Just like most countries in the world, Sweden wants to tax a foreign (non-Swedish) company when it has a permanent establishment (PE) in Sweden. In this article, we will earn more about the Swedish permanent establishment rules, consequences of a permanent establishment, impact of tax treaties, and potentially how to avoid a permanent establishment.
What is a Permanent Establishment according to Swedish law?
As a general rule, Sweden will only tax a foreign company’s business income, if the company has a permanent establishment in Sweden. The legal definition of a permanent establishment in Swedish domestic law, is “A fixed place of business through which the business of an enterprise is wholly or partly carried on.”. The definition is derived from the OECD model tax treaty.
Furthermore, according to Swedish domestic tax law, a permanent establishment is for instance:
a place of management
a branch
an office
a factory
a workshop
a mine, an oil or gas well, a quarry or any other place of extraction of natural resources
a real estate property that constitutes inventory in a business
Apart from the examples, a permanent establishment can also be constituted of a home office in Sweden, or any other fixed place. Sometimes, multiple physical locations can be regarded, together, as a permanent establishment.
After how long time does a Permanent Establishment occur in Sweden?
According to the main rule, in Swedish tax law, a permanent establishment exists when a foreign company has been performing main business activities during six months or more from the fixed place in Sweden.
It is important to note that sometimes, interruptions in the work in Sweden can be regarded when counting the six-month threshold. Also, there are cases when a subcontractor’s activities in Sweden becomes attributable to the main contractor, of for example, a construction project.
The construction/installation rule for Permanent Establishments
Many people are aware that there is generally a special rule for construction and installation projects. According to the OECD model tax treaty, the applicable threshold for such projects (sites), is twelve months, instead of six.
However, in Swedish domestic tax law, this building/installation exception is not stipulated. However, there can be situations when the increased twelve-month threshold can still be applied, by reason of an applicable tax treaty having this clause. A tax lawyer has to assess whether this could be the case.
Swedish Permanent Establishments and tax treaties
Sweden is part to a great number of bilateral tax treaties with other countries. Also, these tax treaties have a permanent establishment provision, which can be applied to non-Swedish companies. In some cases, it is more beneficial to apply the tax treaty, since for example the treaty has the twelve month construction/installation clause that offers extended protection for foreign companies.
What are the consequences of a Permanent Establishment in Sweden
If a company has a permanent establishment in Sweden, it will be liable to Swedish Corporate Income Tax at 20,6 %. The tax liability does only cover income that is attributable to the permanent establishment. Hence, the non-Swedish company is only subject to Swedish Corporate Income Tax on income tied to the activity in Sweden.
By reason of the tax liability that comes with a permanent establishment, the foreign company must file a Swedish Corporate Income Tax Return, with the income and costs from the Permanent Establishment. This income/costs are to be calculated using the “Transfer Pricing” methods.
Furthermore, a permanent establishment in Sweden will affect an employee’s possibility to apply the 183 day rule on his/her employment income. Also, Swedish Social Security Fees will be higher.
There are many more consequences to both the company and its employees, if the company has a permanent establishment in Sweden. Having a permanent establishment can be costly, but also time consuming as a number of administrative obligations will be due for the company.
How to avoid a permanent establishment in Sweden?
The essential factor is to duly plan any project in Sweden before it starts. A tax lawyer should examine the proposed project, in relation to the Swedish tax rules, and if suitable suggest modifications to the project, if that can prevent it from implying a permanent establishment. Also, in many cases, an analysis should be made of whether the construction/installation rule of a tax treaty can be applied.
Furthermore, Sweden has adopted a progressive stance on permanent establishments due to Home Offices (Remote Work) in Sweden. This can be a neat opportunity for digital nomads, cross-border commuters, and other remote workers. If you plan to employ a person that will work from their home in Sweden – you can contact us for an assessment of whether this will trigger a permanent establishment in Sweden for your company. In some cases, a permanent establishment will not be constituted, depending on the circumstances, which should be analysed in relation to Swedish tax law.
If a permanent establishment is unavoidable, it could make sense to consider incorporating in Sweden, i.e. to start up a Swedish limited liability company subsidiary.
Contact us if you need tax advice on permanent establishments in Sweden. We assist non-Swedish companies with tax advice on their projects in Sweden, when they plan to employ a person working from Sweden, or with any other tax related issue that involves Sweden.