Specific rules apply to non-Swedish companies that have permanently established business operations in Sweden, or that carry out transactions with affiliated Swedish companies. These rules also apply to Swedish companies that have permanently established business operations abroad, or that carry out transactions with affiliated companies in other countries.
In this section, we outline the following:
In the “International” section, you can find out about the following:
More information on these matters is available (in Swedish) in the Legal Guidance section.
Transfer pricing (TP) is about prices and other terms that are agreed in cross-border transactions between affiliated companies.
Transfer pricing rules are based on what is known as the “arm’s length principle”, which means that prices and terms agreed in cross-border transactions between affiliated companies must correspond to those that would have been agreed between non-affiliated companies in comparable circumstances.
The arm’s length principle is an internationally accepted principle that is incorporated into Swedish domestic law (Chapter 14, section 19 of the Income Tax Act). The arm’s length principle is also incorporated into all of Sweden’s tax agreements, which are in turn based on Article 9 of the Organisation for Economic Cooperation and Development’s (OECD’s) Model Tax Convention. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations have been published in order to ensure that Article 9 and the arm’s length principle are applied internationally on a consistent basis. The Swedish Tax Agency follows these guidelines when working on transfer pricing issues.
In certain circumstances, companies have an obligation to document their cross-border transactions with affiliated companies. More information on how to document these transactions is available in the “Duty to document” section.
Profit attribution is about the way a non-Swedish company with a permanent establishment in Sweden should be taxed. The same principles apply when a Swedish company has operations in another country and is taxed there. There are no specific regulations in the Income Tax Act regarding the attribution of income and expenses to a permanent establishment. Guidance on determining the income attributable to a permanent establishment can be found in the OECD’s “Report on the Attribution of Profits to Permanent Establishments” and in the commentary on Article 7 of the OECD’s Model Tax Convention.
The principles of profit attribution are also significant when a Swedish company runs operations from a permanent establishment abroad and requests a deduction for foreign tax. Deductions are only permitted for tax on income that the other country has calculated according to the principles of profit attribution.
According to the OECD’s “Report on the Attribution of Profits to Permanent Establishments”, a permanent establishment must report its results as if it were a “distinct and separate” enterprise. This is in line with the arm’s length principle, which means that prices and terms agreed in cross-border transactions between affiliated companies must correspond to those that would have been agreed between non-affiliated companies. The principle is outlined in more detail in the OECD’s Transfer Pricing Guidelines, which also apply to profit attribution. The OECD’s profit-attribution report refers to these guidelines, since they also provide guidance on profit attribution to permanent establishments.
Profit attribution differs from transfer pricing in that a permanent establishment in Sweden is considered to be part of a non-Swedish company. To calculate the income of a permanent establishment, it is necessary to perform an analysis using the method approved by the OECD: the “functionally separate entity” approach. By applying this two-step method, a hypothetical distinct and separate enterprise is created, to which pricing is then applied as for an independent company.
The first step involves creating a hypothetical enterprise that is distinct and separate from the company in question. The starting point is to carry out a functional analysis to identify the operations and economically significant activities of the permanent establishment.
To understand the role of the permanent establishment, it is important to analyse the entire company’s operations, identifying the functions performed by staff at the permanent establishment, and the significance of these functions in terms of profit generation. The significant functions performed by people in the company are known as “significant people functions”. A permanent establishment’s activities can range from support functions to significant operations that lead to the attribution of assets and risks to the permanent establishment.
Risks, assets and capital are attributed to the permanent establishment based on the functions performed there. It is also necessary to map certain other transactions that the company as a whole has had with other legal entities (both independent and affiliated companies), in order to determine which of the rights and obligations linked with these transactions should be attributed to the permanent establishment.
Business risks must be attributed to the particular part of the company where the risks are managed. For a risk to be attributed to a permanent establishment, it must have staff who can take on or manage the risk through active decision-making. This means that the risks will linked to the functions within the permanent establishment.
The attribution of a company’s assets cannot be based on legal ownership, since the company as a whole owns all the assets. The company’s assets are attributed to the permanent establishment instead, on the basis of economic ownership or usage.
Unless circumstances dictate otherwise, tangible assets must be attributed to the part of the company that uses them.
Intangible assets must be attributed to the part of the company where an active decision is made to take on and manage the risk associated with the asset.
Sufficient capital must attributed to the permanent establishment to support the functions, risks and assets that have been attributed to it. This capital must be a non-interest-bearing share, in accordance with the arm’s length principle. This is to ensure that the permanent establishment has a debt-to-equity ratio that is in accordance with the arm’s length principle. Various methods can be used to calculate the amount of capital that needs to be attributed, depending on the situation. The circumstances of each specific case determine whether the application of a particular method will result in a non-interest-bearing share of capital being attributed to the permanent establishment, in accordance with the arm’s length principle.
A permanent establishment is part of a foreign legal entity, from both a legal and financial perspective. Because of this, transactions between the permanent establishment and other parts of the company can have no consequences under civil law. However, the business transactions between the permanent establishment and the rest of the company (which the OECD calls “dealings”) must correspond – from a tax standpoint – with the terms that would have been agreed between independent parties. It is therefore necessary to determine which “dealings” have taken place between the permanent establishment and the rest of the company.
In the second step, pricing is carried out for dealings with other parts of the company and affiliated companies. This must be done in accordance with the Transfer Pricing Guidelines, which are applicable to the permanent establishment’s dealings with other parts of the company. Transactions and dealings must be compared with the transactions that an independent company would have made in a comparable situation. This ensures that payment for all functions and activities performed by the permanent establishment is made in accordance with the arm’s length principle.
To determine whether the permanent establishment is paid in accordance with the arm’s length principle, it is necessary to carry out a comparability analysis and apply an appropriate pricing method. There are several factors to take into account when choosing a pricing method, and the suitability of a particular method will also depend on the situation. It’s important to consider the strengths and weaknesses of the respective pricing methods in relation to the specific transaction. Further information can be found in the OECD’s Transfer Pricing Guidelines.
The results for the permanent establishment should be calculated based on all the activities carried out there, including the following:
A permanent establishment’s accounts serve as a basis for calculating the result. However, these accounting records will be excluded from the Swedish Tax Agency’s assessment if they do not comply with the principles of profit attribution. It may therefore be necessary to make adjustments to the income tax return to ensure that revenue is presented in accordance with the arm's length principle, and to calculate deductible expenses.
In some circumstances, a non-Swedish company with a permanent establishment in Sweden that has dealings with other parts of the company, and cross-border transactions with other affiliated companies, has an obligation to document these transactions. This also applies to Swedish companies that conduct business operations from a permanent establishment abroad. More information can be found in the “Duty to document” section.
A company that carries out transactions with other affiliated companies must, in certain circumstances, produce transfer pricing documentation. The aim is to make it possible to determine whether prices and other terms agreed between the companies are in accordance with the arm’s length principle.
The documentation must consist of two parts. One part is common to the group of companies, and must contain information about the group and its operations. The second part is company specific, and must contain information about the company and any cross-border transactions it carries out with affiliated non-Swedish companies. If the documentation relates to a permanent establishment, the second part must contain information about the company and the transactions attributable to the permanent establishment that are deemed to have taken place between the permanent establishment and the rest of the company. The documentation should highlight transactions that are important from a transfer-pricing perspective. Transactions that are immaterial do not need to be included in the company-specific documentation.
The documentation must be provided in Swedish, Danish, Norwegian or English, and must be submitted to the Swedish Tax Agency on request. The part that is common to the group must be provided by the time the parent company is due to file its income tax return at the latest. The company-specific part must be provided by the time the Swedish company is due to file its income tax return.
Small and medium-sized companies are exempt from the duty to document, but they must still follow the rules for transfer pricing and profit attribution. If a company fails to report a result that is in accordance with the arm’s length principle, the Swedish Tax Agency has the right to adjust the result.
The exemption from the duty to document applies to companies that were part of a group of associated enterprises during the year before a particular tax year. This includes:
To be exempted, such companies must have fewer than 250 employees and either an annual turnover of no more than SEK 450 million or a balance sheet total of no more than SEK 400 million.
Exemption limits are calculated for the group of associated enterprises as a whole. An exemption applies both to companies that carry out transactions with non-Swedish companies, and to companies that operate from a permanent establishment.
The OECD has published a guidance on how the arm's length principle and the OECD's guidelines for transfer pricing should be applied to issues that arise or become more significant as a result of the COVID-19 pandemic.
The guidance addresses four areas that are considered to be of particular importance:
The guidance should be regarded as an implementation of the main transfer pricing guidelines to the specific issues arising as a result of the pandemic. The guidance should not be regarded as an extension or amendment of the main transfer pricing guidelines.
More information on these matters is available (in Swedish) in the Legal Guidance section.
In addition to the legal guidance we offer, we have chosen to outline parts of the guidance offered by the Organisation for Economic Co-operation and Development (OECD) regarding the COVID-19 pandemic and transfer pricing. We have divided this outline into the following three sections: