Sweden: Response to notice by European Commission that withholding rules targeting foreign contractors violate EU law

Rules requiring withholding of preliminary tax on renumeration paid to foreign enterprises may be contrary to the free movement of services

Response to notice by EC that withholding rules targeting foreign contractors violate law

The government on 14 September 2023 responded to a formal notice from the European Commission (EC) that Swedish rules that became effective in 2021, under which principals that pay for work in Sweden performed by contractors from other European Union (EU) member states or European Economic Area (EEA) countries must withhold 30% preliminary tax from the total compensation if the contractor is not approved for F-tax by the Swedish Tax Agency, violate EU law (i.e., the freedom to provide services).

The EC’s position

According to the EC, the rules requiring withholding of preliminary tax on renumeration paid to foreign enterprises may be contrary to the free movement of services because:

  • The rules entail more administration for both foreign enterprises and principals when hiring foreign enterprises. Although the rules apply to both foreign and domestic enterprises, it is more likely that a domestic enterprise already has a F-tax registration.
  • A foreign enterprise without a F-tax registration needs go through a long administrative process to refund the withheld 30%, which could be a considerable amount of the foreign enterprise’s income.

The Swedish government’s answer

The government argues that the fact that tax must be withheld when an enterprise receives renumeration for work performed in Sweden, regardless of whether the enterprise is tax resident in Sweden or not, enhances the competitive neutrality between Swedish and foreign enterprises.

In addition, according to the government, the former rules could lead to principals being less keen on hiring foreign enterprises since they were obligated to assess whether the foreign enterprises had a permanent establishment (PE) in Sweden or not. Under the current rules, the principals/customers only need to assure that the hired enterprise are registered for F-tax, and if not, withhold tax.

Next steps

The EC will now review Sweden's position. If the EC considers the rules justified after such review, the matter ends there. However, if the EC still believes the Swedish rules restrict the free movement of services, the case may be referred to the Court of Justice for the European Union (CJEU). 

Read a September 2023 report prepared by the KPMG member firm in Sweden



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