Sweden–U.S. tax treaty explained (for Americans living in Sweden)

Are you an American thinking about relocating to Sweden? Many Americans' ancestors once made the journey in the opposite direction, and today more U.S. citizens are choosing to move to Scandinavia. With free healthcare, a high standard of living, and rich nature and culture, Sweden has much to offer. But as most Americans know, taxes are high, and moving here can sometimes lead to double taxation with both Sweden and the U.S. claiming tax rights. Fortunately, the U.S. Sweden tax treaty helps reduce this risk and can even create opportunities for strategic tax planning. In this article, we explore what the treaty says, how it affects you, and what to watch out for as an American living in Sweden.

What is the Swedish-American tax treaty?

Sweden and the U.S. have had a tax treaty in place since 1994. The purpose of tax treaties, including this one, is to prevent individuals and corporations from being subject to taxes in more than one country on the same income, which is referred to as double taxation.

Double taxation occurs when two countries claim the right to tax the same individual. For Americans, being a U.S. citizen is in itself enough to be considered a U.S. tax resident, which is quite unique globally. In Sweden, a person becomes tax resident if they live in the country, spend significant time there, or have previously lived in Sweden and maintained significant ties.

Accordingly, if an American individual chooses to relocate and live permanently in Sweden, that person becomes subject both to a U.S. tax claim (due to U.S. citizenship) and a Swedish tax claim (due to tax residency in Sweden).

To determine how the treaty applies, it is crucial to establish where the person is considered resident for tax purposes. This requires a proper analysis based on both countries’ domestic tax laws and the treaty’s so-called tie-breaker rule.

Simply put, the treaty can have two different effects:

1. Only one of the countries is allowed to tax a certain type of income.

2. Both countries are allowed to tax the income, but one country must provide a foreign tax credit for the other country’s tax.

   
   

The treaty between the U.S. and Sweden also contains some provisions that differ from what is typically found in Sweden’s other tax treaties. The U.S. often negotiates for an “overriding tax rights clause” that allows it to continue taxing its citizens, even when the treaty suggests otherwise. This clause is included in the Sweden–U.S. treaty, and for many Swedish advisors this can be difficult to navigate, as it does not appear in any of Sweden’s other tax treaties.

Common pitfalls for Americans living in Sweden

Even though the treaty aims to prevent double taxation, mismatches between how Sweden and the U.S. classify certain income or assets can cause unexpected tax problems.

This is especially true for American 401(k) accounts and U.S. trusts. If you have a 401(k) and plan to move to Sweden, you should definitely seek professional advice. Otherwise, you risk Swedish tax rates exceeding 50 percent and penalties up to 40 percent in case of non-compliance.

The same applies to U.S. trusts. A beneficiary of a U.S. trust could face Swedish income tax exceeding 50 percent.

Fortunately, if the relocation is properly planned, the tax risks related to 401(k)s and trusts can usually be avoided. It is essential to consult a qualified advisor before the move so that practical recommendations can be implemented in time. We often advise American clients on adjustments that should be made to their trust structures to reduce Swedish tax exposure. This can result in substantial savings.

How can the Swedish-American tax treaty help?

Beyond its core function of preventing double taxation, the tax treaty between Sweden and the U.S. can also open the door to valuable tax planning opportunities. For example, under certain conditions the treaty can prevent Sweden from taxing most of a person’s income, even if that person is living permanently in Sweden.

This can be highly advantageous for U.S. expats. We frequently advise clients on how to structure their tax affairs to achieve the lowest possible exposure under both tax systems. Ideally, this planning should be done before relocating to Sweden, but solutions are often available even for individuals already living in Sweden.

Key tax treaty articles that affect U.S. expats in Sweden

Some of the most important articles in the Sweden–U.S. tax treaty include the following:

Article 1 paragraph 4

This article states that the U.S. can disregard parts of the treaty in relation to its citizens and green card holders. Even if the treaty otherwise assigns taxing rights to Sweden, the U.S. can still impose its tax. There are some exceptions, such as for U.S. social security pension income.

Article 4 This is the central article on residency. It contains the rules for determining a person’s tax residency when both countries claim taxing rights. In practice, this article often requires interpretation through case law and legal commentary, as the treaty text alone is not sufficient to resolve all questions.

Article 6 This article addresses income from real estate. It establishes that the country where the property is located may tax the income related to it, regardless of the owner’s residency status. For example, Sweden can tax rental income or capital gains from property located in Sweden, even if the owner lives abroad. On the other hand, if a U.S. expat in Sweden sells a property located in the U.S., this article can prevent Sweden from taxing the gain. We frequently advise clients on such situations.

Article 13 This article stipulates which country is allowed to tax capital gains. Generally, it gives taxing rights to the country where the seller resides at the time of the sale. However, Article 13 includes a unique provision reflecting Sweden’s domestic “ten-year rule.” According to this rule, Sweden reserves the right to tax capital gains on securities, such as stocks and fund shares, for up to ten years after a person has ceased being a Swedish tax resident.

This provision can have unexpected consequences for U.S. citizens who move back to the United States and later sell investments, including holdings in American IRA accounts, since Sweden may still claim taxation rights based on this article. However, with proper pre-departure planning, it is often possible to structure holdings to mitigate or avoid taxation under this rule. We frequently assist clients with planning around this issue.

How do I claim benefits under the treaty?

In Sweden, the process for claiming treaty benefits is not highly formalized. There are no standard forms for this purpose. Instead, your tax advisor typically prepares a formal letter outlining the relevant treaty articles, supported by documentation and legal analysis. We regularly prepare such claims on behalf of our U.S. clients, mostly in their Swedish Income Tax Returns, but in cases of previous non-compliance, in-socalled "Voluntary Corrections".

Do you still need to file a Swedish tax return?

Whether you must file a Swedish tax return is not determined by your status under the treaty. Rather, it is based on Swedish domestic tax law. In particular, individuals who have lived in Sweden are presumed to remain tax residents for five years after leaving, unless they can prove otherwise.

This means it is important to plan not only the relocation to Sweden, but also any later move away from Sweden, whether to the U.S. or to a third country.

Conclusion

For Americans relocating to Sweden, understanding the Sweden–U.S. tax treaty is essential. While it helps reduce the risk of double taxation, it also introduces complexities that require careful management. From retirement accounts and trusts to Sweden’s ten-year rule on capital gains, the tax landscape can be challenging.

With early planning and expert advice, you can use the treaty to minimize tax burdens and structure your affairs efficiently. We collaborate closely with a U.S. tax attorney living in Sweden to provide comprehensive guidance covering both U.S. and Swedish legal perspectives. This collaboration is often necessary to fully address the tax aspects affecting U.S. persons living in Sweden.

If you want tailored advice for your situation, we are here to assist you.