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 Sweden–U.S. 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?

Introduction to the 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 tax in more than one country on the same income, which is referred to as double taxation.

Primary Purpose: Avoiding 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 sufficient 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 tie-breaker rule.

Effect of Applying the Swedish-American Tax Treaty

Simply put, the treaty can have two different effects:

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

• Both countries are allowed to tax the income, but one country must provide a foreign tax credit for the tax paid in the other country.
  

Which outcome applies depends on the type of income, the person’s residency status under the treaty, and the specific treaty article governing that income.

How the Swedish-American Tax Treaty Differs From Other Treaties

The treaty between the U.S. and Sweden contains 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 can be difficult for Swedish advisors to navigate, as it does not appear in any of Sweden’s other tax treaties.

The U.S. “Saving Clause”

This overriding provision is commonly referred to as the “saving clause.” It allows the U.S. to effectively ignore parts of the treaty in relation to its own citizens and green card holders, subject to certain limited exceptions.

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 types of income or assets can result in unexpected tax consequences.

Pension Account Problems

This is especially true for American retirement accounts such as 401(k)s. If you have a 401(k) and plan to move to Sweden, you should seek professional advice before the relocation. Otherwise, you risk Swedish income tax rates exceeding 50 percent, as well as penalties of up to 40 percent in cases of non-compliance.

Why 401(k)s Are Not Tax-Deferred Under Swedish Law

Sweden does not generally recognize the U.S. tax-deferred treatment of 401(k) accounts. As a result, income and value increases inside the account may be subject to ongoing Swedish taxation, even though the account remains tax-deferred under U.S. law.

Ties to a U.S. Trust Can Trigger Significant Taxes

The same applies to U.S. trusts. A beneficiary of a U.S. trust may face Swedish income tax exceeding 50 percent. This is due to Sweden not recognizing a trust as a separate legal entity.

Instead, Sweden typically treats either the settlor or the beneficiary as the taxable owner of the trust’s assets and income, in a manner similar to how an American S-corporation is taxed at the ownership level.

Swedish Classification of U.S. Trusts

Trust-related issues can often be addressed through careful legal analysis and, in some cases, restructuring of the trust. Certain changes may result in a different classification under Swedish tax law, significantly reducing Swedish tax exposure.

The Importance of Planning a Relocation

Fortunately, if a relocation is properly planned, the tax risks related to retirement accounts and trusts can often be avoided. It is essential to consult a qualified advisor before the move so that practical recommendations can be implemented in time.

We frequently advise American clients on adjustments that should be made to their asset and trust structures prior to relocation. Proper planning can result in substantial tax savings.

Why Pre-Move Planning Is Critical for Americans

Once Swedish tax residency has been established, opportunities to restructure assets without adverse tax consequences are often limited. Planning before the move is therefore particularly important for U.S. citizens.

Can the Swedish-American Tax Treaty Be Used Strategically?

Beyond its core function of preventing double taxation, the treaty can also open the door to valuable tax planning opportunities. Under certain conditions, the treaty may 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 regularly advise clients on how to structure their tax affairs to achieve the lowest possible overall tax exposure under both tax systems.

Key Tax Treaty Articles Affecting 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. may 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. may still impose its tax. There are certain exceptions, such as for U.S. Social Security pension income.

This provision is highly unusual and is not found in any of Sweden’s other tax treaties. It can cause significant issues, as it allows the U.S. to override the basic treaty mechanism under which only the country of residence taxes a person’s global income streams.

Article 4 – Tax Residency

This is the central article on tax 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 – Income From Real Estate

This article addresses income from real estate. It establishes that the country where the property is located may tax income related to it, regardless of the owner’s residency status. For example, Sweden may tax rental income or capital gains from property located in Sweden, even if the owner lives abroad.

Conversely, if a U.S. expat in Sweden sells property located in the U.S., this article can prevent Sweden from taxing the gain. We frequently advise clients on such situations.

Article 13 – Capital Gains and the Swedish Ten-Year Rule

This article stipulates which country is allowed to tax capital gains. Generally, it grants 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.”

Under this rule, Sweden reserves the right to tax capital gains on securities, such as shares and fund units, for up to ten years after a person has ceased to be 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, as Sweden may still claim taxing rights based on this article. With proper pre-departure planning, however, it is often possible to structure holdings so as to mitigate or avoid taxation under this rule.

How Do I Claim Benefits Under the Treaty?

The process for claiming treaty benefits in Sweden is not highly formalized. There are no standard application forms. Instead, a tax advisor typically prepares a legal submission referencing the relevant treaty articles, supported by documentation and legal analysis.

We commonly submit such claims in Swedish income tax returns. In cases of prior non-compliance, treaty benefits may also be claimed through voluntary corrections.

Timing and Documentation

Obtaining documentation from U.S. authorities can take time. For this reason, we recommend starting the tax return preparation process as early as possible in the spring.

Do You Still Need to File a Swedish Tax Return?

Whether a Swedish tax return must be filed is determined by Swedish domestic law, not by treaty status. Individuals who have lived in Sweden are generally presumed to remain tax resident for five years after leaving, unless they can demonstrate otherwise.

Planning Both Entry and Exit

This makes it important to plan not only the move to Sweden, but also any future move away from Sweden, whether back 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 the treaty helps reduce the risk of double taxation, it also introduces unique complexities. Retirement accounts, trusts, and Sweden’s ten-year rule on capital gains are just a few examples.

With early planning and expert advice, it is often possible to minimize tax exposure and structure one’s affairs efficiently. We collaborate closely with a U.S. tax attorney living in Sweden to provide comprehensive advice covering both U.S. and Swedish tax law.

If you want tailored advice for your specific situation, we are here to assist you. Contact us if you are interested in our support.