As a new entrepreneur, choosing the right legal form for your business in Sweden is important to meet your future goals. Therefore, we
will introduce the main legal entities in Sweden and offer a couple of suggestions to make the best choice considering your plans.
We will also give an overview of the taxes in Sweden and introduce the tax registration process.
As trade unions and employer associations are important part of the Swedish job market, the article will also introduce their role for business owners.
Legal Forms of Business
Public limited company
A public limited company is the most common legal entity in Sweden and is registered in the business registry. 1Office also has a starting package for new entrepreneurs, including ready-made company, tax registrations, and legal address with a contact person service for a year. The necessary founding documents are the application for registration, the founding act, the articles of association, and an original proof of certificate from the bank. All the documents must be submitted to the business registry in a physical form. The state fee for founding a public limited company in Sweden is currently 2200 SEK.
You have to propose three possible names for your business and state the legal address of your company in the application form. Please note that it is not permitted to use a home address as a legal address for your business in Sweden. The foundation act must include all the shareholders and the size of their share in the company.
Before starting a public limited company, you should contact a bank and notify them about starting a business and ask for an original proof certificate. Opening a bank account for minimum share capital payment is often the main obstacle when starting a business in Sweden.
The minimum share capital requirement to start a public limited company is 25 000 SEK. Previously, it was 50 000 SEK, but was decreased by half in 2020. Therefore, all the public limited companies that made a 50 000 SEK minimum share capital payment can lower it to 25 000 SEK by amending the business registry.
A public limited company must have at least three board members. If appointing three board members is not possible, then the minimum requirement is 1-2 board members and one substitute member. If none of the board members or substitute members live in Sweden or have a Swedish identity code, the company has to appoint a legal contact person in Sweden. See our contact person service here.
The processing time of a public limited company in the business registry will be 5-10 working days, assuming that the minimum share capital amount has been transferred to the company’s bank account.
The beneficial owner(s) must be appointed in four weeks after the company has been established. That can be done electronically, and it requires a state fee payment.
Establishing a Branch
A foreign company’s branch has to be registered in the business registry. We can also help you with a branch registration. The foreign company owning the branch is fully responsible for the obligations and actions of the branch. It also has to appoint an executive director for the branch by sending a relevant application to the business registry. If the executive director doesn’t live in Sweden or doesn’t have a Swedish identification code, then a legal contact person must be appointed for the branch.
Registering a Swedish branch will take 5-10 working days. The accounting has to be kept separately from the foreign company’s accounting, and it must follow the local accounting rules.
A foreign company and a permanent establishment
Doing business with a foreign company is also very common in Sweden. Then you must consider if the company will have a permanent establishment in Sweden or not.
A permanent establishment will determine if the company must pay taxes in Sweden. You should notify the Swedish tax office if you know that the company will have a permanent establishment in Sweden before you establish the company.
When will a foreign company have a permanent establishment in Sweden?
A permanent establishment occurs if a foreign business has a physical location in Sweden, for example, an office, warehouse, or storage, where they carry out their business activities. A permanent establishment will also occur if a foreign company’s business activities in Sweden last longer than six months. That is very common for construction projects. Therefore, if the company is taking on a construction project that lasts for more than six months, they will have a permanent establishment in Sweden. If the project lasts less than six months, the company will not have a permanent establishment in Sweden. That applies even if they have multiple projects at the same time.
A permanent establishment can also occur with seasonal business activities. It means that business activities occurring during a specific period over multiple years can cause a permanent establishment. For example, these kinds of activities can be forestry work or berry picking. In that case, the company will have a permanent establishment even if the business activities occur less than six months.
The company might also have a permanent establishment if they have an agent in Sweden who acts on behalf of the company. That depends on what kind of rights the agent has been given. For example, if the agent has the right to decide about the prices and sign the contracts, the company will most likely have a permanent establishment in Sweden. However, if most of the decisions are made by the foreign company and the agent has restricted rights, the company will probably not have a permanent establishment in Sweden.
Another business activity causing permanent establishment is workforce rent. If a foreign company rents a workforce to a Swedish company, they will have a permanent establishment from the first day. That is a common misconception because people often mistake it for a service that doesn’t cause a permanent establishment.
Which legal entity should I choose?
When considering what form of business to choose in Sweden, then you should have a good understanding of your planned future activities. For example, does the company already have existing long term partners in Sweden. In that case, it is more reasonable to establish a public limited company or buy a ready-made company. Having a Swedish company will also build more trust in potential new clients.
If you plan short-term business activities in Sweden, it might be more reasonable to do business with a foreign company. However, then you have to consider whether the company will have a permanent establishment in Sweden.
Tax registrations are obtained by sending a relevant application to the Swedish tax office. The processing time is quite long and will take minimally 4-8 weeks. When applying for tax registrations, you should have a good overview of the planned business activities in Sweden and what type of tax registrations are required.
F-tax registration is needed to carry out business activities in Sweden. When applying for f-tax, the company will receive a Swedish organization number. Nevertheless, it doesn’t mean that the company is subject to taxation right away.
F-tax registration is relevant for all types of legal entities in Sweden, including foreign companies.
If a company is sending out invoices in Sweden, they should include their F-tax number. If the invoice doesn’t include an F-tax number, then the company that is buying services will risk the possible obligation of paying an income and a social tax on the paid amount. That is the reason why Swedish companies require an F-tax number from the companies they do business with.
Value-added tax (VAT) registration
VAT registration is mandatory for all Swedish companies, foreign companies with a permanent establishment, and the companies who sell goods or services to private persons in Sweden. VAT registration is also required for foreign companies without permanent establishment if they provide services in Sweden. That means the company has to have a VAT registration even in less than 6 months if they already have turnover in Sweden. VAT registration in Sweden is not required if the company offers services and their annual turnover doesn’t exceed 30 000 SEK.
Employer’s registration is mandatory to all Swedish companies and foreign companies with a permanent establishment that have employees in Sweden. The requirement for employer’s registration also arises when a foreign company without a permanent establishment has had employees in Sweden for more than two years.
Trade Unions and Employers’ Associations
Swedish job market is highly regulated by trade unions and employers’ associations, and each sector has its union agreements they follow.
Joining a trade union or an employers’ association is mandatory in most sectors in Sweden. For example, it is almost impossible to do business in a construction sector without joining a trade union or employer’s association.
Trade unions protect the interests of employees and around 70% of employees in Sweden belong to one of the trade unions. Employers’ associations exist to protect the interests of employers. Approximately every 10th employer in Sweden belongs to one of the employers’ association.
When joining a trade union or an employers’ association, it is necessary to know which union agreement to follow. The union agreements state the employees’ working conditions and the minimum salaries in a specific field. Also, the union agreements contain information about the number of vacation days the employees have in this sector. Quite often, the union agreements will give the employees more vacation days than the minimum 25 working days required by the law.
It is recommendable to join an employer’s association too if you already belong to a trade union. The main reason is that employers are not allowed to ask for a revision of clauses in the union agreement. That can only be done through an employers’ association. We can help you with coordination of joining with trade unions.
The Main Taxes in Sweden
An employer has to pay social and income tax in Sweden. At the moment, the social tax rate is 31,42% and it includes national pension, health insurance, parental insurance, work incapacity insurance, job market fee, and general payroll fee.
The reduced social tax rate is 10,21% and applies to young people born between 2002 to 2004 and the elderly born between 1938-1954.
Social tax for foreign companies without a permanent establishment is 19,8%. Foreign companies are entitled to pay reduced social tax because they don’t contribute to the job market fee.
The social tax rates might change annually, especially concerning the lower tax rate.
Private person income tax
Private persons have progressive income tax in Sweden, consisting of local and national income tax. The local income tax rate is 28-35%. The national income tax is doesn’t have to be paid up to the annual income of 523 199 SEK. From the annual income of 523 200 SEK, a 20% national income tax is added to a private person’s income tax.
There are two ways employers can calculate payroll tax. Firstly, they can use a tax table given to all employees by the Swedish tax office. Every employee has to forward their income tax table number to their employer. The employers are then able to pay income tax on each employee based on their salary.
Another option for payroll calculation is to use a 30% income tax rule when an employee hasn’t forwarded their income tax table number.
Value-added tax (VAT)
The standard VAT rate in Sweden is 25%. The accommodation and food services industry is subject to 12% VAT. Literature, cultural, and sport event tickets are taxed with 6% VAT. Medical, dental, social, educational, banking, and insurance services are VAT free.
There are some exceptions to the general VAT rules. For example, construction companies are taxed with reverse charging, meaning that the business buying services from another business is subject to taxation. Therefore, if a construction company submits an invoice to another construction company, the VAT on the invoice must be 0%.
Another exception to the VAT rule concerns the selling of used goods. In that case, if a company buys used goods and sells them forward, they have to pay 25% VAT on the received amount.
There are also different VAT rules for leasing or buying a car. For example, if a company leases a car, then they have the right to get a refund for 50% of the VAT paid. If a company buys a car, there is no right to get a refund on the VAT. However, there are different rules for the companies whose main activity is buying and selling cars.
Corporate income tax
The corporate income tax in Sweden is 20,6%. It has to be prepaid monthly, based on the predicted annual profit for the ongoing year. Therefore, you have to write the company’s predictable profit in the tax registration application. The tax office will then calculate your monthly tax obligation based on the given information.
After establishing a company, you can get a three-month tax extension period, and afterward, you will have an obligation to pay taxes. Please note that the Swedish tax office doesn’t accept it when a company states that there will be no expected profit for the upcoming year. Therefore, you should always give the tax office a realistic number of your company’s predictable profit. The predictable profit can be changed any time by sending a respective application to the tax office.
The data of the company’s next year’s expected profit has to be sent to the tax office at the end of the ongoing year. The tax declaration with the company’s actual profit has to be sent to the tax office at the end of the following year. The tax office will then release a company’s tax decision in December, stating if the company will be refunded for the overpaid income tax, or is required to pay an additional income tax. The additional income tax can be paid in three months after the tax decision was received. Overpaid income tax will be refunded to companies in two weeks after the tax decision was received.
Dividend taxation depends on the tax residency of the person who owns the shares.
For Swedish tax residents, the dividend taxation takes place in three parts. In the first part, the dividends are taxed with income tax. In the second part, the dividends are taxed as a private person’s income tax. The third part is taxed with a capital tax.
In the first part of dividend taxation, you can use the 3:12 rule where dividends are taxed with a 20% income tax rate that can be used up to the lower limit. You can either use the main or the simplified 3:12 rule. The main rule means that the lower limit will be 50% of the company’s yearly salaries. When using a simplified 3:12 rule, the lower limit will be set by the tax office. For example, the lower limit amount in 2021 is 183 700 SEK.
Most companies in Sweden use the 3:12 rule to pay out dividends in Sweden, meaning they will pay out dividends in the amount that can be taxed with 20% income tax.
The second part of dividend taxation is used when the dividend amount is between the lower and upper limit. That part is taxed the same way as a private person’s income tax, so either using a tax table or a 30% rule.
The third part that is exceeding the upper limit, is taxable with a 30% capital tax.
Non-Swedish tax residents can use a 15% income tax rate if they have a tax contract. For example, if a Swedish company has non-Swedish shareholders, they will pay 15% income tax if they have a tax contract. If they do not have a tax contract, the dividends will be taxed with a 30% capital tax.
An Economic Employer
From 1 January 2021, there is a new tax law in Sweden that introduced an economic employer concept. The new law affects foreign companies and Swedish companies who buy services from companies that do not have an F-tax registration.
It means that from now on there are multiple factors to consider that will decide if foreign companies will have to start paying taxes on their employees’ salaries in Sweden. Read more about this topic here.
The new law increases the number of foreign companies that should get an F-tax number, register as an employer in Sweden, and start sending tax declarations to the Swedish tax office. If the company has to start paying taxes on their employees’ salaries in Sweden, the income tax rate will be 30% (25% with a SINK – state income tax for non-residents decision).
The economic employer concept also affects the Swedish companies who buy services from companies without an F-tax registration. If a Swedish company is an economic employer then they have the right to hold off 30% income tax on the invoices sent by foreign companies.
Knowing the key things about the Swedish legal entities and tax system will make establishing and managing your business a lot easier. However, each country’s tax system is different, and some details might need more explanation even for experienced entrepreneurs. We can offer you a Swedish tax consultation where we will answer the questions based on your individual case.