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A court decision from the Swedish Supreme Administrative Court could mean increased labor costs for employers with employees on net salary agreement

On 23 February, 2010 the Supreme Administrative Court (Sw. Regeringsrätten) announced a decision concluding that the calculation of gross earnings for employees on net salary agreements shall be performed without taking into account the tax effects of the basic allowance and tax relief for employee compulsory social security charges. The ruling means that there is a significant risk of increased costs for companies with employees on net salary agreements. We therefore call on companies that have these forms of contract to immediately review your current practices and explore alternative forms of contract.

In company groups with international mobile employees, it is quite common that the employer guarantees a net salary to ensure that the employee is comfortable that the income after tax in the work location will not be lower than in the home location. How the Swedish gross salary should be calculated for net agreements has been subject to debate for some years.

According to a written opinion from the Tax Agency, the gross salary should be calculated to correspond to the net salary and the preliminary tax withholdings according to standardized tables. The tax effect of the basic allowance and the general tax credit on employment income is considered in the tax tables. Hence, the Tax Agency's view is that these reliefs should be taken into account when calculating the gross salary. However, other reliefs, e.g. relief for compulsory employee social security charges and relief for temporary work etc., should not be taken into account.

Another solution, commonly used in practice prior to the Tax Agency's written opinion, was that the gross earnings should be determined to correspond with the net salary and the estimated final tax. Consequently, also other type of reliefs, e.g. relief for compulsory social security charges and relief for temporary work, should be taken into account when calculating the gross salary.

However, the Supreme Administrative Court has in the current ruling concluded that the basic allowance and the tax relief for compulsory social security charges etc. shall not be taken into account when calculating the taxable gross salary.

Hence, contrary to the Tax Agency's opinion the basic allowance should not be taken into account when calculating the gross salary. Therefore it is doubtful whether the Tax Agency's position is consistent with current law and if the standardized tax tables can be used when calculating the gross salary.

The decision needs to be further analyzed for all practical aspects on the handling of net agreements to be considered. However, employers who use net agreements should urgently review their processes for handling net salaries.

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[2010-02-25]