Sweden: Winter car testing activities do not create PE, tax authority’s appeal of lower court decision denied (Supreme Administrative Court decision)

Testing activities do not constitute conduct of core business, required for finding permanent establishment 

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December 5, 2024

The Supreme Administrative Court on November 25, 2024, denied the tax authority’s appeal of a decision of the Administrative Court of Appeal (KRS 4140-23, dated April 12, 2024) that the taxpayer's winter car testing activities in northern Sweden do not create a permanent establishment (PE) and the taxpayer is therefore not liable to pay corporate income tax in Sweden.

The Administrative Court of Appeal agreed that the taxpayer has a fixed place in Sweden but determined that in order for a PE to exist, the taxpayer's core business must be conducted from that location. The court noted that the taxpayer's core business is to develop, produce, and distribute cars, and its activities in Sweden are limited to testing and collecting data from these tests, the information from which is then sent to the taxpayer’s headquarters for further analysis and product development. Some adaptations and adjustments of software and hardware are carried out on site in Sweden to optimize the testing, but the test objects include prototypes and pre-series cars that are several years from production. Car testing in winter conditions is also carried out in other countries. Furthermore, the Swedish operations take up only a small part of the taxpayer's resources for research and development. The court found that such testing activities are of limited significance for the taxpayer's overall operations, and thus such activities do not constitute core activities, but are instead of a preparatory or auxiliary nature.

Read a December 2024 report prepared by the KPMG member firm in Sweden 

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