not inconceivable that Sweden will revert to the rules for preliminary tax withholding that were in place before the changes in 2021. This would mean that Swedish companies would again need to make their own assessment regarding the foreign contractor's potential tax liability in Sweden to determine the obligation for tax deductions on invoice payments. For Swedish companies, this would create greater uncertainty regarding when tax withholdings should be made.

At the same time, EY agrees with the criticism directed by the Commission, considering the administration that the current regulatory framework imposes on foreign companies providing services in Sweden, which often results in requirements for F-tax registration despite the lack of corporate tax liability in Sweden. In practice, these rules often lead to a comprehensive and time-consuming process for foreign companies operating in Sweden, and at the same time, a potential indirect barrier for Swedish companies to hire foreign companies for work in Sweden.

Swedish version of this article.

Authors

• Andreas Bråthe, Partner, People Advisory Services Tax, 073 397 24 33
• Johanna Tullock, Senior Manager, People Advisory Services Tax, 076 854 83 31
• Adis Hasic, Senior, People Advisory Services Tax, 076-864 38 59