Rules on tax deductions for payments to foreign companies may conflict with EU law – The European Commission refers Sweden to the EU Court of Justice

Vill du läsa artikeln på svenska? Klicka här

On May 7th, 2025, the European Commission decided to refer Sweden to the EU Court of Justice due to the Commission's view that the Swedish regulations on preliminary tax deductions for payments to foreign companies, which are not liable for tax in Sweden, for work carried out in Sweden, conflicts with the principle of freedom to provide services under Article 56 of the TFEU and Article 36 of the EEA Agreement.

Background

On January 1st, 2021, Sweden introduced new rules which briefly mean that a preliminary tax deduction must be made for payments to foreign companies if the foreign company has carried out work in Sweden without holding approval for F-tax or another decision from the Swedish Tax Agency that grants exemption from tax deduction. This applies regardless of whether the foreign company is liable for tax in Sweden or not.

We have previously written about the European Commission initiating infringement proceedings against Sweden (see Tax Alert "The Commission urges Sweden to amend its rules on preliminary income taxation of foreign contractors" here) and about the response submitted by the Swedish government on September 14th, 2023 (see Tax Alert "Rules for preliminary tax for foreign companies may conflict with EU law - government's response to the European Commission" here). In its response, the Swedish government argued that the rules on preliminary tax neither prohibit, hinder, nor make it less attractive for foreign companies to offer their services on the Swedish market, but rather increase competitive neutrality between Swedish and foreign companies and that foreign companies are not subjected to a greater administrative burden than Swedish companies under the current regulations. Furthermore, the government stated that payers under the current regulations only need to check whether the company has F-tax or not, thereby avoiding the risk of administrative penalties if the assessment of a difficult tax law issue turns out to be incorrect.

The Commission does not consider that Sweden has adapted its rules on preliminary income taxation to EU requirementsThe Commission believes that the obligation to withhold preliminary income tax in situations where foreign companies do not have a permanent establishment in Sweden - and thus, no obligation to pay income tax in Sweden - conflicts with the freedom to provide services. The administrative steps that a foreign company must take to obtain approval for F-tax to avoid the obligation of withholding tax on invoice payments and the processing time with Swedish Tax Agency constitute an obstacle and thus, a limitation of the freedom to provide services.

The Commission is overall of the opinion that the Swedish tax legislation in its current form can result in significant cash flow disadvantages for foreign companies wishing to offer their services to Swedish customers. The Swedish legislation does therefore constitute a barrier to the internal market and the Commission is based on these grounds referring Sweden to the EU Court of Justice.

Deloitte's Comment

The main purpose of the Swedish regulations implemented in 2021 was to make it, according to the legislator's view, more competitively neutral between foreign and Swedish companies. This was done, among other things, by extending the Swedish tax deduction rules to also cover foreign service providers even in situations where it is clear in advance that the foreign companies are not liable for tax in Sweden.

In our experience, the conditions for cross-border exchange between foreign and Swedish companies have deteriorated as we see an increased administrative burden in cross-border service exchange for both foreign providers and Swedish clients. Deloitte therefore agrees with the European Commission's assessment that the Swedish tax legislation on preliminary tax deductions for payments to foreign companies that are not liable for tax in Sweden constitutes a barrier for foreign companies.

For foreign companies, the process for obtaining approval for F-tax also constitutes a limitation on the freedom to provide services in Sweden. Foreign companies need to submit documents with their application that, among other things, support that the company has no tax debts in its home country. The documents must be issued by the relevant authority and must not be older than three months at the time of application. Deloitte's experience is that such documents cannot easily be obtained in certain jurisdictions and that this in practice constitutes a barrier for some foreign service providers.

Furthermore, it is Deloitte's experience that the current regulations have also put Swedish payers in difficult positions where they, on one hand, have a difficult-to-apply statutory requirement to make tax deductions in certain situations, and on the other hand, risk breach of contract if they do not fulfil payments to foreign providers who lack approval for F-tax.

The need for effective tax control in situations where foreign companies conduct temporary activities in Sweden remains, but in Deloitte's opinion, this need can be met in a simpler and more appropriate way without being administratively burdensome for both Swedish and foreign companies. Deloitte therefore welcomes the challenge to the rules and the review in the EU Court of Justice. We will continue to monitor the case and developments going forward.

Contact Us

If you have any questions, please feel free to contact us.

Alexander Strandberg
Partner, Tax & Legal, Tax GES Payroll
+46 76 827 61 66
astrandberg@deloitte.se

Mato Saric
Director, Tax & Legal, Business Tax
+46 76 827 61 66
msaric@deloitte.se

Amanda Olsson 
Consultant, Tax & Legal, Tax GES Payroll
+46 70 080 41 72
amolsson@deloitte.se