Doing business in Sweden

Tax losses

Tax allocation reserve

Transfer pricing

  Other forms of taxation

 VAT – value added tax

Value Added Tax (VAT) is charged on the supply of goods and services effectuated in Sweden in the course of a business. Goods imported to Sweden are also subject to VAT. The rate of VAT is normally 25%. Some goods and services are exempted from VAT or are taxed at a lower rate. The sale of real estates, insurance and financial services, health services, and some educational services are tax exempt.

 Stamp taxes and capital taxes -  A stamp tax is payable on a deed of transfer of real estates. The stamp tax is 1.5% for individuals and 3% for legal entities.No capital tax is payable on the issue of shares, on an increase of share capital or on the transfer of shares.

Real estate tax

A national real estate tax is paid annually by owners of real estates. The tax rate is 0.4-1.0% of the "taxed value" of the property. The "taxed value" must correspond to 75% of the market value of the real estate. The real estate tax will be abolished from 2008.

Taxation of branches

 In principle, branches are taxed the same way as a Swedish limited liability company. Branch profits remitted to the head office are not subject to withholding tax. The accounts of a branch must be kept separate from the accounts of the foreign company.

Employment

General

The Swedish labour market is regulated both by legislation and by its parties through collective bargaining agreements. Trade unions traditionally enjoy a powerful position in Sweden. Although mandatory law and/or collective bargaining agreements provide the basic terms of employment, the employer must provide the employee with the key terms of employment in writing.

Employees in managerial positions are not covered by the mandatory rules in the Swedish Employment Protection Act and are excluded from the terms of collective bargaining agreements. For these employees, the employment is governed by the terms of the individual employment agreement.

Working hours

The statutory maximum ordinary working hours are 40 hours per week, excluding lunch. Under special circumstances, ordinary working hours may instead average 40 hours per week for a period of not more than four weeks. Overtime hours may be worked with a maximum of 200 hours per calendar year. However, the total working hours (inclusive of inter alia overtime hours) may not average more than 48 hours per week for a period of four months.

The Swedish Work Environment Authority may grant exemption from the rules mentioned above, for example by increasing the allowed maximum amount of working hours. Employers must pay two weeks of each period of sick leave, except for the first day, which is not remunerable. The sick pay during these two weeks shall amount to at least 80% of the salary. The Swedish National Social Insurance Office is responsible for sick pay after the first two weeks of sick leave.

Holiday entitlement

 Employees are entitled to a paid annual vacation of a minimum of 25 days in addition to bank holidays (roughly ten working days per year). Employees who occupy a managerial or comparable position or who are entrusted to organise their own working hours and are therefore not entitled to overtime pay, are normally compensated with five additional vacation days per year.

Sick pay

All state funded sick compensation is capped, for 2007 the amount is 80% of SEK 302,250. In particular for salaried employees, the cap is often lower than 80% of the actual salary, why it is not uncommon that the employer provides certain additional compensation, normally up to the 90th day of sick leave. It is also common for collective bargaining agreements within this sector to provide for such extra compensation.

 Parental leave

Parents are entitled to a total of 480 days paid leave, which can be shared between them and used any time before the child reaches the age of eight. However, 60 days of the leave are earmarked for each parent. If one of the parents does not use these 60 days, they will be forfeited. Payment during any period of parental leave is funded by the state and generally amounts to 80% of the salary for the parent taking the leave. However, it is capped at a maximum of 80% of an annual salary of SEK 302,250, i.e. SEK 25,187 per month. It is not uncommon that the employer pays certain additional compensation to cover the gap between the actual salary and the compensation from the social insurance.

On returning to work, parents are generally entitled to reassume their employment on the same conditions. Parents are also entitled to reduce their working time by up to 25% (without pay) until the child reaches the age of eight, or until the completion of the child’s first year of school, whichever occurs first.

Dismissal

According to mandatory law, a dismissal by the employer must be based on objective grounds. These grounds are either economic, technical or organisational reasons, i.e. redundancy, or personal reasons, for example serious misconduct or disloyalty. Summary dismissal is only possible when the employee has grossly neglected his or her duties towards the employer. In a redundancy situation, the principle of "last in-first out" applies, in certain cases with modifications.

 If the employee is a member of a trade union (or if the employer is bound by a collective bargaining agreement) the employer must initiate and complete negotiations with the union of which the employee is a member before any action to dismiss the employee is taken. This rule applies irrespective of the cause of the planned dismissal. A notice of dismissal must include certain formal information. The period of notice normally varies between one and six months, depending on the duration of the employment.

 Under certain collective bargaining agreements, this period is prolonged when the employee has reached a certain age and has been employed for many years. In case of wrongful dismissal, the employer might be liable to pay punitive damages. Normally such damages amount to a maximum of 32 monthly salaries.

 Loyalty and restrictive covenants

The collective bargaining agreements include obligations for the employee to observe confidentiality and to refrain from competition during the employment. These principles are also well established practice. In addition, employment contracts for employees in key positions may include an undertaking by the employee restricting him/her from entering into any business competing with the business of the employer for a certain period after the termination of the employment.

There is no specific legislation in Sweden to prohibit such clauses, however there is a provision in the Swedish Contracts Act to the effect that a covenant prohibiting competition can be modified or set aside to the extent a court of law finds it unreasonable.

For a restrictive covenant to be legally enforceable, Swedish case law indicates, inter alia, that the covenant must be limited to a maximum of two years after the termination of the employment and that certain compensation must be paid for the inconvenience caused to the employee during the restricted period.

Cost of employment

The employer must pay a national social security contribution, which for 2007 amounts to approximately 32% of the employee’s gross salary. It is also common for employers to pay contributions to employee pension schemes. The social security contribution on such payments is approximately 24% of the amount contributed.

Overseas employees

Foreigners other than citizens of EEA countries must have a work permit in order to work in Sweden. Work permits must normally be obtained before travelling to Sweden. There are tax incentives for overseas key position managerial employees and experts exempting one quarter of the overseas employee’s wages and the full amount of certain employment benefits.

The exemption is available upon application from the employer and for a maximum of three years. Income tax Swedish income tax is payable by all Swedish residents on their worldwide income. This may be subject to modification as a result of existing tax treaties for the avoidance of double taxation. In addition to the national income tax of 20% there is an income tax payable at the municipal level. The municipal tax rate varies between 27% and 34%. Assuming an average municipal tax rate of 32%, the effective rate of income tax in 2007 is 32% on the first SEK 316,700 of income.

Additional income up to SEK 476,700 is taxed at 52 % (municipal tax 32% plus national tax 20%) and income above SEK 476,700 is taxed at 57% (municipal tax 32% plus national tax 25%). The income brackets are adjusted annually. Investment income (dividend income and net interest income) and capital gains are taxed as income from capital at a flat rate of 30%.

Special rules apply to capital gains resulting from the disposal of shares in closely held companies and on dividend income from such companies. Wealth tax is payable at a rate of 1.5% to the extent the value of the taxpayer’s net wealth exceeds SEK 1,500,000 for single taxpayers and SEK 3,000,000 for taxpayers who are taxed jointly.

 Marketing arrangements Agents

Agents are protected in Sweden by the Swedish Commercial Agency Act, which came into force in 1992, implementing the EC Commercial Agency Directive. Unless an Agency Agreement is entered into for a fixed period of time, the notice period is one month during the first contract year and thereafter an additional month is added for each contract year up to a maximum of a six months notice period. When an agency agreement has expired, or has been terminated, the agent may in certain circumstances be entitled to commission in respect of contracts concluded after the termination of the agreement. In addition, the agent may be entitled to an indemnification of an amount up to the equivalent to the average of the agents’ remuneration during the preceding five years.

Distributorships

There is no specific law regarding distributorships in Sweden. Case law suggests that a distributor is entitled to a reasonable period of notice of termination of the distribution agreement. The provisions of the Swedish Commercial Agency Act may be applied by way of analogy in cases where the distributor forms part of the supplier’s sales organisation and the distributor has far-reaching obligations towards the supplier. However, there is no clear authority on this. The parties’ freedom to negotiate terms is to some extent restricted by rules of competition law. There is a block exemption for vertical agreements broadly corresponding to that which exists in European Community law.

Franchising

According to the Swedish Act on certain information requirements for franchisors, a franchisor must give certain information to an intended franchisee within reasonable time before entering into a franchise agreement. The Act states certain minimum information requirements that must be fulfilled. Failure to give such information can result in an order to fulfil such information requirements under pain of fines.

The Swedish Franchise Association (www.franchiseforeningen.se) plays an active part in a self-regulating process by requiring its members to comply with stipulated ethical rules. In terms of competition law, there is a block exemption for vertical agreements broadly corresponding to that which exists in European Community law, which is applicable also to franchising arrangements.

 Intellectual property Intellectual property rights are protected by a set of specific acts. Both criminal and civil liability sanctions may apply in respect of infringements of such rights.

Patents

Patent issues are governed by the Swedish Patents Act. Patent applications are submitted to the Patent and Registration Office ("PRV"). The registration process generally takes some three years. The maximum duration of a patent is 20 years from the date of application although certain products in the pharmaceutical and plant industry may be granted an additional maximum five years of protection based on the council regulations (EC) No 1768/92 and 1610/96. Application and patent portfolio management is generally handled by patent agencies, rarely by law firms. Sweden is a party to the Paris Convention, the Patent Co-operation Treaty and the European Patent Convention.

Trademarks

Trademarks are governed by the Swedish Trademark Act. Exclusive protection may be obtained either by registration with PRV or by consistent usage by the proprietor or its licensee. It takes approximately six months to register a trademark. The term of registration is indefinite, subject to renewal every ten years. Sweden is a party to the Madrid Agreement and has implemented the Trade Mark Directive. Furthermore, the EC Community Trade Mark Regulation applies in Sweden.As a member of the European Union, Sweden also applies the Council regulation (EC) 40/94 on the Community Trade Mark.

Copyright

Copyright is governed by the Swedish Copyright Act. No registration or other formalities are required to obtain protection under the Act. Works are protected by copyright upon creation. The author, or creator, may assign economic rights to a work, but certain moral rights remain with the author or creator. Copyright protection lasts for the lifetime of the author or creator and 70 years thereafter. Sweden is a party to the Berne Convention and the Universal Copyright Convention, and has implemented the European Directive 2001/29/EC on the harmonization of certain aspects of copyright and related rights in the information society.

Designs

Designs are governed by the Swedish Design Protection Act as well as the Council Regulation on Registered and Unregistered Designs. A review of the Swedish legislation is presently taking place. A design may be registered with PRV if it qualifies as a novelty and differs substantially from other previously known designs. Protection under the Act lasts five years and is renewable for another two five-year periods thereafter. Sweden is a party to the Paris Convention and the Locarno Agreement. Confidential information and trade secrets Protection for trade secrets is governed by the Swedish Trade Secrets Act. The Act prescribes both criminal and civil liability for unauthorised usage or disclosure of trade secrets.

Infringement investigation

A court may, upon petition of a proprietor or a licensee showing reasonable suspicion of an infringement, for the purpose of securing evidence, grant leave for a so-called infringement investigation. An infringement investigation is executed through the local Enforcement Authority, which is empowered to seize and detain documents or objects relevant to the investigation.

Unfair marketing

Advertising and other marketing measures are governed by the Swedish Unfair Marketing Practices Act, as well as certain other specific regulations regarding products such as tobacco, pharmaceutical products and alcohol. The Swedish Marketing Practises Act contains prohibitions against unfair marketing in general and against certain specific marketing practices such as various terms of misleading marketing, misleading comparisons and certain other unfair or inappropriate marketing practices. Use of the unfair marketing practices may result in court orders to cease such use under pain of fines. In certain cases, liability for damages towards third parties may also arise.

Product liability

The Swedish Product Liability Act is based on the European Community Directive on Liability for Defective Products. The Act imposes strict liability on sellers, importers or manufacturers for personal injury and for damage on property used by individuals caused by an unsafe product. In certain circumstances, manufacturers may also be liable for damages under general tort or contract law. Sweden has also adopted a new Product Safety Act, based on the European Community Directive on Product Safety, under which marketing and sales of products or services may be restricted or prohibited by a public authority for safety reasons.

Dispute resolution

Court system

The Swedish courts are divided into:

• Courts of general jurisdiction (the District Courts, the Courts of Appeal and the Supreme Court) having jurisdiction in respect of disputes related to private and criminal law,

 • Administrative Courts with jurisdiction in respect of issues of public law, including taxation,

• Special Courts for disputes within certain legal areas such as labour law, market regulation and patent registration matters.

In civil litigation the losing party is generally ordered to reimburse the successful party’s costs incidental to the proceedings. Sweden is a party to the Lugano and the Brussels Conventions. By virtue of its membership of the AU, Sweden is also bound by the Brussels Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters.

Arbitration

The institution of arbitration has an exceptionally long standing in Sweden and Stockholm is often chosen as a venue for international arbitration. The state courts have conscientiously upheld a pro-arbitration stance in their supervisory functions. The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has for decades distinguished itself in the service it provides to the arbitration community. The main source of arbitration law in Sweden is the Swedish Arbitration Act. An arbitral award is final and is not subject to substantive review. However, arbitral awards may be challenged on the basis of serious procedural defects or on public policy grounds. Sweden is a signatory of the 1958 New York Convention, and foreign awards may be enforced in Sweden regardless of in which foreign country the arbitral proceedings took place.

This article was written by Swedish law firm Vinge KB