How to Avoid Double Taxation as an American in Sweden

Most Americans living abroad are aware that the United States applies citizen based taxation, meaning that U.S. citizens, including those residing in Sweden, remain subject to U.S. tax obligations. When an individual is taxable in two countries, there is a substantial risk of double taxation. Fortunately, there are several ways to mitigate this risk, including the U.S. Sweden tax treaty. This article examines how Americans living in Sweden can avoid double taxation.

When Do You Become a Tax Resident in Sweden?

Under Swedish tax law, there are three categories of individuals who are considered tax resident in Sweden.

Categories of Swedish Tax Residency

The following individuals are regarded as tax resident in Sweden.

• Individuals who permanently reside in Sweden

• Individuals who have a habitual abode in Sweden

• Individuals who have previously lived in Sweden and continue to maintain essential ties to Sweden
  

For individuals who have recently relocated, the concept of habitual abode is often decisive in determining when tax residency arises. Sweden does not apply a fixed day threshold, such as a 183 day rule, when assessing whether an individual has a habitual abode in Sweden.

Instead, the assessment is based on principles developed through Swedish case law, primarily from the Supreme Administrative Court of Sweden. This case law shows that tax residency can be established after as few as 79 days spent in Sweden, provided that the stays are regular and follow a consistent pattern.

Do Americans Moving to Sweden Risk Double Taxation?

If an individual is considered to have a habitual abode in Sweden, that person becomes tax resident in Sweden. As a result, Sweden will assert a tax claim on the individual’s worldwide income.

United States sourced income, such as dividends from American companies or distributions from a 401(k) or other U.S. retirement plans, will therefore be subject to Swedish taxation. Since the United States generally also seeks to tax such income, the risk of double taxation is high.

What Is the U.S. Sweden Tax Treaty?

Countries enter into tax treaties in order to prevent double taxation. Sweden and the United States have had a tax treaty in place since 1994. But how does a tax treaty operate in practice?

A tax treaty takes precedence over domestic law. This means that Sweden’s right to tax an individual can be limited through the application of the treaty. It is therefore essential to determine in which of the two countries, Sweden or the United States, the individual is considered tax resident under the treaty.

This treaty residency determination can range from relatively straightforward to highly complex, depending entirely on the specific facts of the case. In certain situations, clients may structure their affairs in a way that establishes treaty residency in the most advantageous country. As such, tax treaties can also be used as a tool for tax optimization, meaning the minimization of overall tax exposure.

How Does the U.S. Sweden Tax Treaty Affect You?

The first step is to determine treaty residency in either the United States or Sweden. Once treaty residency has been established, the effects of the treaty can be assessed.

The U.S. Sweden tax treaty is unusual in that it contains a saving clause. This clause allows the United States to disregard certain treaty provisions when taxing U.S. citizens and green card holders. In such cases, relief from double taxation requires a more complex process in which both countries may need to grant tax credits for the same income.

Practical Application of the Treaty in Sweden

Sweden does not provide a specific form for applying tax treaty benefits. Instead, individuals must submit a separate written attachment to the Swedish tax return in which treaty benefits are claimed. Supporting documentation must also be provided.

In many cases, the Swedish Tax Agency requires a tax treaty residency certificate issued by the IRS in order to apply the treaty provisions.

What Is the Swedish Foreign Tax Credit Law?

In addition to the U.S. Sweden tax treaty, Sweden’s internal foreign tax credit legislation provides another mechanism to mitigate double taxation. However, the foreign tax must have been levied by the source state, in this case the United States, because the income is considered sourced in that country.

This requirement can create practical challenges when attempting to apply the Swedish foreign tax credit rules.

Americans Residing in Sweden or Considering Relocation

If you are an American currently living in Sweden or considering a move to Sweden, you may wish to seek professional advice regarding your tax situation. We also recommend reviewing our guide for Americans moving to Sweden for additional general information.