Taxation of consulting services provided to a previous employer via one’s own company

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PwC-skatteradgivning-Group-outline_0005_orange.pngLast autumn the Council for Advance Tax Rulings issued an advance ruling stating that a part owner in a consulting company who changes his or her from being an employee in that company to executing the same work duties as an employee in his or her own limited liability company are to be seen, in certain cases, to undertake independent business operations. The requirement of independence is seen to be fulfilled if the part owner’s new company employees, as a minimum, a further 10 individuals. In such a case, the consulting fees charged by the new company are not taxed as salary.

This advance ruling referred to a case in which a previous part owner and employee in a consulting firm who intended to invoice, via his or her new consulting company, for services provided to clients on behalf of the consulting firm in which he or she had previously been employed. According to the first alternative assessed, the part owner in question was going to be the only employee in his/her new cmopany. According to the second alternative, the part owner was going to employ at least 10 individuals in his/her new company.

According to the consulting services agreement, the newly established company would only execute and invoice for services provided to one principal, the consulting company in which the part owner had been previously employed.The consulting firm would, in its turn, invoice the clients. The question assessed referred to whether the compensation to the new consulting company would be taxed as income from independent business operations in the new company, and if it would make any difference if at least 10 individuals would be employed in the new company.

According to the premises, the new company has a notice of tax assessment for self-employed persons, has been registered for VAT, is, itself, responsible for the accounting, bookclosing and audit of the operations, and also pays for equipment and the ongoing operating costs of the company. The new company determines, itself, working hours and plans the client assignments and assumes a business risk implying that if the clients do not pay or are not satisfied with the executed services, the compensation for the invoiced services is reduced.

The Council for Advance Tax Rulings determined that the new company was seen to undertake independent business operations when 10 individuals were employed. The compensation paid by the previous employer would, in such a case, be taxed in the new company as income from business operations and not as salary for the employed part owner. The Council for Advance Tax Rulings made special note that in addition to the new company assuming the economic risk that the consulting company does not receive full payment from the clients, it should also be considered that the new cmpany assumes the further risks incurred in its role as an employer. After an overall assessment was made, it was concluded that these circumstances led to the operations in the new company being seen to be undertaken on a sufficiently independent basis for the compensation received to comprise consulting fees, instead of salary.

Comments

As we previously reported, it can be an interesting and flexible solution to invoice, for example, consulting services from your own company to a previous employer.

During nearly 10 years, we have had regulations, the purpose of which is to make it easier to start business operations. The parties’ intention in entering into a contract to provide services is to be assigned increased significance in an assessment of the application of these regulations. However, be careful with any dependence on one single contractor providing the services. If the contractor is excessively dependent on the principal and is integrated into the principal’s operations, this can imply that the parties’ intention in establishing the agreement will not seen to apply.

If there is only one principal, this implies an obvious limitation on independence as evidenced in this advance ruling. Consequently, this must be weighed against other circumstances if the operations’ revenues are not to be taxed as salary. An overall assessment should always be made including all of the circumstances in the specific case being tested in order to determine if the operations are undertaken on an independent basis.

The advance ruling has been appealed in the Supreme Administrative Court.

Do you have any questions on corporate taxation?

Christina Aronson

Christina Aronson

Christina Aronson arbetar på PwC:s kontor i Jönköping med skattefrågor rörande bolagsbeskattning, internationell beskattning och ägarbeskattning.

Kontakt: 010-212 52 08, christina.aronson@pwc.com

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