Sweden has not been a country previously featured in this blog, but we have become aware that the Swedish Tax Agency (the “STA”) has contacted several local employers in recent months to seek clarification on the amounts withheld in relation to equity award income and correct the reporting where needed. We believe it is possible that many more companies could be audited with respect to their equity award tax withholding practices in 2019 and beyond.

The Issue

As of January 1, 2019, a new monthly Pay-As-You-Earn (“PAYE”) reporting system replaced the annual income statements that were previously required in Sweden. The monthly tax returns include separate line items for the different categories of income (i.e., salary, car benefit, fuel benefit and other benefits including equity income) and the tax withheld on the income for the applicable month.

Separately, it has always been the case that the amount of tax withheld in a particular month may not exceed the total amount of an employee’s gross monthly salary for the same month. If taxes due exceed the employee’s gross monthly salary, companies may withhold tax only up to the amount of monthly salary. The employee would then be required to pay any remaining tax when he/she files his/her annual tax return.[1] We understand that, in the past, withholding amounts could be spread over multiple pay periods to avoid this issue, but this is no longer the case.

Prior to implementation of the new PAYE system, taxes withheld on equity award income and other income were reported in an income statement at year-end, in which case it was nearly impossible for the STA to determine whether taxes withheld for purposes of equity award income in a particular month had exceeded an employee’s monthly gross salary for the same month. Under the new PAYE process, however, any time the withholding amount reported through PAYE for a particular month exceeds the employee’s monthly salary, the STA technically is being alerted to the infraction.

Especially in case of RSUs vesting or options being exercised and considering the high tax rates in Sweden, it can often be the case that the total tax due on RSU/option income (together with tax due on regular salary and other income) exceeds an employee’s monthly salary. It is irrelevant/not helpful that most companies either (i) sell a number of shares on behalf of the employee and use the sale proceeds to cover applicable withholding taxes, or (ii) withhold a number of shares and come up with the equivalent cash to cover applicable withholding taxes. Even though these processes mean companies are not actually withholding any tax due on the equity award income from the employee’s salary, the rule that the tax withheld as reported through the PAYE system cannot exceed the monthly gross salary still applies.

In this respect, it is also important to point out that companies arguably may withhold taxes only from salary (i.e., cash payments) so a sell-to-cover or share withholding method are not contemplated under Swedish tax law. [2]

As mentioned, we have already seen the STA approaching several companies to question why taxes withheld in a particular month exceeded an employee’s monthly gross salary. More concerning, the STA has suggested that, to the extent the tax withheld exceeds the monthly salary, such excess amount will be deemed additional taxable income on which income tax and employer social security contributions are due.

What Next?

In light of the above, companies should review their obligations both with respect to taxable events that have previously occurred in 2019 and on a going forward basis. To date, we have not seen the STA challenge years prior to 2019.

Prior Taxable Events

Companies should review their monthly individual income tax returns for 2019 to determine if there are instances where the tax withheld on equity award income (together with other tax withheld for the relevant month) exceeded the employee’s gross salary for the applicable month. If this were to be the case, it is possible to apply for a reassessment of the taxes due in the applicable month. This would entail effectively telling the STA that taxes were withheld from an amount other than salary and that taxes were overwithheld, so companies will need to carefully consider if this is the right strategy for them. Further, under Swedish tax law, a taxpayer generally can apply for reassessment only when there is an obvious mistake, such as transposing figures. However, we have seen reassessments being accepted by the STA for this purpose. If the STA accepts the reassessment, it will refund any tax withheld in excess of the monthly salary to the employee via the company (and the employee would then be required to pay the tax when he/she files his/her annual tax return).[3]

Going Forward

To avoid any issues going forward, we believe companies essentially have two alternatives:

1. Withhold from salary and let employees cover the remainder of the taxes due on their own
Under this approach, the company will withhold taxes from the employee’s salary up to the employee’s gross monthly salary and leave it up to the employee to come up with the cash to pay any remaining amounts.  Instead of selling/withholding any shares to cover taxes, the company would issue all of the shares to the employee.

This means: (a) the withholding could wipe out an employee’s entire pay check for one month and (b) employees will have to come up with the cash to cover the remainder of the tax obligation if/when it is due.  With respect to (b), employees can sell shares received from the equity awards (e.g., upon vesting of RSUs), but this could be problematic if the issuance occurs during a black-out (although we assume the employee could plan accordingly and enter into a 10b5-1 plan to sell shares).

2. Withholding from salary AND sell-to-cover/share withholding

    1. Step 1:  In the month of the taxable event, the local employer would withhold taxes from the employee’s salary up to the employee’s monthly salary and report only these withholdings through PAYE.
    2. Step 2:  The issuer would sell/withhold shares to cover the remaining taxes owed on the award income – these amounts would not be remitted or reported through PAYE. Instead, the issuer would either: (a) remit any remaining taxes to the employee’s tax account with the STA on behalf of the employee or (b) remit the amount of taxes to the employee for the employee to pay directly to the STA.

This alternative is more employee friendly as the employee can settle the tax liability immediately and will not have to worry about having to sell shares to cover the taxes due. However, it is more burdensome for the issuer from an administrative perspective.


As a first step, companies should check with their local payroll in Sweden to see if local payroll is aware of the issue and may have already been approached by the STA. As noted, it is recommended to review if the issue of withholding tax in excess of an employee’s monthly salary has already occurred in 2019 and, further, whether to file for a reassessment of taxes for the relevant month. Going forward, companies also need to make a decision on whether to change their withholding practices to follow one of the approaches outlined above. Most likely, communications to the affected employees will be required or at least highly advisable. Separately, some companies may decide to approach the STA to lobby for a change to the withholding rules for equity award income. We would be happy to assist with any of the above.


I would like to thank my colleagues Linnea Back (based in our Stockholm office) and Bianca Lansdown (based in our San Francisco office) for their help with drafting this post.

[1] If the total tax owed by an individual for the relevant tax year exceeds SEK 20,000, however, payment of the taxes must be made by February of the following year to avoid interest becoming due on the taxes owed.
[2] It is not entirely clear if the STA would be entitled to penalize companies for using these withholding methods. However, there is a chance an employee could claim to be entitled to the value of the shares sold/withheld (even though these amounts were used to settle taxes due by the employee).
[3] See FN 1.