Swedish rules on preliminary tax deductions for foreign contractors referred to the EU Court of Justice

The European Commission is referring Sweden to the Court of Justice of the European Union for not complying with Article 56 of the TFEU and Article 36 of the EEA Agreement regarding deduction of preliminary tax for foreign contractors.

As per the Swedish legislation on preliminary tax deduction enacted in 2021, principals who pay for work carried out in Sweden by foreign contractors must withhold 30% of the total compensation as preliminary tax if the contractor does not have F-tax approval from the Swedish Tax Agency. The European Commission states that deducting such tax for foreign contractors from other EU/EEA countries who are not taxable in Sweden (i.e. has no PE) conflicts with the EU freedom to provide services.

In 2023, the European Commission initiated an infringement procedure by sending a formal notice to Sweden that the Swedish legislation on deduction for preliminary income tax for foreign enterprises is not in compliance with EU law. In response to this notice, the Swedish government asserted that it maintains its view that the regulations do not contravene the freedom to provide services. KPMG has previously written a TaxNews on the process, which can be found here. 

The Commission notes that the scope of the notion “work carried out in Sweden” also encompasses work that takes place abroad if it is carried out “within the framework of the client's activity in Sweden”. Furthermore, the Commission states that foreign contractors cannot legally obtain 'F-tax approval' for such foreign work, and that there is no threshold regarding the scale or duration of work that triggers the deduction requirement. 

Consequently, foreign contractors face significant cash-flow disadvantages and administrative burdens, due to lengthy refund processes despite, even without Swedish income tax liability. These provisions create barriers to the internal market and restrict the freedom to provide services.

The Commission maintains that Sweden’s 30 % preliminary tax on contractors from other EU member states or EEA countries is seen as infringing the freedom to provide services under Article 56 of the TFEU and Article 36 of the EEA Agreement. Despite Sweden receiving a formal notice in July 2023 and a reasoned opinion in May 2024, the efforts to address this incompatibility have been deemed insufficient, leading to the referral to the Court of Justice.

KPMG’s comments 

KPMG Sweden has worked extensively with the rules in question since they entered in to force in 2021.

Initially, it can be said that the rules are not always straightforward and easy to neither explain nor to apply, for instance when a foreign enterprise has engaged foreign as well as Swedish subcontractors or when the principal is a foreign enterprise itself. Thereto, there are many practical and administrative obstacles. 

Depending on the outcome of the ruling by the Court of Justice, the Swedish government may need to abolish the current provision on deduction of preliminary tax.  Alternatively, the ruling could lead to a modified version of the rules, should parts of them be deemed justified. For instance, the rules may be modified to include a minimum threshold of when preliminary tax is to be deducted to target potential permanent establishments. Such a modification would in our view largely simplify the rules and exclude foreign contractors where no permanent establishment is expected. The ruling from the Court of Justice could also affect other provisions, such as the rules on specific information. 

It should further be noted that the European Commission has decided to refer Sweden to the Court of Justice of the European Union due to Sweden's failure to comply with the EU / EEA freedom to provide services. The EU / EEA freedom to provide services primarily applies within the EU and EEA and does not extend to third countries. The ability to provide services to or from third countries is typically governed by international agreements between the EU and those countries, such as trade agreements or specific sectoral agreements. This means that the outcome of the ruling will primarily affect companies within EU member states or EEA countries. Whether or not it will also be applicable to third countries depends on the legal and regulatory frameworks established through international agreements and must be analysed on a case-by-case basis.

Many of our clients are affected by these rules and we will keep you posted on the development of the procedure as it continues. 

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European Commission pressrelease May 7, 2025