Offering employees compensation in the form of incentive schemes has become increasingly popular over the last few years. Incentive schemes have proven to be helpful for tech startups, or other innovative businesses that may be low on cash but show promising valuations. Offering incentive programs can align organizational and staff goals, as employees will benefit directly from business success.
A common question we receive at Nomadtax is “How are incentive programs taxed in Sweden?”. In particular, this question is commonly asked by people that work in a separate state from their employer. Read on to find out how Sweden taxes participants in incentive programs like RSUs, SARs, Phantom Stocks and similar.
Are RSUs, SARs and Phantom Stocks subject to taxes in Sweden?
Sweden has a global tax claim on its tax residents that participates in incentive programs. Sweden's tax code states that 'benefits in kind' are to be taxed based on the market value of the benefit. This also applies to incentive schemes.
However, there is a special tax rule that governs when the point of taxation occurs.
The rule states that an RSU/SAR/Phantom Share can be classified as either a security or an employee option, for Swedish tax purposes.7
If classified as a security, the point of taxation (for the employee) is when the employee actually receives the RSU/SAR/Phantom Stock, i.e. when the vesting is completed.
If classified as an employee option, the point of taxation occurs at the moment when the RSU/SAR/Phantom Share is exercised or sold.
The difference between these two points of taxation is that a subsequent value increase after the vesting period would be subject to Swedish Employment Income Tax (30-55 %) if the asset vested is classified as an employee option. For assets that are classified as a security, any value increase would instead be taxed with Swedish Capital Tax (30 % or 25 %). Accordingly, it is usually more beneficial for the employee for incentive schemes to be classified as a security.
This is significant for employers since social security fees would be affected by the point of taxation. If an asset is classified as an employee option, a value increase would imply increased social security fees for the employer.
How to classify RSU, SARs and Phantom Stocks under Swedish tax law?
The Swedish Supreme Administrative Court’s case law determines if an incentive scheme should be classified as a security or an employee option. Factors, such as whether the asset can be freely disposed of, whether continued employment is required to exercise or sell the options are of importance in the classification assessment.
A lawyer must conduct a detailed review of the terms and conditions governing the incentive scheme, in order to properly classify it for Swedish tax purposes. In 2022, the Swedish Supreme Administrative Court established that Phantom Stock programs could be designated as a security for Swedish tax purposes — which was a win for employers and employees. However, as the classification is dependent on the terms and conditions, as well as any statutory provision, of every scheme, not all Phantom Stock programs would be classified as a security. If properly designed, however, it is possible to have a Phantom Stock program classified as a security.
What obligations do employers with incentive programs have in Sweden?
An employer’s tax obligations in Sweden are governed primarily by their employee’s status as a Swedish tax resident. If a foreign (non-Swedish) company has an employee who is a tax resident in Sweden, the employer is obliged to withhold monthly preliminary wage taxes, and in most instances, to pay Swedish Social Security Fees (31,42 % as a main rule). To fulfill these obligations, the employer must register as an employer with the Swedish Tax Agency.
Oftentimes, a foreign company hires a local payroll provider to handle compliance, or set it up themselves.
Ultimately, one must classify the incentive scheme to know how to report the in kind benefit to the Swedish Tax Agency, since the point of taxation differs between securities and employee options. This means that the classification has to be done, in order for the employer to be compliant with its PAYE obligations. Therefore, the first step towards ensuring compliance with Swedish tax law, is to let a tax lawyer classify the incentive program under the provisions of Swedish tax law.
Are you planning to offer an employee the opportunity to join an incentive program of your company? Does the employee live in Sweden? Feel free to reach out to us at nomadtax for all guidance you need about Swedish tax aspects of incentive programs. Are you looking for guidance on ESOPs? Read our article on ESOPs here.
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