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Appraisal of the Tax Law for Foreign Experts (the “Expert Tax Law”, ETL) (and further considerations regarding tax roll-overs).


by Peter Sundgren




In Sweden there are two tax payer categories that are granted special exemptions from State Tributes (skattefrälsen) – lingonberry pickers and foreign experts.


The tax breaks in a nut shell regarding this latter mentioned category under the ETL (chapter 11 paragraphs 22-23 of the Income Tax Law) are afforded only to foreign nationals employed by Swedish employers or foreign employers with permanent establishments in Sweden for a period of maximum three years who, after approval by the so called Scientist’s Tax Board (Forskarskattenämnden), are classified as experts/key personnel/company managers or scientists. The (normal) Swedish income tax in these cases and social security charges in these cases are based on only 75% of the gross income of the employee. Certain fringe benefits are tax free altogether. The total reduction of taxes and social security charges over a three year period, see below, amounts to about one and a quarter million SEK, the tax free benefits not included.


Some time ago the ETL was discussed at a tax seminar arranged by Deloitte, Stockholm the purpose being to draw conclusions from the application of the law since its entry into force on 1 January 2001. Keynote speakers were Elise Adelsköld, Johan Sander and Olle Kinnman from Deloitte, Pia Ahlfors of Astra Zeneca, Lennart Tottie from the Scientist’s Tax Board and Kerstin Nyqvist of the Federation of Swedish Enterprise (Svenskt Näringsliv).


The purpose of the ETL is to improve Sweden’s tax competitiveness in relation to our neighbor states, to provide incentives for enterprises, to maintain leading functions of Swedish groups of companies in Sweden, to offer better wage opportunities adapted to the world market and to promote the establishment in Sweden of scientific research and development programs. The means herefor is “to reduce wage costs of Swedish companies in order to enable them to provide net of tax wages to foreign expertise adapted to the world market” [1]. The reason herefor is  “that the determination of wages for this category of personnel is based on after, or net-of-tax considerations which can be very expensive for employers where such wages give rise to increased taxation which must be compensated by still higher wages etc.…”[2]


There was a general consensus between the panelists that the ETL during its first years had been a flop. The law had thus not lived up to its expectations to reduce taxes and social security charges in order to facilitate the employment of foreign expertise. This, (which I announced), dovetailed also the conclusions drawn in a recent 50 page report by the Swedish Institute for Growth Policy Studies (Institutet för Tillväxtpolitiska Studier, www.itps.org). The result of this report indicated that the ETL does not seem to have influenced the choice of foreign expertise to move to Sweden. Nor has the recruitment by Swedish enterprises been dependant on the existence of the ETL. Instead foreign experts were attracted to come to Sweden more for the purpose of making a career. Almost fifty percent of the companies involved in the ITPS investigation concluded that the Swedish rules for attracting foreign experts were less favorable than those of other countries. They asserted, however, that, in the near future, there would be a considerable demand for recruiting foreigners and that, therefore, the legislation should be maintained despite its shortcomings during its initial period of existence.


Lennart Tottie who is the secretary of the Researchers’ Tax Committee (Forskarskattenämnden) provided some interesting statistical data, e.g. that the average wage amount for those who had been granted expert tax status was app. 800 000 SEK and that the number of applications that had been approved was around 600 per year. The total annual cost to the treasury could thus be established at about 150 million SEK.


Kerstin Nyqvist from The Federation of Swedish Enterprise, who had recently been appointed a regular member of the Researchers’ Tax Committee, was probably the harshest critic of the present structure of the ETL which she considered almost impossible to apply in practice. On the website of the Federation of Swedish Enterprise (www.svensktnaringsliv.se) she has concluded that the regime is erratic and unpredictable especially with regard to the determination of the term “key personnel”. She recommended that our system be exchanged for the type of legislation adopted by Denmark where foreigners who take up employment there for a period of three years are granted an especially favorable tax rate of 25 percent on gross income if they earn a minimum annual salary of 785 000 DKR. (The interviewees in the ITPS’ study had also noted the advantages of the Danish system concluding, however, that it rewarded the very highly paid experts but were unfavorable to low paid scientists.)


At the concluding discussion of the seminar I expressed my disappointment that it had completely ignored the widespread application of the practice granted by the Supreme Administrative Court ruling RÅ 1991 not. 53 according to which Swedish (tax) residents (irrespective of nationality) employed by foreign employers who do not have permanent establishments in Sweden and who consequently are not subject to the normal pay-as-you-earn tax payment regime as Swedish companies, can benefit from being taxed only on their disposable current (net) income upon which the ensuing income tax amount is subjected to tax only in the following year (of tax assessment.) This tax regime, nick-named “tax roll-overs”, gives rise to tax and social security advantages, which, depending on the wage amount and the progression of the tax rate, are quite considerable. I underlined that a discussion or a seminar devoted to the study of the tax consequences of how to furnish high-earning foreign expertise with favorable tax conditions in order to recruit them to Sweden without taking into consideration the tax roll-over regime was incomplete and of little meaning. If the tactics of this method were used to its full extent the complaints that had been raised at the seminar about the characterization of the Swedish tax system as an obstacle to the recruitment of foreign experts was less convincing.[3]


At the seminar two further problems of a technical character came up to discussion but were never fully resolved. One of these addressed the problem of deferred wage payments  to foreign experts (efterskottsbetalningar), the other the definition in the ETL of the term “employer”. Both of these problems had in fact given rise to serious contemplation by the tax authorities in their published opinions (styrsignaler) under the headings “Efterskottsbetalningar till “expatriater” (Deferred payments to “expatriates”) which, however had been superseded by “Deferred payments to foreign key personnel” (Efterskottsbetalningar till utländska nyckelpersoner m.fl.) (2006-05-18 dnr. 131 320553-06/11) and “Are payments from other than Swedish employers comprised by decisions of the Researchers’ Tax Committee?” (Omfattas utbetalningar från annan än den svenska arbetsgivaren av beslut från Forskarskattenämnden?), (2005-06-17, dnr. 130 352766-05/111).


The purpose of the following discussion is to further analyze these problem areas and will reveal that they contain considerable tax planning opportunities as well as, in both cases, EU tax considerations. With regard to the uncertainty of the definition of the term employer, tax roll-overs will also come into renewed focus.



Deferred wage payments.


In this context a deferred wage payment is understood as a payment made to an ETL-expert where the payment is made after the elapse of the three year period during which tax benefits are granted under this regime. In its first opinion the tax authorities concluded that such payments should not be given tax benefits of the ETL. However, after a subsequent ruling by the Supreme Administrative Court, which overturned the tax authority opinion, they naturally issued a new opinion to this effect.


At the seminar I broached the question whether or not this would apply also to a situation where the expert/employee had left Sweden and thereafter received his deferred payment. In such a case he/she would no longer be resident in Sweden and thus not subject to unlimited tax liability under The Income Tax Law (ITL) but instead under the special income tax law for Foreign residents (Lagen om statlig inkomstskatt för utomlands bosatta, SINK). Under this tax regime employment income is taxed on a gross basis and taxed at a flat rate of tax of 25 percent. As mentioned above this question was not fully resolved at the seminar but the tax authorities have subsequently determined that deferred wage payments of this kind shall indeed also be covered by ETL benefits. Tax on such payments shall thus be subject to 25 percent on 75 percent of the payment, consequently an effective tax of 18.75 percent.


Moreover, EU residents under certain circumstances are entitled to choose whether they desire to be taxed under the ITL or the SINK. It can, however, be assumed that only under very special circumstances will it be more favourable to choose ITL taxation. Or, in other words, it is highly unlikely to achieve a tax under the ITL that beats the  SINK-taxation! It can be expected that the ruling on the above discussed deferred payments will give rise to all sorts of tax planning techniques such as loan transactions etc. whereby payments to foreign experts will be deferred to a point in time where they can benefit from the 18.75 percent rate.



The definition of the term “employer”.


In her presentation at the seminar Elise Adelsköld discussed the above mentioned opinion by the tax authorities according to which ETL treatment is afforded only to wage payments made by Swedish employers and by foreign employers that have a permanent establishment in Sweden. Only if it can be clearly demonstrated, the tax authorities have concluded, that the wage payment has been made on behalf of a Swedish employer will ETL benefits be granted. Consequently the Swedish employer shall bear the effective cost and be entitled to a deduction here for and shall also pay the social security charges.


Ms Adelsköld pointed out, however, and with some emphasise too, that this was “only” the (non-binding) opinion of the tax authorities and that there was in her opinion an uncertainty as to whether foreign employer payments should be excluded from ETL treatment. However, she did not provide any precise explanation as to why the tax authority opinion could be rejected. Johan Sander pointed out that the restrictions of the ETL only allowing benefits to wage payments made by Swedish employers or foreign employers with permanent establishments in Sweden constituted an unfortunate application of the law. As an example he referred to a situation of a foreign group company who had established head office functions in another Scandinavian country and who had experts sent out to work in Sweden where the employer did not have a permanent establishment and who could thus not enjoy expert tax status.


It is difficult to understand on what grounds the opinion of the tax authorities is incorrect. The wording of the provision itself seems quite clear and the preparatory works to the ETL point out that in order for to qualify for ETL benefits it is necessary that the employer be established in Sweden in such a manner that it is liable here to corporate taxation. The key condition for determining tax liability in Sweden of a foreign enterprise  is precisely that a permanent establishment exist here. The term “belongs here” (höra hemma här) is also the normal Swedish term for expressing unlimited tax liability in Sweden for corporate bodies. Important too is of course the employment contract between the parties obliging the employer to pay wages to the employee for services rendered. A “payor” of such wages as such does not automatically qualify him as an employer for ETL tax purposes. As pointed out by the tax authorities the “payor” of the wages performs only a service on behalf of the true employer, (a service which also gives rise to an (arm’s length) payment from this employer to the payor).


It remains a mystery, however, why the legislator has disqualified foreign employers from the ETL benefits. The main purpose of this regime, one would think, is to provide as favourable conditions as possible for the employment of foreign experts as such in Sweden. So what difference does it make who is the employer? Why restrict the application of the law only to situations where Swedish employers are involved? By enabling foreigners employed by foreign enterprises without permanent establishments in Sweden to take advantage of the ETL one would gain the further advantage that the corporate tax base is not reduced by the wage costs and social security charges!


A problem regarding the restriction of the ETL to apply only to Swedish employers – and here Elise Adelsköld could have a point - is that it could be considered a discrimination of foreign experts employed in Sweden by foreign and especially EU based companies. Or, in other words, why should not an EU resident employee with an EU employer be entitled to the benefits under the ETL? Mr Sander pointed out that the “the employer problem” would be challenged in court.



Joint application of the ETL and tax roll-overs.


A development of the application of the ETL along the lines promoted by Johan Sander, i.e. encompassing also employment by foreign enterprises without permanent establishments in Sweden would no doubt represent a wet dream of every international tax practitioner. The reason here for is that one could then apply both the ETL and tax roll-overs at the same time! The basis for operating the roll-overs is precisely that a foreign employer without a permanent establishment – under specific provisions supplied by the tax authorities - is not obliged to deliver pay-as-you-earn (preliminary) wage taxes. Only if he has a permanent establishment in Sweden does this obligation click into operation. Thus, by offering a foreign ETL expert employment in Sweden a tax roll-over contract, only 75 percent of both the net income in the year when it was derived and the tax thereon which is payable and subject to tax in the following year would be taxable under the ETL treatment. The tax roll-over would thus add a “turbo-effect” to the ETL regime! The outcome of the court decision in this respect is therefore awaited with great interest.


The ETL will apply in many cases especially for persons who work for large international group companies and who are sent out to Sweden for a period of time to work for the Swedish subsidiary. In these cases it is quite easy to arrange his or her employment situation so that he/she maintains his employment in the foreign company instead of the Swedish company in order to take advantage of both the ETL and the roll-over. If the foreign expert is not employed by a group company it may be possible to recruit him/her through a foreign hiring-out-of-personnel company in order to achieve the same result.


Expert tax and tax roll-overs in numbers.


The following calculation will give an approximate idea of the wage and social security amounts to be paid by the employer with the application of the ETL and tax roll-overs, (and a possible combination thereof), based on the average annual (gross) income of 800 000 SEK (as determined by the Researchers’ Tax Committee.)


Granted ETL status the social security charge (at 33%) will be based on 600 000 SEK (= 75% of 800 000). The combined wage amount and the social security charge is 998 000 SEK annually. Over three years 2 994 000 SEK.


In the above case the tax to be paid by the expert employee (also based on 600 000 SEK) would be app. 257 000 SEK and his net income would thus be 543 000 SEK (=800 000 – 257 000 SEK).


If the ETL is not applicable because the employer is foreign based and does not have a permanent establishment in Sweden and if the above annual level of net income is agreed with the employee to be a fair income for the work performed in Sweden, the application of the tax roll-over method over a three year period would cost the foreign employer approximately  3 500 000 SEK.


If the ETL and the tax roll-over method could be jointly applied (i.e. allowing ETL treatment also to a foreign employer without a permanent establishment in Sweden) the total wage and social security charge for the employer over three years would fall to app. 2 780 000 SEK.


(In order to give a Swedish (expert) employee, on whom neither ETL nor tax roll-over treatment is applicable, an equal after tax income, the employer’s wage and social security cost over three years would rise to about 4 250 000 SEK.)



Concluding remarks.


The advance ruling in RÅ 1991 not 53, in my opinion is based on a misunderstanding of the underlying construction of the roll-over employment contract. (Incidentally the Court did not bother to inspect the complete employment contract.) The determination of the salary of the employee – which seems also to be the conclusion of the Advance Rulings Board in this tax case -  is based on factors that are all known at the conclusion of the contract i.e. the level of the net income, the tax amount and progression of the tax rates in both Sweden and the hypothetical tax that would have applied in the homeland of the foreigner if he had remained and worked there. The employment contract does thus not contain any unknown elements or risks that would prevent the correct assessment of the gross income already in the year during which it is derived. If the employee should die or quit his job after the conclusion of his stay in Sweden he would still be entitled to an imbursement from his employer for the tax amount on his (previous) net income. His income is thus rightly derived and its gross amount is factually known (faktiskt förvärvad och till sitt belopp känt) as soon as the net amount is paid out. And this is the key definition of our cash principle that triggers tax liability with regard to employment income. The tax roll-over is an anachronism giving rise to a temporary deduction of income tax. The subsequent payment of tax also gives rise to repetitive and further tax roll-overs ad infinitum after the conclusion of the tax payer’s sojourn in Sweden. The analysis by the tax authorities of the Supreme Court case is a submissive conclusion that the outcome thereof “seems to rest on the wording/structure of the employment contract”.


Tax roll-overs, in my opinion, represent a degenerate form of tax planning that corrupts the tax system. It is unfair and provides unforeseen and unwarranted tax advantages allowing a certain group of tax payers to enjoy a standard of living at a fraction of the tax cost that applies to other tax payers. The legislator, after a lot of hand-wringing, has adopted specific tax breaks for foreign experts under the ETL ostensibly with the purpose that only this system shall apply. The tax roll-over system also distorts tax competition to the detriment of Swedish employers that cannot benefit there from. A further complication is that it is very difficult to detect in the normal tax assessment procedure.


It is the task of the tax authorities – this at least was something that applied at the time (quite long ago) when I worked there – to promote “a uniform and fair taxation in our country”. In no way do tax roll-overs conform here to. The tax authorities should therefore as soon as possible initiate proceedings to abolish tax roll-overs  by legislation or otherwise.[4] This in fact is very easy to accomplish! They have only to decree that foreign employers too– in accordance with the Law on Tax Payments (skattebetalningslagen), paragraph 5, subparagraphs 1-5 – shall make (normal) preliminary (pay-as-you earn) tax payments on behalf of their employees in Sweden!


The seminar gave no indication as to the expected future development of the ETL. A representative of the finance department who was present at the seminar expressed his concern that, due to the prevailing shortcomings and problems regarding this legislation, certain large Swedish group companies such as Ericsson had even given up applying for ETL status of their foreign experts. As mentioned above Kerstin Nyqvist of the Federation of Swedish Enterprise suggested that Sweden, in order to strengthen its competitiveness in attracting foreign personnel, should introduce legislation similar to that existing in Denmark and which had also been officially proposed to the new alliance (‘tory’) government. As expressed in the report by the ITP such a model would be a great idea for high-earning experts and key personnel but be a disadvantage for young scientists with low salaries. Considering the prevailing emotional debate going on in Sweden regarding the tax favours that in the recent past have already been showered to persons with high incomes and to capital owners it would probably be politically sensitive to give further tax breaks to the type of tax payers discussed in this article.


Stockholm in October 2007



[1] Ebba Perman, ”Expertskatt, en kartläggning av konsten att attrahera den kompetenta arbetskraften”, Juridiska Institutionen vid Handelshögskolan i Göteborgs Universitet, ht 2005.

[2] A telling example hereof was revealed in the 2006 annual report of Skanska AB, according to which the company had to give its (foreign) CEO (Stuart Graham) a raise to the tune of 10 million SEK in order to preserve his net-of-tax income after the elapse of the three year period during which he had enjoyed the application of the ETL.

[3] In an article by me that was published in Svensk Skattetidning no 4/2001 in conjunction with the introduction of the ETL I provided an in-depth study also of tax roll-overs. At www.skatter.se I have written an additional report on tax-rollovers titled “The tax authorities continue to pave the way for tax avoidance!” (Skatteverket bäddar för (fortsatt) skatteflykt!). This report was denied publication in Svensk Skattetidning.

[4] It has lately been reported that an investigation by the Tax Authority in this matter is indeed under way.