Tax roll-overs and foreign expert tax benefits

WebJournal on International Taxation in Sweden no 4/2011

Tax roll-overs and (foreign) expert tax benefits

by Peter Sundgren
-------------------------------------------------------------------------------------

In a ruling last year that has attracted very little attention the Swedish Supreme Administrative Court (the Court), unwittingly perhaps, has paved the way for very interesting international tax planning opportunities for certain foreigners employed in Sweden. The issue as such that came up before the Court appears quite trivial and it is at first sight quite difficult to understand why the tax payer and his tax adviser (Ernst & Young) have taken the trouble of litigating what spontaneously appeared to be such a trifling matter all the way to the court of the highest instance.

The case focused on our so called expert tax regime concerning a foreign citizen who was employed as as managing director of a Swedish subsidiary of a German (parent) company. He was considered such an ”expert” that qualified him for the benefits available under our foreign expert tax regime. The most important tax break in such cases is that only 75 percent of wages paid out to such experts is subject to Swedish income tax. This amount also constitutes the base for social security charges.

Due to what was considered ”administrative reasons” it had been agreed that the German parent company should make the payments of the salaries to its Swedish subsidiary's managing director. For undisclosed reasons this would make it easier for him to cover certain costs arising in Germany during his stay in Sweden.

The problem with this arrangement, however, was that the expert tax provisions explicitly apply only to experts with Swedish employers which of course normaly makes the payments of salaries to its employees. The situation was further complicated by the fact that under chapter 1 paragraph 6 of the Swedish Tax Payments Act (skattebetalningslagen) the term employer is determined to be the person that makes the payment of the salaries in question.

It was established that the German (parent) company would charge its Swdish subsidiary for its salary disbursments and that consequently the final cost herefor would be borne by this latter company.

The tax authorities, all along, maintained that expert tax priviledges should be denied due to the explicit requirement that such priviledges only apply where the employer was Swedish and that the the employer was the person who actually made the salary payments. As already mentioned the Court, however, ruled in favour of the tax payer. Subsequently the tax authorities in a letter ruling (ställningstagande) no 130 352766-05/111 have confirmed that ”in cases where it is clearly established that salary payments have been made intermediately by a foreign payor on instructions by and on account of a Swedish employer the recipient of the salary may still be eligible for expert tax benefits”.

Comments:

As mentioned above it difficult to figure out why it was so crucial that the salary payments should be made by the German company. In our present digitalized world with deregulated finance markets one would imagine that it would be quite easy for the employee in Sweden himself to take care of simple cash payments and bank transactions also crossborder, especially within the EU. And for the Swedish (real) employer it would also be most uncomplicated, one would imagine, to include its managing director too in the normal wage payment routines of the company. Using the foreign parent company for such purposes appears complicated and costly. Such an arrangement would incur additional costs for the Swedish company for services provided by the forign company. Considering too that such payments are not at arm's length the payments must take transfer pricing problems into account. The Swedish company may also incur foreign exchange costs when reimbursing the foreign parent company. And this company may also have to charge interest for payments made in arrears. So therefore, again, why (on earth) litigate such a trivial problem as this all the way to the Supreme Court?

The answer hereto is no doubt the following: By adopting a salary payment regime as described it is possible to combine the benefits of the expert tax regime with the widespread system allowing foreign citizens with foreign employers on so called tax roll-over contracts subjecting the employee to tax only on his net-of-tax salary received from his employer. Only when the tax, based on this net amount, is assessed as a final tax in the subsequent year, does this tax amount become taxable together with the (net) salary received by the employee for this same year. The tax attributable to the net income received by the employee in the current year is thus ”rolled over” to the subsequent year. Or in other words, the tax payer enjoys a (temporary) deduction for a tax assessed on a his net income! Considering too that the final tax is paid quite late in the year of assessment of tax these tax roll-over arrangements also give rise to a considerable interest saving. (Sweden is so far as is known the only country allowing tax roll-over arrangements of this kind.).

But how (on earth) – which every wage earner would ask himself – has the preliminary pay-as-you-earn-tax which every employer must withhold and pay already in the current year been eliminated.
As such this amount must surely be added to the taxable (net) income received in that year by the employee!

The answer hereto is, however, quite simple: Foreign employers, in this case the German parent company, of Swedish resident employees subject to world wide taxation, are exempted from making current preliminary tax payments! This has been explicitly and independently decreed by the Swedish Tax Authorities. Despite it beeing in conflict with the Tax Pyments Act which does not provide any such exemption for foreign employers. According to certain sources foreign employers will sometimes actually make voluntary preliminary tax payments but will not include the amount as taxable income when subsequenly reporting the salary payments.

The bottom line is thus that a foreigner who works in Sweden on a tax roll-over contract and who also qualifies as an expert by the Scientist Tax Board (Forskarskattenämnden) will pay tax on only 75 percent of his cash salary. He thus enjoys double benefits, partly under established tax practise as regards tax roll-overs and partly under the expert tax provisions. And his employer (in Sweden)will pay social security charges on that same amount.

A couple of years ago when reporting from a seminar held by Deloitte, Stockholm, it was lamented that expert tax benefits were not available for foreign companies' experts in Sweden. I suggested that such a regime combined with tax roll-overs represented a wet dream for all tax practitioners. That dream has now come true! This report is re-printed below.

The Swedish government has announced that the expert tax regime shall be widened to allow benefits automatically to all foreigners with monthly earning of two base amounts (basbelopp) and above, currently 85 600 SEK. This round of legislation should then give an opportunity to reconsider the above reported combination of the expert tax and tax roll-overs.

Stockholm June 2011

peter@sundgren.net