Nordic Region’s labour market needs simpler tax rules

Four years ago, the Nordic prime ministers agreed on a vision for the Nordic Region to be the most sustainable and integrated region in the world by 2030. A decisive factor for achieving that goal is to create a flexible Nordic labour market with as few bureaucratic obstacles as possible for both employers and employees.

But a recent analysis commissioned by the Freedom of Movement Council carried out by consultancy firms KPMG and Resonans Nordic states that, if this is to happen, the Nordic tax agreement must be simplified.

The analysis points to four problem areas which are currently inhibiting the Nordic labour market. These concern rules for domestic work, employer registration obligations in more than one country, and the taxation of wages and pensions when working in another Nordic country.

However, there are solutions to these problems. The analysis makes the following concrete proposals:

• the Nordic countries should have common conditions for when working in the country of residence, including from a home office, is to be considered as a so-called permanent establishment;
• in future, advance tax should only be reported and collected in the employer’s country, so that the employer will no longer have to administer the legislation of several countries for the same salary income;
• salary income should be taxed in the country of employment and, for example, working from home in the country of residence shall be equal to work in the country where the employer is located. This presupposes that the proposal in the first point becomes a reality; and
• pension fees for pensions established in another Nordic country should be mutually recognised as deductible and ongoing returns should only be taxed in accordance with the legislation of the country where the pension plan is established.

The Nordic countries currently have several agreements that regulate cross-border and remote working. Common to all of them is that they’re based on the countries’ need to protect their tax base. Such an approach doesn’t promote the Nordic Region as an integrated labour market. Citizens and companies must increasingly be at the centre of legislation if the Nordic Region is to achieve the goal of increased freedom of movement.

Today, the worst-case scenario is that bureaucracy results in employers hesitating to hire, and employees hesitating to take a job in another Nordic country. Consequently, different tax and administrative rules in different countries become an obstacle to the free movement of labour.

A functioning labour market across borders is profitable. For example, calculations for the Öresund region show that a fully integrated labour market can generate an annual socio-economic gain of up to DKK 2.9 billion for Sweden and Denmark combined.

“Our countries have a lot to gain from having a flexible common labour market. It can solve the problem of skills shortages in one country and the problem of unemployment in another. In other words, a functioning labour market is a strong catalyst for our countries’ economies,” says Siv Friðleifsdóttir, chair of the Freedom of Movement Council in 2023.

The pandemic in particular revealed the flaws in today’s system when a large proportion of cross-border workers worked from home. The risk of being taxed in two countries, with different tax levels and more bureaucracy, both for the individual and for the authorities, became a reality.

“Now that more companies are open to their employees working from home, the current Nordic tax agreement just isn’t keeping up. I hope this analysis will pave the way for dialogue and that the end result will be simplification and less bureaucracy. Mobility should be the focus, and that also supports efforts to achieve the goals of Vision 2030,” says Karen Ellemann, Secretary General of the Nordic Council of Ministers.

The report is currently only available in Danish but will be translated during the autumn of 2023 into Swedish, Norwegian, Finnish, Icelandic and English. 

The Freedom of Movement Council is an independent political body tasked by the Nordic governments with promoting freedom of movement in the Nordic Region for the benefit of both individuals and businesses.