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Tolling Arrangements - Permanent Establishment Issues 

Published: March, 2009

Submission: April, 2009


A Foreign Company ("FC") is subject to Swedish taxation on income from a permanent establishment ("PE") in Sweden. Today, different types of tolling arrangements are part of the business model of many MNE’s. The purpose of this article is to analyze the Swedish tax implications of a tolling arrangement, primarily the risk of a FC to acquire a PE in Sweden. The below example can be used in order to illustrate the PE issues at hand.

A foreign company ("FC") provides products on the global market. A Swedish company ("SC") has developed a product ("the Product"). The rights to the Product have been licensed to the FC for marketing and sale on a global basis. According to an agreement SC will manufacture the Product on behalf of FC under a tolling arrangement.

The tolling arrangement implies that FC outsources the manufacturing as such of the Product to SC, i.e. FC will own the material and components of which the Product is made and SC will only provide the necessary manufacturing tools such as premises, manufacturing equipment and labour. FC will pay SC for the use of the premises, equipment and labour provided. Furthermore, FC will have ownership to all of the inventory of the Products (stored in Sweden) and SC will not bear any risk for the inventory etc.

Ownership of inventory – a PE issue?

A Swedish PE is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The Swedish PE rules are based on art. 5 of the OECD’s Model Tax Convention ("MTC").

According to many of Sweden’s double taxation treaties ("DTT") the term PE shall be deemed not to include inter alia

• the maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of storage, display or delivery

• the maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of processing by another enterprise

In the light of the above it is fair to assume that a tolling arrangement or FC’s ownership of inventory in Sweden will not in itself create a PE for FC in Sweden.

Products for the local market – a PE issue?

Often a part of the manufactured Products, when fully processed and stored at SC’s premises, will be marketed and sold on the local market to Swedish customers/end users. Again one must consider the risk of a PE for the FC. For this particular situation one must fall back on the general definition of a Swedish PE in order to determine whether a PE has been created.

Since Swedish PE rules are based on OECD’s Model Tax Convention, guidance for the interpretation of the Swedish PE definition can be found in the commentaries to art. 5 of the MTC.

The mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. The place of business may be situated in the business facilities of another enterprise. No formal legal right to use that place is required. Our conclusion based on the above is that FC will be considered to have a fixed place of business in Sweden.

The next and final question is then to determine whether FC partly carries out its business in Sweden through the fixed place of business. To the extent the FC will market and sell the Products on the Swedish market in its own name or by using dependent agents it is quite clear that the FC will have acquired a PE in Sweden. Also, it the FC will merely restrict itself to sell and deliver the Products to end users there is a risk that such a limited activity will create a PE here. In order to avoid the risk of a PE in Sweden it is recommended that the FC shall engage another company to carry out the marketing and sales activities for the Product in Sweden. In this case the exclusion from the definition of a PE in the DTT’s will apply as the activity will fall under the category "maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery".

By the Tax group at Delphi






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