In northern Sweden, a large industry has developed as the automotive industry conducts winter testing in the cold climate. The Swedish Tax Agency claims that the activities lead to permanent establishments for the foreign automotive companies. However, a recent court case in which KPMG acted as counsel concluded that Audi AG does not have a permanent establishment in Sweden. This ruling provides guidance for other companies and groups that carry out similar activities in Sweden. This article explains the implications of the ruling.
Background to the case
For several years, Audi has been conducting winter testing activities in northern Sweden. The Swedish Tax Agency has argued that these activities lead to Audi having a permanent establishment in Sweden and, consequently, to Audi being liable to pay corporate income tax in Sweden.
Administrative court of appeal ruling
On April 12 2024, an administrative court of appeal ruled that Audi does not have a permanent establishment in Sweden, despite its winter testing activities (KR 4140-23).
The court agreed with the Swedish Tax Agency and the administrative court that Audi has a fixed place of business in Sweden. However, for a permanent establishment to exist, Audi's core business must be conducted from that location.
The court noted that Audi’s core business is to develop, produce, and distribute cars. The activities conducted in Sweden are limited to testing and collecting data from these tests. The information is sent to Germany for further analysis and product development purposes. Some adaptations and adjustments of software and hardware are carried out on site in Sweden to optimise the testing. The test objects include prototypes and pre-series cars that are several years from production. Car testing in winter conditions is carried out in other countries and the Swedish operations take up only a small part of the company’s resources for R&D.
In its ruling, the court stated that the testing activities conducted in Sweden, which aim to collect data, have limited significance for Audi’s overall operations. The activities in Sweden are therefore not considered to be core activities but are instead considered to be of a preparatory or an auxiliary nature. The Swedish Tax Agency had therefore not been able to show that Audi conducts its core business from the fixed place of business and Audi should not be considered to have a permanent establishment in Sweden.
The Swedish Tax Agency appealed the ruling to the Supreme Administrative Court, which, on November 25 2024, decided not to grant leave to appeal. The administrative court of appeal’s ruling therefore stands.
Previous practice
An administrative court of appeal has previously issued a ruling under similar circumstances. In the ruling in KR 2276-15, the court found that the German company Dunlop Tech GmbH had a permanent establishment in Sweden following winter testing activities that could not be considered to be of a preparatory or an auxiliary nature.
The court emphasised that developing and selling software for tyre pressure systems was the company’s core business and that the testing of software appeared to be of great importance in the development and production of the company’s products. The court also stated that the activities in Sweden were carried out in the same way, and by the same staff, as when the activities were performed in Germany or in other countries and should therefore be regarded as an essential part of the overall provision and generation of income. Furthermore, the court attached great importance to the fact that it was the end customers’ cars that were used in the tests.
KPMG’s comments
A large proportion of the world’s vehicle manufacturers and vehicle parts manufacturers carry out winter testing activities in Sweden. The ruling therefore provides important guidance for several other companies and groups that undertake similar types of activities in Sweden.
The court determined that there were significant differences between Audi’s and Dunlop’s activities in Sweden, resulting in different outcomes for each case. Notably, both rulings indicate that each case must be assessed on its individual circumstances, and general conclusions about winter testing activities and permanent establishment cannot be made.
The Audi ruling paves the way for companies to challenge the Swedish Tax Agency’s decisions in cases where the agency has imposed taxes on winter testing activities conducted within Sweden and when citing the Dunlop ruling as justification for such taxation.
It is crucial for companies engaged in similar activities in Sweden to thoroughly examine their unique circumstances to assess the existence of a permanent establishment. Each situation requires an individual assessment, considering all relevant factors, including the scope and significance of the business to the company’s core operations.
