Economic Employer: The 'Game Changer' in Sweden's Tax World

Scott: Hello, I’m Scott Shaughnessy with the Global Mobility Services Group in KPMG’s Washington National Tax Practice in the United States.  And I’m here today with Petter Frodeberg, a GMS partner with KPMG in Sweden and we are talking about a groundbreaking change in the Swedish tax world, the introduction of the economic employer concept.  Welcome, Petter.

Petter: Thanks, it’s nice to be here.

Scott: Petter, as you know, many tax authorities around the world have adopted an economic employer approach to interpreting Article 15 of the OECD Model Tax Treaty, which deals with employment and dependent services.  And now, Sweden is jumping on board too, starting January 1, it’s introduced the concept of economic employer into its tax code.  I was wondering if you can talk to us a little bit about what has been the operating principle in Sweden up to this point.  How has Sweden customary defined employer?   

Petter: Sure.  Up until now, Sweden has used what’s called the legal or formal employment concept, meaning that if you look at what entity you’re employed by.  So if you’re working for a foreign entity but working in Sweden, you have been able to be there in most cases up to 183 days before creating any tax liability or reporting obligations.

Scott: So what will be different now under the economic employer concept?

Petter: Well, it will be a big difference.  I mean it’s kind of game changer in Sweden.  That’s the biggest change that happened for over 20 years, so it’s a big one.  So, there are two ways to identify whether or not you’re going to be taxable.  Either if you have a stay, a trip that’s exceeding 15 days in Sweden, or if during a calendar year, exceeds 45 days, then you will get hit by taxation if you’re viewed to have an economic employer in Sweden.

Scott: Okay.  So correct me if I’m wrong, but up to now, the 183 days rule in Sweden’s special income tax act for non-residents, that limits the liability for mobile employees performing work in Sweden under certain conditions, or if certain conditions are met. Is that correct?

Petter: That’s right.  Because Sweden has been very generous in the past and that has also made that a lot of foreign entities used to not having to worry about Sweden when it comes to business travel or people on short term assignments.

Scott: Right.  So now that economic employer is operational, that rule can no longer shield the employee from his liability to tax in Sweden if his work is deemed to entail the delivery of labor to a Swedish employer, right?

Petter: Right, that’s exactly the case.  

Scott: So, how will this change impact foreign employers with mobile employees in Sweden?  Let’s say you’re a U.S. company, posting a mobile employee to Sweden to work for the Swedish business, on a short term, say a four-month assignment, what’s changing for the U.S. employer?

Petter: I mean from compared to before, you could have an employee for four months without basically doing anything in Sweden.  Now, you will need to register them and start paying withholding taxes for them through payroll.  You will also need to file some other formal registration that you need to do within the European Union.  So I would say it’s a huge shift compared to before, where you could just send them, be there for four months and back, without having any impact.  And of course, then you have the U.S. side of it because you need to claim credit for that tax for employees operating in Sweden.  

Scott: Yes, major change.  So I’m also wondering, as many companies use business travelers, what do companies with business travelers coming into Sweden on a frequent basis need to be aware of?

Petter: Same thing there.  That’s a trickier situation.  I mean an assignment you know that you’re going to have to report it from the beginning.  If you have travelers to Sweden, they need to track them and see one, they have exceeded one of these thresholds, either the 15 days in a row, or the 45 days during a calendar year.  And then after they’ve passed that threshold, then you need to do all the filing, the reporting.  And worth noticing, it’s a foreign entity that has the obligation.  It’s not if you have a subsidiary in Sweden that can operate a shadow payroll, so it’s a foreign entity.  And that makes it very burdensome.

Scott: Right.  So tracking and monitoring become very important here, I understand.  So I’m curious, how do treaties play into all this?

Petter: Well, the good thing is Sweden has a lot of treaties.  And treaties can limit the work, so it’s just the actual working days in Sweden, and if you work a lot there, it could also limit so that you’re not taxed on, for example, capital gains or dividend.

Scott: These are really interesting develops, Petter.  And I can see how this represents a sea change really in Sweden’s tax law, and for foreign employers.  So I was wondering if you could talk a little bit about what are some of the next steps for employers?  I mean they can’t continue to do things the same way.  I imagine it sounds like there could be tax withholding and reporting obligations for them that may not have been part of the plan for them previously.   

Petter: No, I mean if you are, for example, U.S. company having … you know you have to have short term assignments, then you need to start getting a process in place for them for reporting and doing.  Do you have business travelers?  Okay.  Then you need to kind of make an assessment whether or not they’re going to be in Sweden to that extent that they have reporting obligations.  And if it’s likely that will have it, then I would recommend to make a registration already now of the foreign entity so that you have everything up and running once they exceed any thresholds, because then you need to apply for nonresident tax status for the employees and do the payroll reporting.  So I mean really be ahead instead of being reactive once you’ve hit the thresholds.

Scott: Right.  Really good points, Petter.  Well, it’ll be interesting to see how economic employer induces changes in travel patterns, assignments to Sweden, employers policies and practices, not to mention the change in approach to the application of Sweden’s tax rules by the country’s tax authorities.  All very interesting Peter, and can’t thank you enough for being with us here today to shed some light on this development.  Thank you so much.  Oh, and (Swedish).

Petter: It’s been my pleasure, and I’m impressed by your Swedish. (Laughter)