Doing Business in Sweden

Executive Summary
  • The Swedish legal system is based on statutory law, supplemented by case law and preparatory works.
  • Sweden is a member of the European Union since 1 January 1995. EU Law is thus effective in Sweden, either directly or by incorporation.
  • Limited liability company (Sw. “Aktiebolag”) is the most common form of incorporation. The company requires a share capital of SEK50,000 or SEK500,000 if it is a public company.
  • Branch office form is available but is not considered a separate legal entity.
  • Other forms of incorporation are sole proprietorship, private partnership, general partnership, limited partnership, foundation and economic association.
  • Corporate tax rate presently at 22%.
  • Value Added Tax (VAT) 25% with a few exceptions.
  • Employment contracts are mandatory.
  • Labour market is regulated by both legislation and collective bargaining agreements.
  • Dismissal for cause or redundancy is possible, but will usually be negotiated with Trade Union.
  • Wrongful dismissal could result in punitive damages of up to 32 monthly salaries.
1. Introduction

The main question, for a foreign corporation wishing to set up a business entity in Sweden, is typically whether to establish a subsidiary (Sw. “dotterbolag”) or a branch office (Sw. “filial”). These entities will be dealt with in further detail below. Generally the advantages and disadvantages of each form of legal entity must be considered on a case-by-case basis. However, the choice of a subsidiary is often motivated by fencing the risk of the investment to the assets in the subsidiary. Tax is also a common driver.

The most common forms of business entities are private limited liability companies, public limited liability companies, sole entrepreneurs, partnerships and limited partnerships. Other corporate vehicles are available in the form of co-operatives, European Economic Interest Groupings and certain specially designed corporate entities.

2. Business Organisations

2.1 Limited Companies
The Swedish limited liability company (Sw. “Aktiebolag”, AB) is the most common type of company organisation in Sweden. Swedish legislation provides for two types of companies with limited liability (joint stock companies):

  • Private Limited Liability Company (Sw. Privat Aktiebolag) and
  • Public Limited Liability Company (Sw. Publikt Aktiebolag)

(a) Capital Requirement
For a private limited company the minimum capital requirement is SEK 50,000 compared to SEK 500,000 for a public limited company. The share capital may be stated in either SEK or in EURO. To have the share capital stated in EURO the company must have its accounts denominated in EURO as well. All shares in a limited company must have the same value, but the voting power may vary. No class of shares is allowed to have more than 10 times the voting power of another class of shares. All shares in a company must be fully paid up before the company can be registered. Only public companies may issue shares or other securities to the public.

(b) Formation
A limited company can be formed by one or more founders, individuals or corporate entities. The founders can be:

  • natural persons that are residents of the European Economic Area (“EEA”) (Sw. “Europeiska ekonomiska samarbetsområdet”, “EES”);
  • legal persons in Sweden; or
  • companies established in accordance with the legislation of an EEA state and who have their domicile, head office or primary trading area within the EEA. A limited company is established when all founders have signed the formation paper (Sw. “Stiftelseurkund”). However, the company is not considered as a legal entity until it is registered with the Swedish Companies Registration Office (Sw. “Bolagsverket”).

It usually takes two to four weeks to register a new limited company with Bolagsverket. To speed up the process it is possible to use previously established so-called “shelf-companies” which can be acquired from auditors, company lawyers or companies that are specialised in the establishment of companies.

(c) Board of Directors and Managing Director
The Board of Directors (“Board”) of public companies must consist of at least three directors. In private companies the Board may consist of a lower number of directors, provided that at least one Deputy Director is appointed. If the Board consists of more than one director, one of them must be appointed Chairman. The Chairman must ensure that Board meetings are held when necessary or when requested by a Director or a Managing Director. A Managing Director must be appointed in public companies and may be appointed in private companies. In public companies, the Managing Director cannot concurrently be Chairman of the Board. The Managing Director is responsible for the day-to-day management of the company in accordance with the directions issued by the Board and is always authorised to represent and sign on behalf of the company in relation to the day-to-day management. A majority of the Directors, and the Managing Director, must be residents of the EEA, unless granted an exception by Bolagsverket. The Board is responsible for the organisation of the company and for the management of the company’s affairs. Typically the employees have their own representatives in the board, due to the statutory right of Unions to appoint a certain number of members of the board. The number of representatives permitted depends upon the workforce and the nature of the business and can vary between one to three members.

(d) Governing Law
Limited companies are regulated by the Companies Act (Sw. “Aktiebolagslag (2005:551)”, “ABL”). Aktiebolagslagen is supplemented by more specialised laws for some limited companies. If a more specialised law apply to a certain limited company; the specialised law prevail ABL according to the principle of lex specialis.

2.2 Other forms of Business Entities
The following types of entities are not separate legal entities:

(a) Sole Proprietorship (Sw. “enskild näringsverksamhet”)
The structure is an unincorporated business, which means that it is not a separate legal entity and has only one owner. The owner has unlimited liability for all debts and there is no separation between the owner’s private and business debts.

(b) Private partnership (Sw. “enkelt bolag”, ”EB”)
In a private partnership the business is conducted under a common business name and the partners are equally liable. As the private partnership is not a legal entity, it can neither hold property nor contract in its own name. It cannot sue under its own name in the courts, and similarly it cannot be sued under its own name.

(c) General partnership (Sw. “handelsbolag”, ”HB”)
This partnership is based on an agreement between two or more partners (individual or corporate) and constitutes a legal entity The partners operate under a common name. The general partnership can hold property, can contract in its own name and can sue and be sued. The partners are jointly and severally liable for partnership debts. A general partnership must be registered with Bolagsverket, otherwise it will become a private partnership.

(d) Limited partnership (Sw. “kommanditbolag”, “KB”)
This partnership is a form of General Partnership but has, besides one or more general partners who are jointly and severally liable, one or more limited partners whose liability are limited to the amount of their capital contribution. It is usual that the general partner is a limited company. It enjoys the same property rights as a General Partnership and constitutes a legal entity. Private, general and limited partnerships are regulated by the General and Private Partnership Act (Sw. “Lag (1980:1102) om handelsbolag och enkla bolag”, “HBL”).

Economic Association (Sw. “ekonomisk förening”), “EF”)
An economic association is a legal entity, set up by a minimum of three individuals or corporate entities. The association is issued with a registration number as a means of identification. An economic association is to be registered with Bolagsverket after the association has been established. In this way, it is similar to a limited company, but there are certain differences. Every member undertakes to pay a certain contributed capital and, normally, to pay an annual membership fee which is decided by the general meeting of members. There is, however, no requirement of a minimum starting capital similar to a share capital. Apart from the amount contributed, the members of an economic association are not personally liable for the debts and other obligations of the business enterprise. Economic associations are regulated by the Act on Economic Associations (Sw. “Lag (1987:667) om ekonomiska föreningar”, “FL”).

3. Company Name

The Bolagsverket examines the proposed names of the business organization. It is possible to search on registered company names beforehand. When registering a limited liability company or economic association, the company name is protected throughout the country of Sweden. If registering a general or limited partnership, the company name is protected in the specific county in which the enterprise is located. For an international or European protection of the name, a trademark registration must be made.

4. Branches

An alternative approach to do business in Sweden, other than forming a company, is the establishment of a branch structure. Registration in the branch office registry of Bolagsverket is required when an overseas company conducts its business activities (activities of a financial and commercial nature) in Sweden. It can be a difficult task to determine whether an overseas company has established a branch or not. In the process several factors must be taken into consideration. Business activities exceeding a period of 12 months will generally be considered to constitute a business that is liable for registration.

The branch office is subject to Swedish law and must have a Managing Director (MD) resident of the EEA. A branch is not considered a separate legal entity and all legal responsibilities and liabilities remain with the parent company. The branch office must have its own bookkeeping records, which must be separated from those of the parent company. The financial statements and the auditor’s report must, together with the corresponding documents for the overseas company in its entirety, be annually submitted to Bolagsverket. If the overseas company is comparable to the Swedish limited company and domiciled within the EEA, it is only required to submit a copy of the overseas company’s annual report translated into Swedish. If the overseas company or branch has not handed in the financial statements for the two previous years, the Bolagsverket has the authority to, without prior notice, deregister the branch in Sweden. Branches are regulated by the Branch Act (Sw. “Lag 1992:160 om utländska filialer m.m.”).

5. Residence Permit to Establish a Company

The Companies Act requires that at least half the members of the board in a Swedish limited company as well as half the deputy board members must be residents of the EU or the EEA states. The requirement also applies to the Managing Director and the Vice Managing Director. In addition, at least one person authorized to sign for the company must be a resident of the EU or the EEA. The company may contact Bolagsverket and apply for exemption from these requirements.

If the limited company neither has a person in Sweden authorized to sign on behalf of the company, nor has a board member who is a resident of Sweden, the company must appoint a person authorized to receive service of process (Sw. “särskild delgivningsmottagare”). The appointed person must be a resident of Sweden and there is no exemption from this requirement.

There are no obstacles for foreign citizens or people resident abroad to sign up for and own 100 % of the shares in a Swedish limited company.

6. Taxation

Sweden’s corporate taxes are comparatively low in an international context, being some of the lowest rates in Europe.

6.1 Taxation of Companies
Limited companies and certain other legal entities presently pay a corporate tax rate of 22 %. The tax is deducted from the pre-tax results of operations, subject to certain fiscal adjustments. Machinery, equipment, fixtures and fittings with an expected useful life of less than three years, or of a low-value, may be written off immediately in the year of acquisition. Other machinery and equipment may be depreciated using either the straight-line method (20% per annum) or using the declining-balance method (30% of the remaining book value).

(a) Sweden is a Favourable Country for Holding Companies
The selling of business-related shares is free from tax. A business-related share refers to Swedish limited companies and others. Dividends are still tax-exempt and interest expenses are deductible.

(b) Distribution of Dividends
Dividends paid by a Swedish limited company to another Swedish limited company are tax-exempt for business-related shares.

(c) Tax on a Branch
A branch office, constituting a permanent place of business in Sweden, is taxed in accordance with the normal rules on income from a business operation, in the same way as if the business had been conducted via a Swedish limited company. Double tax treaties have the effect that, in most cases and with suitable planning, double taxation of income can be avoided.

(d) Partnerships and Limited Partnerships
In spite of the fact that partnerships and limited partnerships are legal persons that can enter into legally binding agreements, it is not the partnership/limited partnership that is subject to pay tax on its income. Instead it is the owners that are taxable for their share of the profits of the partnership as income tax. Co-owners, who are legal entities, pay corporate tax at 26,3 %.

(e) Value Added Tax (VAT)
VAT is charged on the supply of goods and services conducted 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. Tax exempted items include, for example, insurance and financial services, health services and some educational services.

(f) Fiscal representative
Foreign companies without a permanent establishment within the EU or EEA must appoint a fiscal representative.

6.2 Taxation of Individuals
(a) Residents of Sweden
Residents of Sweden pay Swedish tax on their world wide income, wherever it is earned. However, if having income that is liable for taxation from a company abroad or from a Swedish company, the income could either be exempted from tax based on Swedish rules or based on tax agreements with other countries in order to avoid double taxation. You will be regarded as a resident of Sweden if you stay in the country for longer than 6 months, or if your fixed abode lies in Sweden. Since December 2004 the inheritance- and gift taxes in Sweden have been abolished.

(b) Expatriate Tax Legislation
Since 1 January 2001, new expatriate tax legislation has been effective in Sweden. Tax relief is granted for foreign experts, scientists and key personnel with such knowledge and skills that cannot readily be found in Sweden. The employer should be a company domiciled in Sweden or a foreign company with a permanent establishment in Sweden.

(c) Non-residents in Sweden
If you are not a resident of Sweden, your tax liability is limited to the income that you have earned in Sweden. Individuals residing outside Sweden will only pay a national final source tax, special income tax, of 25%. No deductions are allowed.

(d) Non-residents Working for a Foreign Employer
Earned income from business operations carried out in Sweden is taxable in Sweden with one exception. According to the 183-day rule, earned income will be tax-exempt in Sweden under certain circumstances.

(e) Filing an Income Tax Return
Everyone receiving an income is required to file a tax return the year after the relevant income year. The tax return must be filed with the local tax office by 2 May every year.

7. Auditors

The auditor shall audit the company’s accounts and the Board’s work. The auditor has to inform if he/she has a suspicion of crime. It is regulated by law in Sweden that all limited companies shall have at least one auditor and that only an authorised or approved auditor may act as an auditor for a limited company. The auditor shall not only protect the shareholders but also the employees, guarantors and capital market actors. The new auditing standard in Sweden is a translation of the International Auditing Standards (ISA). The independency of an auditor is crucial. Through Sarbanes-Oxley Act (SOA) the Securities and Exchange Commission has specified several “non-audit services” which are forbidden services for registered public accounting firms who audit issuers. These “non-audit services” are discussed in the EU.

8. Employment

8.1 Introduction
The general Swedish labour market is regulated both by legislation, The Employment Protection Act, (Sw. “Lag 1982:80 om anställningsskydd”, (LAS)), and through collective bargaining agreements. It should however be noted that employees in managerial positions are not covered by LAS. Particular note should be taken that, in contrast to Germany’s Kundigungsschutzgesetz, which exempts employers with no more than five employees, the labour market regulations also apply to small businesses. Whatever the situation, the employer is required to provide the employee with the terms of the employment in writing. Weekly working hours are limited to 40; overtime must not exceed 50 hours per month unless a collective bargaining agreement provides otherwise. Employees are entitled to paid annual vacation of a minimum of 25 days in addition to bank holidays; employees in managerial positions or employees who are entrusted to organise their own time, and thus are not entitled to overtime payment, will normally get an extra compensatory allowance of 5 days.

Employment contracts are assumed to be for an indefinite period of time, although under certain circumstances it is possible to hire employees for a definite and limited period of time, for instance on a project basis or to cover for another employee. An employer may also hire staff on a 6-month trial basis. If the employer do not want the employment to transfer into an employment for an indefinite period, he/she must end such employment no later than at the expiration of such trial period; after 5 months, the employer must inform the employee in writing that the trial employment will not transfer into an employment for an indefinite period. If he or she fails to do so, the employment will automatically transfer into an employment for an indefinite period.

Obligations upon the employee to observe confidentiality and to refrain from competitive activities are a well established practice. It is also possible under Swedish law to include an undertaking for a key employee not to enter into competitive activities for a maximum period of two years after the expiration of the employment, but such non-compete covenants may be set aside by court if considered unreasonable. A non-compete covenant will need to be supported by certain compensation.

If a company is being transferred from one employer to another, all rights and duties based on the employment agreement held by the previous owner in relation to the employees remain with the new owner.

8.2 Parental Leave
Parents are entitled to a total of 480 days paid leave to be shared between them; 60 days are earmarked for each parent and will be forfeited if one of the parents does not use it. A lone parent is entitled to all these days. The days may be used any time before the child reaches the age of 8 years. Payment during parental leave is funded by the state and generally amounts to 80% of the yearly salary. It is not uncommon that employers pay some or the entire gap for employees earning more than the capped amount, although they are not legally bound to. On returning to work, parents are generally entitled to reassume their work with unchanged conditions. Parents are also entitled to reduce their working time by 25% (without pay) until the child reaches the age of 8 or starts school, whichever occurs first.

8.3 Sick Pay
On the first day of sick leave (Sw. “karensdagen”), the employee is not entitled to receive his/her salary. For days 2-14 of the sickness period, sick pay is 80 % of the daily salary and other employment benefits that the employee has lost owing to the sickness. After 2 weeks, the Swedish Social Insurance Agency (Sw. “Försäkringskassan”) will assume responsibility for the sick pay, although the employer may in some instances be obligated to pay an additional amount. A self-employed must pay his or hers own health insurance contributions to the health insurance along with the tax.

8.4 Dismissal and Redundancy
Summary dismissal is only possible in obvious cases of serious negligence by the employee. However, if there are objective grounds (Sw. “saklig grund”) for it, such as shortage of work (redundancy) or personal reasons (serious misconduct or disloyalty), the employer may dismiss an employee, observing certain rules. Hence, whatever the reason for the dismissal, the employer must initiate and conclude negotiations with the trade union if the employee is a member or the employer is bound by a collective bargaining agreement prior to any action taken to dismiss the employee. Moreover, a notice of dismissal must include certain formal information. The statutory notice period varies between 1-6 months, depending on the duration of the employment; certain collective bargaining agreements may provide for an additional notice period also taking the age of the employee into consideration. Finally, in redundancy situations, the “last in – first out” principle generally applies. If a court determines a dismissal as being wrongful the employer could become liable to pay punitive damages. Depending on the duration of the employment, LAS provides that such damages shall equal 16-32 monthly salaries.

The material contained in this guide is provided for general purposes only and does not constitute legal or other professional advice. Appropriate legal advice should be sought for specific circumstances and before action is taken.

© Miller Rosenfalck LLP, June 2017

Please contact:

Astrid Trolle Adams, Solicitor & Advokat (Sweden)

DD +44 (0)20 7553 6008

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