When are you liable for Income Tax in Sweden? – Permanent Establishment

Even if a foreign company does not have a Swedish entity registered with the Swedish
Companies Registration Office, it can become liable for income tax in Sweden.

This is the case when a company conducts business activities in Sweden from a permanent location in Sweden, and as such is deemed to have a so-called permanent establishment. The basis for this is regulated in the Swedish Income Tax Act which corresponds with Article 5 in the OECD Model Tax Convention.

Three Conditions to be met
Generally, a permanent establishment is defined as a permanent place of business from which the business is wholly or partly conducted. There are three conditions that must all be met for a permanent establishment to be considered to exist.

The conditions are as follows:

• It must be a geographic location in Sweden.
• The location must be permanent.
• The business activity shall be conducted wholly or partly from this place.

Location in Sweden
A location can be a room or any other space. A location can also be a machine, for instance a server or other equipment. A part of a home, a desk in another company’s premises or a designated place in a square are examples of places that can mean a foreign company has a permanent establishment in Sweden. It does not matter whether the place where the business conducted is owned or rented or otherwise disposed of.

In a written statement published by the Swedish Tax Agency, they concluded that the circumstance that a foreign company has an employee working from their home does not necessarily result in a permanent establishment arising because a place in the employee's home is at the disposal of the company.

Explicit or implied requirement for home office
However, if there is an explicit or implied requirement for work to be performed at home, a permanent establishment may arise. An implied requirement may consist of the company not providing any office space even though the work requires it. The Swedish Tax Agency also considered whether there is any benefit to the company from the work being performed in Sweden or if the company has an interest in the work being done in Sweden.

For example, this may be the case if the company has clients in Sweden that the employee works with or if the employee is involved in sales activities and the company wants to enter the Swedish market. Home office work cannot be considered to occur due to a requirement from the company when the reason for home office work is due to government restrictions such as those during the COVID-19 pandemic.

The same applies when home office work is due to the employee's own preferences and the company does not have any business interest or benefit from the employee working from home. If the work performed at home is exclusively of a preparatory or auxiliary nature, no permanent establishment arises even if the residence can be considered at the disposal of the company.

Permanent Place
The place of business must be used permanently. What is meant by permanent has not been defined in the text of the legislation and there is no case law regarding the concept in the Swedish Income Tax Act. However, normally, an activity that extends over a period of six months is considered to be permanent.

According to the Swedish Tax Agency, an annual recurring activity can be permanent if the activity is conducted in Sweden for more than two to three months per year. Recurring may normally mean activities for at least three years. An activity that continues for three months over a period of three years would therefore be considered to be a permanent establishment provided that the other conditions are fulfilled.

Business Activities - Core Business vs. Ancillary Activities
The third condition for a permanent establishment is that the business activities of the foreign company must be carried out from the permanent establishment. The activities do not necessarily need to be of a productive nature. The Supreme Administrative Court in Sweden has held that “business activities” and “business operations” do not imply any form of limitations to business activities of a certain kind.

Often the term core business is used synonymously with business activities. Core business is a term used in the commentary to the OECD Model Tax Convention to describe activities that are not of a preparatory or ancillary nature.

However, unlike the OECD Model Tax Convention, the Swedish legislation does not contain any exceptions for activities of a preparatory or ancillary nature. The legislator has not considered it necessary to regulate the exception regarding preparatory or ancillary activities.

Activities that are exclusively of a preparatory and ancillary nature does not mean that the foreign company is considered to conduct business from permanent establishment in Sweden. For example, work tasks performed by a company’s finance unit or personnel unit can be seen as ancillary activities and do not result in the foreign company having a permanent establishment.

However, activities of an ancillary nature are generally performed to support the real business activities of the company. If the performance of the activities from a permanent place involves a large portion of the company’s assets or employees, these activities are unlikely to be ancillary.

It is often difficult to distinguish between activities that are of preparatory and ancillary nature and those that are not. If the activities carried out from a permanent place are in themselves an essential and characteristic part of the activity of the business as whole, they are not preparatory or ancillary activities. Nor can an activity whose general purpose is identical to the general business of the whole undertaking be considered as preparatory or ancillary. The factual circumstances are decisive for the assessment.

Example – Permanent Establishment – German Company
The Swedish Tax Agency has presented some examples of situations that (in their opinion) creates a PE. The following example could be relevant for many companies that want to establish a presence in Sweden:

German company B has hired X as a salesperson to introduce the company's products and find customers in the Nordic market. The work involves a lot of travel within Sweden and to Denmark, Finland and Norway, but also requires some office work in the form of planning and contact with customers. Company B has no office premises in any of the Nordic countries, but X works from his home in Stockholm. The trips for customer visits take up about 75 percent of the working time, while the work at home amounts to about 25 percent.

The Swedish Tax Agency considers that company B gets a PE in Sweden. Even if the company does not make an explicit requirement that X work from home, it may be considered an implied requirement because the company does not provide any office space even though the work requires it. Since X has been hired to operate in the Nordic market, the company has an interest in his placement in Stockholm. It is therefore of value to the company that he uses the home for his work and the home may be considered to be at the company's disposal.

It is irrelevant if company B has an office in Germany as it is not possible for X to carry out his work from there. It is the company's core business that X conducts and not activities of a preparatory or ancillary nature. The Swedish Tax Agency believes that the assessment will be the same even if company B has no customers on the Swedish market and X will only sell in Denmark, Norway and Finland. Even then, X's location in Stockholm, central to the Nordic market, is of interest and beneficial to company B.