April 28, 2021
Your Employees: Now Taxable in Sweden?
In 2021, Sweden implemented a new tax law that may affect your employees from other countries working in Sweden. In previous years, such employees might have been exempt from Swedish taxation. As a result of the new law and the economic employer approach, your business might now have to report their income and withhold taxes.
To help you understand the new change in Swedish taxation, we have analyzed a previous work assignment tax treatment and how international assignments to Sweden may look going forward.
Treaty Exemption – Tax Treatment Of The Past
In a global business world, companies frequently need to send their employees overseas for temporary work in a host country. As a result, business leaders have learned to rely on local law and tax treaties for exemption from host country income taxes and related compliance.
The general idea behind tax treaties is, “If your people are not here too long, we won’t tax them. If our people aren’t there too long, we won’t tax them.” More specifically, to be treaty exempt, the taxpayer cannot be in the host country for more than 183 days (i.e. the majority of the year) within a specified 12-month period for the applicable tax year. Additionally, the taxpayer’s compensation cannot be paid out of or charged back to the host country.
Historically, companies used tax treaties for short-term work or assignments, structuring them to be comfortably less than the six-month “183-day” limit. For certain countries and treaties, businesses were able to take advantage when the treaty language did not include a “rolling 12-month period” that starts or ends in the relevant tax year. The absence of such language allowed the clock to reset at the end of the tax year and and enabled treaty exempt assignments that were longer than six months.
Economic Employer Approach – Present Tax Treatment Under New Law
Under the economic employer approach, countries appear to ignore tax treaties. In concept, it focuses on who is practically employing the assignee and who is receiving productive use of the person’s work.
Yes, the taxpayer might still be technically employed out of the home country and on home country payroll. However, if the employee is working in the host country and the employee’s efforts are contributing to the host country entity’s business, then the host country entity could be considered the “economic employer.” Once the host country is considered to be the economic employer, treaty exemptions are ignored, and the employee is taxable in the host country.
Sweden’s new law went into effect in 2021, by which it enacted certain rules regarding the economic employer concept. Generally, if the employee’s work falls under the responsibility and guidance of the Swedish entity for the benefit of the Swedish entity, then Sweden is the economic employer. The company would be required to report the employee’s compensation to Sweden and comply with Swedish tax withholding (the same as it would have to for a local hire).
The economic employer approach will not be applicable, and the employee could be exempt from income tax, if both of the following are true:
- The work in Sweden is over less than 15 consecutive workdays (excluding weekend and leisure days).
- The work in Sweden is for no more than 45 total workdays.
This is a high-level overview of the tax considerations and planning for an assignment in Sweden while factoring in Sweden’s new 2021 tax law. Businesses should keep Sweden’s new legislation and economic approach in mind when planning temporary work assignments to Sweden. If you are planning an upcoming assignment, you may want to consider the following steps:
- Determine in advance whether the employee’s work in Sweden is expected to be taxable in Sweden under the economic employer legislation.
- Perform a tax cost projection to quantify the expected tax impact.
- Structure the assignment to be nontaxable (if feasible) and closely monitor the employee’s workdays in Sweden to maintain nontaxable status.
- If the assignment will be taxable, set up shadow payroll in Sweden to properly report compensation and address required tax withholding.
If you are seeking more guidance or specific planning for an assignment to Sweden, contact our global mobility tax team at email@example.com.
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For 15 years, Global Mobility Tax, has been assisting startups and early growth companies to navigate the tax implications of a global workforce. We provide strategy, consulting, and tax services to organizations and individuals that relocate internationally.
Contact us for any of your global mobility questions or concerns.