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The Administrative Court of Appeal rules that the VAT on the sale of NFTs should be governed by the associated asset.

preTAX has represented a company in proceedings against the Swedish Tax Agency regarding the sale of 3D animations linked to Non-Fungible Tokens (NFTs). The Swedish Tax Agency considered that the primary supply was the NFTs themselves and that the sale should be subject to a 25% VAT. The company, on the other hand, argued that the customer was interested in the 3D animation and that the provision of the NFT and the functions it entails were subordinate to the associated 3D animation. Thus, the supply should be seen as the sale of art, and the reduced tax rate of 6% should apply.

The Administrative Court of Appeal (sw: kammarrätten) opined that a system for verifying ownership generally is considered to have limited value if there is no associated asset for which the ownership is verified. Against this background, the court judged that it was the 3D animations that constituted the primary supply in the company's sales. Therefore, each transaction should be seen as a single provision where the VAT is determined based on the tax rate applicable to the turnover of the associated asset. According to the court, the applicable tax rate in this case is therefore the reduced rate of 6% applicable to art.

Our comments

We agree with the court's conclusion. An NFT is best regarded as a contract that regulates how the sale and ownership of the associated asset are to be governed. The sale of the NFT itself is subordinate to the sale of the associated asset. In other words, it is not the NFT itself, but the associated asset that the customer is interested in, and both the tax liability and the VAT should be governed by what the associated asset constitutes.

The court's decision emphasizes the importance of correctly assessing what the primary supply consists of and what the customer actually requests. From a VAT perspective, this means that although it may be tempting to assess everything digital as electronic services, reality is significantly more complex.

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New rules concerning economic employer concept and new obligations for all companies having personnel in Sweden will enter into force from the 1st of January 2021.

Economic employer

According to the new rules a foreign employee employed by a foreign employer will no longer be exempted from tax in Sweden according to the Special Income Tax Act for Non-Residents (SINK) if the employee’s work in Sweden is considered as a part of a staffing arrangement with a Swedish company.

In such case, the Swedish company will be considered as the employee's economic employer and the employee will be taxed in Sweden from the first workday. The decisive factor for taxation is who the employee does the work for, and not who pays the salary.

Only work carried out in Sweden for a very limited period shall be exempted from the rules. This exemption applies for work carried out for a maximum of 15 consecutive working days or a maximum of 45 working days per calendar year.

A foreign employer will be required to withhold tax in Sweden for employees who are covered by the economic employer concept. Therefore, the foreign employer will then also be obliged to register for PAYE-purposes in Sweden.

Withholding of tax in no-employment situations

Swedish companies must withhold preliminary tax of 30% on payments to foreign companies for work carried out in Sweden if the foreign company is not registered for F-tax at the Swedish Tax Agency.

Foreign companies must withhold preliminary tax of 30% on payments for work performed in Sweden if the receiver of the payments is not registered for F-tax at the Swedish Tax Agency.

Specific information to the Swedish Tax Agency

The Swedish Tax Agency requires information from foreign self-employed individuals and companies without a permanent establishment in Sweden to assess whether there is a tax liability in Sweden or not. Information regarding time spent in Sweden and the nature of the work performed in Sweden must therefore be provided to the Swedish Tax Agency.

The Swedish Tax Agency is preparing guidelines regarding the information provided to the Swedish Tax Agency. These guidelines are not yet available. The information will be filed on an annual basis and the due date will be the same as the due date for the income tax return.

Comments

The new rules entail a significant change for foreign companies, which are doing business in Sweden. The transition to an economic employer concept requires foreign companies to identify and analyze if the employees will be taxable in Sweden from the first workday. Foreign companies and subcontractors also need to assess if they must be registered for F-tax in Sweden and what is required to comply with the new rules.

Please feel to contact us if you have any questions regarding the new legislation and how your business can be compliant with the new rules. We will be more than happy to assist you through this!

Adjustments to the new tax rules for the corporate sector

The 1st of January 2019 new EBITDA interest deduction tax rules were implemented for the corporate sector. The new tax rules have led to situations where the limitation has effectively partially reduced historical tax losses for companies expanding. In order to correct this, the government proposes that corporations that wholly or partially cannot deduct the yearly interest costs, because of the limit, will in some cases be able to adjust their deductions for previous years in relation to the denied interest deductions.

Tax reduction for investments

The proposal represents a temporary tax reduction on investments in inventory. The reduction, which means that a lower income tax is paid, is proposed to be up to 3,9% of the acquisition value of the inventory. The tax reduction will apply to inventory purchased during 2021.

Reduced general payroll tax for 19–23-year-olds.

The government proposes a temporary reduction of 37% of the payroll tax for 19–23-year-olds from the 1st of April 2021 to the 31st of March 2023. The purpose for the reduction is to off-set the negative effects of the pandemic on youth employment and to stimulate the hiring of new employees.

The expert tax on foreigners becomes more competitive.

Foreign experts, researchers, and key people can currently get a tax reduction for at most the first three years of their limited visit to Sweden. The government proposes to extend this reduction to the first five years. The proposed change would be implemented for those who began their stay after the 31st of May 2020.

Enhanced FoU-deduction

The FoU-deduction means that companies that employ people working in the research and development fields pay a reduced payroll tax and a lower general payroll fee. By enhancing this deduction, the government intends to improve the opportunities for companies to conduct research and development in Sweden.

The proposal means that the qualifying time worked on research and development is reduced per employee to at least half of the calendar month and simultaneously the maximum reductions is increased from SEK 450 000 to SEK 600 000 per month.

Comments

Generally the proposals are favorable for many Swedish companies and most welcome.

Contact us for further details how this may be applicable to your operations in Sweden.

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In a recent decision, the Swedish Tax Agency has declared that converting a virtual currency to a traditional currency is not a transaction that falls within the scope of VAT. The logical conclusion is that the Swedish Tax Agency has accepted virtual currencies as legal tender and the exchange is simply a conversion of one currency to another currency.

The Agency is currently auditing companies that mine virtual currencies or who provide hash power to clients who mine currencies. The Swedish Tax Agency has recently denied an alleged mining company reimbursement of VAT, on the grounds that the company did not have a business activity falling within the scope of VAT.

The Swedish Tax Agency have asserted that the mining of a crypto coin is not a transaction, as there is no purchaser of the mining company’s service. The subsequent exchange or sale of the mined coin into a fiat currency is not a transaction from a VAT perspective, as the miner is performing the exchange on their own behalf.

The Agency’s judgment on this matter makes it clear that this decision applies irrespective of the virtual currency that is exchanged.

The ramifications of the Swedish Tax Agency’s decision

It should be noted that the European Court of Justice has ruled that the service of changing one legal currency to another is a service transaction. It has further ruled that a bitcoin is not goods and consequently a service, but neither a legal currency nor a negotiable instrument. A supply of services has a very broad scope and is in essence everything that is provided under a legal relationship where the provider is remunerated for the supply of the service.

preTAX has asked the Swedish Tax Agency if the legal arguments being presented are the individual tax officers’ own opinions or the Agency’s official standpoint. We have recently received the following answer:

“The draft decision presents the results of the Swedish Tax Agency's investigation. The legal conclusions are part of the outcome. It is therefore the Swedish Tax Agency's investigation and the Swedish Tax Agency's conclusions, which the Swedish Tax Agency stands for. I can't make it clearer than that”.

Judging from the above statement, we might infer that the legal arguments presented reflect the official stance of the Agency and in extension the Swedish government.

Arguments could be made that the mining activity is subject to VAT. However, the Agency’s view that the exchange of a virtual currency to another currency is not a transaction is ground-breaking. Either the Agency has invented a new (non-) transaction form for VAT purposes, or it accepts all virtual currencies as legal currency and the exchange as simply a transfer of one currency to another at the equivalent value.

A few conclusions can be made when interpreting the Swedish Tax Agency decision in the light of the rules set out by the European Court of Justice:

1. The Swedish Tax Agency considers that all virtual currencies should be treated the same irrespective of the characteristics and rights derived from the individual coins;
2. The conversion of a virtual currency to a legal currency is not a transaction and, it would seem, irrespective of what value you give the virtual currency;
3. The only reasonable conclusion to the non-transaction is that the opinion of the Swedish Tax Agency is that the parties to the exchange are only trading legal currency at equivalent intrinsic values.  

At the same time, the Swedish Tax Agency’s decision leaves a number of unanswered questions, including:

• What are the boundaries of a virtual currency, and to what extent can diverse services and rights be included in the virtual currency?
• Is it possible to give a virtual currency any given value at a sale and thereby shift profits between entities and countries?
• What are the income tax consequences for private individuals and for companies exchanging virtual currencies?
• What are the consequences from a regulatory standpoint?

Although it is not entirely clear what the legal basis for the Swedish Tax Agency’s decision is, it appears that the Agency is taking radical steps in both the tax treatment of virtual currencies and what constitutes a virtual currency. Right now, it is difficult to fully appreciate the full impact of the Agency’s decision, and to know whether the Agency’s decision will stand up in court. Finally, while this does create opportunities and challenges from a taxation perspective it also raises a number of important regulatory issues as well.

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In order to relief the consequences of the Covid-19 outbreak the Government has presented proposals for corporate liquidity.

In brief, the proposals include the following:

Deferral of payment of taxes and fees

Possibility of deferral of payment of VAT, social security contributions and preliminary tax for employees. Interest will be calculated from the day of the deferral and until full payment of the deferred amount has been made with an efficient annual interest rate of approximately 3.1 %.

Short-term lay-off

The possibility of short-term lay-off of staff and the State paying up to 50% of employees’ wages.

The government has announced improvements to the short-term lay-off system to make it more powerful. The short-term lay-off system is proposed to be temporarily strengthened. The government proposes that the employer should be able to reduce the working hours of employees by up to 80 per cent, of which the state bears most of the cost. The rules shall apply for three months with start from 1 May 2020.

The proposed rules mean that the costs for the employer will bed reduced. The salary cost of an employee is reduced by over 70 per cent while the employee is allowed to retain almost 90 per cent of his/her original salary. Combined with the reduced employer contributions, up to 86 per cent of the total salary cost can be lifted from the employer during May and June.

Sick pay responsibility

The State takes over sick pay responsibility for the first two weeks of sick leave during April and May 2020.

State loan guarantee

A state loan guarantee which means that the State guarantees 70 % of new loans from banks to companies which, due to the consequences of the coronavirus, have experienced financial difficulties, but are otherwise viable. The guarantee is issued to the banks, which in turn provide guaranteed loans to companies. Each company is proposed to borrow a maximum of SEK 75 million, but exceptions can be made.

Preliminary corporate tax payments

Companies can make an adjustment of the preliminary income tax if they have been affected by the virus. The adjustment means that companies can avoid excess preliminary tax payments, if they believe that the income during the financial year will be lower than they had previously stated. The adjustment should be made by submitting a new preliminary income tax return for the current year. The Swedish Tax Agency can adjust the preliminary income tax during the entire year and up to six months following the end of the tax year.

Temporary reduction of social security contributions

Temporary reduction of social security contributions during the period 1 March to 30 June 2020. The reduction will be applicable for up to 30 employees and for salaries of up to SEK 25 000 per employee per month, which would result in tax relief of up to SEK 5 300 per employee per month. In order to provide a corresponding reduction to sole traders they only have to pay the pension contribution and two thirds of the other social security contributions and the general payroll tax in 2020. The rules are proposed to enter into force on 6 April 2020.

Rental costs in vulnerable industries

Temporary discount for rental costs in vulnerable industries. Compensation is given with a maximum of 50 per cent of the reduced fixed rent, but a maximum of 25 per cent of the original fixed rent. The aid may be applied retroactively and shall apply for the period from 1 April to 30 June 2020.

Allocation to tax reserves

100 percent of the taxable surplus from 2019, up to a maximum of SEK 1 million, may be allocated to tax reserves. The taxable profit allocated can be offset against possible future losses. The proposed rules mean that many can get a repayment of preliminary tax for 2019 that has already been paid. However, in order to receive repayment, a new preliminary income tax return has to be submitted. The rules are proposed to enter into force in April 2020 and apply retroactively for 2019.

Opportunity to put your company dormant

Companies that are dormant in the event of unemployment will be exempted from the rule that companies may only be laid dormant once for five years.  

Contact us for further details how this may be applicable to your operations in Sweden.

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The Government’s proposal

In response to the Covid-19 outbreak the Government has presented a proposal to mitigate the current and future liquidity stress for many companies.

Deferral of payment of taxes and fees

The proposal allows companies to defer payment of

• Social Security Contributions,
• Withholding tax on employees' salaries, and
• VAT which is reported monthly or quarterly.

The deferral is allowed for three months' worth of tax payments and for a maximum period of time of 12 months. Three months’ tax payment is specified as:

• For companies that report VAT quarterly, one VAT return and three PAYE returns.
• For companies that report VAT monthly, three VAT returns and three PAYE returns.

Interest will be calculated from the day of the deferral and until full payment of the deferred amount has been made with an efficient annual interest rate of approximately 4,85 %, out of which 1,25 % constitutes the cost interest rate and 3,6 % constitutes a special deferral fee. The interest cost is not deductible for income tax purposes which makes it comparable to a deductible interest of aprox. 6.6 %.

The new rules are proposed to take effect on 7th of April 2020 but can be applied retroactively from 1 January 2020. This means that companies which have paid the above taxes and fees for January to March may have the payments temporarily refunded from the Swedish Tax Agency.

In addition to the proposal for a deferral of payment of taxes, the Government issued two more proposals to ease liquidity stress for companies.

Short-term lay-off of employees

If necessary, the State may step in and pay up to 50 % of employees' salaries for a limited amount of time. The construction is similar to short-term work, but the subsidy rate is increased.

The State takes over the sick pay liability

The state will temporarily, during April and May, take over the sick pay responsibility for all companies. In practice, this should mean that the State also takes over responsibility for the payment of sick pay for the temporarily revoked qualifying period (first day of absence). According to the proposal, the application for sick pay must be made to the Swedish Social Insurance Agency (Försäkringskassan) by the employee and thus not by the employer.

Existing opportunities to reduce liquidity stress

Adjustment of preliminary tax payments

Please note that the Government's proposal does not include deferral of the payment of preliminary tax for companies (F-tax). If it is assessed that the profit for the year will be adversely affected by the virus outbreak, all companies have the opportunity to request an adjustment to the preliminary tax payments on the grounds that the result is likely to be lower than the estimated result that the preliminary tax is based on (normally the reported result of the previous financial year). The request is made electronically or on form SKV 4313 for legal persons and SKV 4314 for sole traders and persons who are partners in partnerships.

Deferral of payment due to temporary cash flow problems

The Swedish Tax Agency has also issued a press release stating that companies that are already experiencing temporary liquidity pressures can apply for a deferral, in accordance with the already applicable grounds for deferral due temporary payment difficulties. A requirement for such a deferral is that it can be demonstrated that sufficient funds will be available to pay the tax after the deferral period has ended. No such requirement has been communicated regarding the new deferral rules proposed to apply from 7 April. You can read more about this here.

Comments

The Government's support package is welcomed and offers concrete support to Swedish companies' liquidity challenges in the coming months. However, there are some considerations before companies apply to deferral of tax payments.

The deferral is not 'free' but runs at an interest rate equal to approximately 6.6 % of deductible annual interest. In other terms it is a credit. If payment cannot be made when the deferral is finally due in one years’ time, the interest rate will rise further to approximately 16,25 %.

Nor is it clear from the Government's communique that an exception would be made with regard to the directors liability for unpaid taxes and fees in the event that the taxes and fees still cannot be paid when the period of deferral has ended. The outset is therefore, that the company's directors become personally liable for unpaid taxes and fees in the event of future bankruptcy.

The aid package is likely to be of great help for companies experiencing temporary liquidity problems but who believe in a turnaround as soon as the dust of the virus outbreak has settled. For companies that are more uncertain about the long-term effects of the virus outbreak, consideration should be given to the cost of the deferral in relation to alternative credit options, in particular with regard to the liability of the company directors.

For preTAX, it is business as usual, albeit to a greater extent through work from home. We are available for individual guidance and questions regarding the above.  

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