The Swedish Government’s response to the European Commission’s criticism of Sweden’s newly implemented Rules on Tax Withholding on work performed in Sweden by foreign contractors

The Issue
As of January 1, 2021 there are new rules implemented in Sweden, under which the payor of an invoice for work performed in Sweden is obliged to withhold 30% tax unless the issuer of the invoice (i.e. the recipient of the payment) is registered for F-tax, or has obtained a decision of exemption from the Swedish Tax Agency. The tax deduction constitutes a preliminary tax and is paid and reported to the Swedish Tax Agency by the payer of the invoice. It may be credited to a foreign entity in connection with the final tax assessment the year following the payment if it can be shown that no corporate tax liability exists in Sweden. There is also an option available for the entity to apply for an early repayment of the deducted tax. The main purpose of the new rules is to ensure an effective tax control system and to prevent unfair competition.

On July 14th, 2023, the European Commission initiated an infringement procedure by sending a formal notice to Sweden, arguing that the Swedish taxation rules on tax withholding constitute a breach of EU-law (specifically article 56 and 57 of the Treaty of the Functioning of the European Union (EUF), and article 36 and 37 of the Agreement on the European Economic Area (EEA)). On September 14th, 2023, the Swedish Government published a response to the Commission’s notice, opposing the criticism and ensuring that the domestic rules are compliant with EU-law.

The European Commission’s view
The Commission directs its criticism mainly towards chapter 10, section 6 of the Swedish Tax Procedures Act (Sw: Skatteförfarandelagen). Under this rule, the tax withholding applies to all companies that have not been registered for F-tax, regardless of whether the company has a permanent establishment in Sweden or not. According to the Commission, this rule constitutes a limitation of the free movement of services – as it indirectly discriminates foreign companies. The Commission claims that the tax withholding rule prevents foreign companies from establishing themselves on the Swedish market, as they risk facing a liquidity disadvantage if the foreign company do not apply for an approval of F-tax or an exception from such.

Compensation for work performed by foreign companies or non-tax residents that do not have a permanent establishment in Sweden are generally not liable for tax in Sweden, which means that the preliminary tax that is deducted through the obligatory tax withholding in many cases eventually must be repaid. The process to reclaim tax that has been withheld can take up to two years. Thus, the withholding of preliminary tax from foreign contractors, contributes to a liquidity disadvantage, which may prevent foreign companies from expanding their businesses to the Swedish market. This, since the 30% tax deduction decreases the contractors’ income significantly.

Although it is possible to apply for an early repayment of the deducted tax, this is applied restrictively and can therefore not be considered to change the Commission’s view on the liquidity disadvantage. Neither the option to apply for exemption from tax deductions (10:9 SFL) or requesting a special calculation basis (55:9 SFL) changes the Commission’s position. With an approval of F-tax, the companies can admittedly avoid a tax deduction at the source of their compensations and instead be able to pay their taxes on their own – which leads to a more accurate taxation. However, the Commission argues that applying for F-tax requires larger administrative efforts from foreign companies than it does for Swedish companies. This circumstance is a clear disadvantage for foreign companies, and therefore this possibility does not change the Commission’s view on the liquidity disadvantage that foreign companies experience under these rules.

Moreover, the rules also prevent Swedish costumers from hiring contractors that are not already established on the Swedish market, as it requires more administrative work for the costumer than it does to hire a company that has already been approved for F-tax. In addition, should Swedish customers (the payors) fail to fulfil their obligation to deduct the tax correctly, they risk administrative sanctions and penalties.

Lastly, the Commission addressed the question of whether the limitation should be considered proportionate in relation to the underlying interests of the rule. The conclusion was a negative answer, as the Commission argued that this rule is based on a general presumption that the interest of tax collection is at risk and is applied automatically and preventatively.

The Swedish Government’s Response
The Swedish Government opposes the claim that the tax withholding of foreign contractors constitutes a limitation of the free movement of services. Instead, they claim that the purpose is to ensure an effective tax collection and allow the receiver to freely dispose the paid amount without worrying about future taxes. As opposed to the Commission’s claim, it is the Swedish Government’s view that the rules constitute an advantage to the foreign contractors and serves the general public’s interest.

Moreover, the Swedish costumers are more likely to hire foreign companies with the new tax withholding rules. This since the payor of an invoice does not have to consider whether the foreign contractor has a permanent establishment in Sweden under these new rules, which they were forced to do before the implementation. Under the new rules, the Swedish costumer must only consider the F-tax registration. The option of applying for F-tax is available to both domestic and foreign companies. Swedish companies are not automatically approved of F-tax, they must apply in the same way as the foreign contractors, and the criteria are the same. Thus, this creates competitive neutrality between Swedish and foreign companies.

Our comments
The Swedish government’s answer to the criticism is, in our view, not reflective of the practical consequences of the tax withholding rules. It is our view that foreign companies are subjected to more complicated administrative processes than Swedish companies – despite the formal criteria being the same for both groups. The documentation required for foreign companies when applying for F-tax is more comprehensive and requires contact with e.g., agencies in their country of residence – which sometimes can lead to quite complex situations. This leads to indirect discrimination of foreign companies which cannot be considered to bring competitive neutrality. With an F-tax registration also follows an obligation for a foreign company to annually submit specific information in which the company must answer a number of questions aimed to clarify why there is no obligation to submit a corporate income tax return.

The alleged liquidity disadvantage can be a problem and a demotivating factor for foreign companies considering establishing their business in Sweden. As the principle of free movement of services entails both a negative and a positive obligation for the member states to ensure that domestic rules does not restrict them from exercising that right, but also make it possible for them to do so – the Swedish government might indeed have to review the tax withholding rules.

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