What Is Tax Harmonization?
Tax harmonization involves the gradual alignment of tax rules across EU member states. It does not mean complete unification of national legislation but rather the elimination of differences that hinder the integration of national markets.
The goal is to ease cross-border business, reduce fiscal barriers, and establish consistent competitive conditions. However, this process also raises concerns about the loss of tax sovereignty among member states.
Challenges Related to Harmonization
Every change in the tax system affects a country’s economic conditions. Harmonization may disrupt existing mechanisms, such as incentive schemes or local tax reliefs.
For years, experts have debated whether the benefits of harmonization outweigh its costs and risks. Tax systems across member states differ significantly in structure and budget impact.
Moreover, harmonization may weaken the position of countries with attractive tax regimes, such as those with low corporate income tax rates (CIT).
Sweden’s Tax System and EU Integration
In Sweden, taxes are relatively high and serve a redistributive function. The Swedish Tax Agency (Skatteverket) enjoys a high level of public trust. Income tax for individuals ranges from 30% to 55%, while corporate tax is 28%. VAT and payroll taxes are added on top.
Foreign companies operating in Sweden are subject to limited tax liability – they only pay taxes on income generated within Sweden. The scope of taxation can also be restricted by international tax treaties.
For Sweden, harmonization may require the country to align its national regulations with EU standards – which could present both opportunities and risks.
Is Harmonization Beneficial for Sweden?
Compared to other EU countries, Sweden ranks in the middle when it comes to corporate tax rates. Countries like Malta or Denmark have higher rates but follow different tax models.
In Western Europe – including Sweden – taxes are primarily seen as a tool for redistribution. In Central and Eastern Europe, the emphasis is often on attracting foreign investment through tax incentives.
These differences suggest that full tax harmonization may not be in the best interest of countries like Sweden, which have highly developed welfare systems and complex tax structures.
The New BEFIT Directive – Toward a Common Tax Base
In September 2023, the European Commission proposed the BEFIT directive (Business in Europe: Framework for Income Taxation), aimed at creating a unified method for calculating the corporate tax base across the EU.
Key objectives of BEFIT include:
- A single method for calculating the tax base across EU countries
- Cross-border profit and loss offsetting within corporate groups
- Simplified tax supervision and compliance
- Elimination of withholding tax on intra-group transactions
BEFIT is a continuation of previous efforts to integrate taxation within the internal market. For Sweden, it means adapting its CIT reporting rules, particularly for large multinational enterprises operating in the EU.
Who Will BEFIT Apply To?
The new regulations will apply to capital groups (domestic and international) that:
- Prepare consolidated financial statements
- Exceed €750 million in annual revenues in at least two of the last four fiscal years
Exemptions apply to groups whose parent company is based outside the EU or whose EU-generated revenues are below €50 million or account for less than 5% of the group’s global revenue.
The sector of activity is not a determining factor for inclusion, though some industries – such as aviation or mining – may be subject to special rules.
How Will CIT Be Calculated Under BEFIT?
The calculation process will consist of several steps:
- Each group entity calculates its tax base according to BEFIT rules
- All tax bases are combined into one unified base
- The common base is allocated to group entities using a fixed formula
- Each entity is taxed at the local CIT rate applicable in its country
Sweden’s Position on BEFIT
Sweden supports the idea of a common tax base functioning in parallel with the national CIT system. The country also insists on maintaining control over the entry and exit conditions for companies in the system.
This cautious stance reflects Sweden’s intent to protect its domestic tax model and carefully assess the directive’s impact on small and medium-sized enterprises (SMEs).
Conclusion
EU tax harmonization is a long-term process aimed at reducing administrative barriers and facilitating cross-border business. For companies operating in Sweden – especially large corporate groups – the new rules may simplify reporting but also require adaptation to common standards.
Do you need help with corporate tax planning or understanding BEFIT’s impact on your group? Contact Revea – we’ll help you navigate the changes and prepare for the future of taxation in the EU.
