New tax rules for Öresund commuters

In June 2024, Sweden and Denmark concluded a new updated agreement on certain tax issues in the Öresund region (the “Öresund Agreement”, Sw. Öresundsavtalet), supplementing the Nordic Tax Treaty. The updated agreement includes a number of changes relating to taxation of individuals commuting between Sweden and Denmark, and tax deduction liabilities for their employers. Recently, the Swedish government published the bill proposing the approval and implementation of the new Öresund Agreement in Sweden. This article describes the new changes and expectations on how they are to facilitate the situation for employers and employees in the Öresund region. Further, the article highlights the applicable provisions for determining social security liability, in the light of a new agreement between the Swedish Social Insurance Agency and the Danish Ministry of Employment.

Current taxation situation for Öresund commuters

To facilitate the tax situation for individuals commuting between the two countries (“Öresund commuters”), a bilateral agreement, called the Öresund Agreement, supplementing the Nordic Tax Treaty, is in place between Sweden and Denmark. In simple terms, the agreement means that salary should be taxed only in the state where the employer is established and the work is normally carried out. This rule applies even if the work should partly be carried out from the employee’s home in his or her state of residence, or if it is a question of business trips and similar, in another third state. However, to benefit from the exemption in the agreement, the employee must spend at least half of the working time, calculated over each three-month period, in the state of the employer’s establishment. Without the Öresund Agreement, the salaries of Öresund commuters working partly from home would normally be taxed in both the state of residence and the state of employment, under the Nordic Tax Treaty.

The Öresund Agreement has facilitated the tax situation for Öresund commuters working partly from their state of residence, but having their employer and normal place of work in the other state. However, the scope of the Öresund Agreement is limited, and causes administrative difficulties for both employees and employers.

An Öresund Agreement that covers more jobs and observes longer time periods

The new agreement extends the scope of the exemption when simultaneously reducing the administrative burden on both employees and employers. The updates in the agreement are mainly the following.

• The period for calculation, when assessing the employee’s total working time in each state, is extended from every three months to every twelve months. The extended calculation period reduces the administrative burden for the employees and employers concerned.
• The agreement is amended to cover all work (within the scope of employment) in the employee’s state of residence, whether it is carried out inside or outside of the home. It will therefore be possible to work from other locations in the state of residence, such as cafés or summer cottages, with the same flexibility.
• In addition, the new Öresund Agreement is extended to cover income paid as a result of employment in the public service. Previously, the salary taxation right usually had to be divided between Sweden and Denmark for a person employed in for example the Danish public service who, for private reasons, is resident in Sweden and performs some of his or her work from there.

The changes in the Öresund Agreement will consequentially result in some changes in the Swedish Law on Special Income Tax for Non-residents (SINK).

A compliant system of tax and social security obligations

The above-mentioned change of calculation period from three to twelve months follows from another agreement reached between the Swedish Social Insurance Agency (Sw. Försäkringskassan) and the Danish Ministry of Employment earlier this year, for the coordination of social security systems between the countries.

According to the EU social security coordination system, the general rule is that an individual is subject to the social security legislation of the country of work. However, if an individual works in two countries and lives in one of them, the individual is instead, generally, covered by the legislation of the country of residence, if pursuing a substantial part of the work (at least 25 percent) in that country.

Sweden and Denmark have already previously agreed on exemptions from these rules for certain individuals. According to that agreement, a Danish employer, for example, with an employee resident in Sweden could, upon application, avoid paying employer’s contributions in Sweden even though the employee performs more than 25 percent of the work from home. In order for the exemption to apply, the employee had to work at least half of the working hours for a continuous period of three months at the employer’s workplace. The new agreement between the Swedish Social Insurance Agency and the Danish Ministry of Employment extends the period to a continuous twelve-month period.

Both the Öresund Agreement and the agreement between the Swedish Social Insurance Agency and the Danish Ministry of Employment are thus based on a calculation of working time over a twelve-month period. This means that the conditions for taxation and payment of social security contributions in the state where the work is normally carried out, are essentially the same in both areas of law. The amendments also clarify the conditions for working longer coherent periods in the state of residence without affecting either tax or social security obligations.

Employers can more easily avoid unnecessary tax deductions

Since 2021, a foreign employer without a permanent establishment in Sweden is obliged to make tax deductions on salary paid for work performed here. As a starting point, this means that a Danish employer needs to be registered as an employer with the Swedish Tax Agency. Further, the employer will need to make preliminary tax deductions on salary paid to an employee for his or her work performed in Sweden, even if the salary is tax exempt in Sweden under the Öresund Agreement. In order for a Danish employer  to avoid the obligation to make tax deductions in Sweden under the current rules, the employee must voluntarily apply for Swedish tax exemption with the Swedish Tax Agency, by way of adjustment (Sw. jämkning).

The new Öresund Agreement introduces a provision which, in summary, exempts an employer resident in one state from the obligation to deduct tax on salary of an employee resident in the other state. The employer can refrain from making such tax deductions if the purpose of the employment is to avoid tax liability on the salary in the employee’s state of residence.

This way, a Danish employer can under certain conditions be directly exempted from the obligation to make tax deductions in Sweden on salary that will not be taxed in Sweden anyway under the Öresund Agreement.

Entry into force

The Öresund Agreement will, in essence, enter into force 30 days after the date on which the two countries have notified each other in writing that the necessary constitutional measures have been taken. It is not yet possible to determine when this will take place. It is proposed that the amendments to the Swedish Act on the Nordic Tax Treaty (where the new Öresund Agreement is included) will enter into force on a date to be determined by the government. Setterwalls is monitoring the decision-making process and the forecast for the entry into force of the proposed legislative amendments.

The changes to SINK are proposed to enter into force on 1 January 2025, and to apply to salary or benefits for work performed after 31 December 2024 and where the remuneration is paid after that date.

Setterwalls comments

The new Öresund Agreement allows for a more flexible working environment for more employees in the Öresund region, commuting between Sweden and Denmark. The coordination between social security liability and tax liability for Öresund commuters is, of course, a key element in enabling employees to take full advantage of the increased flexibility.

We look forward to the fact that employees in the public sector will now also be covered by the regulations. We are also very pleased that Danish employers can avoid unnecessary tax deductions in Sweden without having to request an adjustment decision from the employee.

Extending the calculation period for working time gives employees greater flexibility in the work planning, without risking a significant change in their tax situation. However, the requirement to work at least 50 percent of the work time in the country of the employer remains, meaning that there is a continued need for monitoring the working time in each country.

Setterwalls’ tax experts have extensive experience in matters concerning cross-border teleworking. Please contact us if you have any questions about the new agreement or other questions relating to tax and social security contributions liability for Öresund commuters.

This article is of general and informative nature and is not legal advice to be used as a basis for assessment in an individual case.