Foreign Tax Credit in Sweden: A Complete Guide for Expats

As an expat living in Sweden, you may find yourself earning income from abroad while being liable for Swedish taxes. The good news is that Sweden offers mechanisms to prevent double taxation through foreign tax credits (avräkning för utländsk skatt). This comprehensive guide explains how the Swedish foreign tax credit system works, who qualifies, and how to navigate the complex interplay between Swedish domestic law and international tax treaties.

Can I Get a Foreign Tax Credit Against My Swedish Taxes?

The basic rule

Yes. If you are tax resident in Sweden and Sweden taxes a certain item of foreign income, you may normally claim a foreign tax credit for income tax paid abroad on that same income. The legal basis is the Swedish Foreign Tax Credit Act (Avräkningslagen, AvräkL).

The underlying principle is straightforward: Sweden can tax your worldwide income as a Swedish tax resident, but it will generally grant credit for foreign income tax paid on the same income so you are not taxed twice.

Credit vs. deduction

Sweden uses both credit (avräkning) and deduction (avdrag) mechanisms, but they function very differently.

A credit reduces Swedish tax “crown for crown.” A deduction reduces the tax base, meaning the real value is typically lower. In practice, the credit method is therefore usually the preferred relief mechanism when it is available.

Two Methods to Avoid Double Taxation

Credit method

The credit method reduces Swedish tax directly, but only up to a foreign tax credit limitation (spärrbelopp). This is the most important technical limitation in Swedish foreign tax credit law.

Deduction method

A deduction may become relevant where a credit is not available, or where foreign tax relates to income that is not taxed in Sweden (for example due to exemption under Swedish domestic rules or a treaty exemption method).

The practical takeaway is that the Swedish treatment of the income itself drives the relief method. If Sweden does not tax the income, you normally cannot use foreign tax via a credit because there is no Swedish tax to reduce.

What Types of Foreign Income Can Qualify?

Foreign tax credits can apply to many income categories, but the starting point is always the same: the foreign income must be taxable in Sweden.

Employment and business income

Foreign employment income can qualify if it is included in Swedish taxation. However, if the income is exempt in Sweden under domestic rules (such as the six-month or one-year rule) or under a treaty exemption method, there is usually no credit.

Foreign business income can also qualify, including income earned through foreign operations. Complexity often increases where a foreign permanent establishment is involved, because Swedish domestic law and the relevant tax treaty both become central to the analysis.

Income from foreign real property

Rental income and certain other property-related income may qualify if Sweden taxes the income and the foreign tax is of a creditable character. Real estate taxation differs significantly between jurisdictions, and a common issue in practice is whether a specific charge is “income-tax-like” or instead a non-creditable property tax or fee.

Investment income

Investment income such as dividends, interest, and royalties is frequently exposed to foreign withholding tax. If Sweden taxes the income, the withholding tax may often be creditable. However, the treaty rate matters greatly: where foreign withholding exceeds the treaty maximum, the excess normally needs to be reclaimed abroad rather than credited in Sweden.

Capital gains can also qualify in principle, but specific limitations exist in Swedish practice and case law, particularly where the foreign tax is not considered sufficiently comparable to Swedish income tax.

Key limitation: Sweden must tax the income

A foreign tax credit is not a general refund mechanism for foreign tax. It is relief against Swedish tax on the same income. If Sweden does not tax the income item, the credit mechanism normally cannot be used.

How the Foreign Tax Credit Limitation Works

Why there is a limitation

Even if you paid substantial foreign tax, Sweden limits the credit to the Swedish tax attributable to the foreign income. This prevents foreign tax from reducing Swedish tax on other income.

The basic approach

In simplified terms, the credit is limited to the lower of:

• the foreign tax actually paid on the income, and

• the Swedish tax that corresponds to that foreign income (the limitation amount).
  

In practice, the calculations can become technical, especially for companies and more complex income streams.

When foreign tax is higher than Swedish tax

If the foreign tax rate is higher than the effective Swedish tax rate on the same income, you may end up with “excess” foreign tax that cannot be credited in the current year. Swedish law includes limited carry-forward mechanisms in some situations, but the rules are restrictive and fact-sensitive.

What Foreign Taxes Can Be Credited?

Taxes that generally qualify

Sweden generally grants credits for foreign taxes that are comparable to Swedish income tax. In practice, the following categories are frequently creditable:

• national income taxes on income or profits

• local or municipal income taxes, where relevant

• withholding taxes on dividends, interest, and royalties (within treaty limits)
  

The decisive point is the character of the tax. Sweden looks for a tax on income or profits rather than a charge that is closer to a fee, transaction tax, or consumption tax.

Taxes that typically do not qualify

Some foreign levies fall outside the system, even if they feel tax-like in the source country. Typical examples include:

• VAT or sales taxes

• customs duties and similar transaction-based charges

• regulatory fees or licensing charges

• wealth taxes and inheritance taxes
  

As a general rule, foreign social security contributions are neither creditable nor deductible against Swedish income taxes. These charges are considered social insurance contributions rather than income taxes, and they fall outside the Swedish foreign tax credit system.

How Tax Treaties Affect the Outcome

Treaty allocation drives the credit analysis

Tax treaties can change the result in two ways. First, they allocate taxing rights. Some income may be taxable only in Sweden, some only in the source country, and some in both countries.

Second, treaties typically limit source-country withholding tax rates for dividends, interest, and royalties. If the source country withholds above the treaty limit, Sweden will often treat the excess as non-creditable, meaning the taxpayer must seek a refund abroad.

Credit vs. exemption method under a treaty

Where a treaty uses the exemption method, Sweden may exempt the income from Swedish tax. In that situation, a foreign tax credit is normally not relevant because Sweden is not taxing the income item.

Where a treaty uses the credit method, Sweden taxes the income but grants credit relief under the domestic credit rules, typically subject to the foreign tax credit limitation.

How to Claim a Foreign Tax Credit in Sweden

Individuals

Individuals declare worldwide income in the Swedish tax return and provide information about foreign tax paid. Skatteverket often performs the credit calculation based on the reported figures, but the result should always be reviewed.

You generally need to show:

• what income the foreign tax relates to

• that the tax was actually paid

• the country and tax year involved

• withholding certificates or tax assessments
  

Companies

For legal entities, the process is usually more calculation-heavy. Companies often need to compute the foreign tax credit limitation and support the position with proper workpapers and documentation.

Where there are multiple income streams, different jurisdictions, or complex structures, the credit analysis becomes significantly more technical.

Conclusion

Sweden’s foreign tax credit system is built on a simple principle: if Sweden taxes the income, Sweden may grant credit for foreign income tax paid on the same income. The main complications arise from the foreign tax credit limitation (spärrbelopp), the requirement that the foreign tax must be of a creditable character, and the interaction with tax treaties.

In straightforward cases, the system is manageable. In more complex cross-border situations involving multiple jurisdictions, mixed income categories, or over-withholding, the analysis becomes technical and documentation-heavy.

Disclaimer

This article is for informational purposes only and does not constitute legal or tax advice. Tax outcomes depend on the specific facts, the applicable tax treaty, and current Swedish administrative practice.

This article has been drafted by Felix Schöttle (LL.M.), Swedish lawyer specializing in Swedish and international tax law. For complex cross-border situations, tailored advice should be obtained before filing.