Swedish-American tax treaty - what is it?

Moving to Sweden from the United States can be challenging in many respects. One of the most significant difficulties for Americans who settle permanently in Sweden is taxation.

Because the United States applies citizen based taxation, American citizens living in Sweden are generally subject to tax claims from both Sweden and the United States. To mitigate double taxation of individuals and companies, Sweden and the United States have entered into a bilateral tax treaty. For a high level overview of taxation for Americans living in Sweden, we have published a separate article addressing the general framework.

What is the purpose of the Swedish American tax treaty

The primary purpose of the Swedish American tax treaty is to mitigate double taxation of individuals and corporations.

As noted above, double taxation is common for Americans living in Sweden due to the special approach applied by the United States when taxing its citizens and long term residents regardless of where they live. The treaty allocates taxing rights between the two states and establishes mechanisms for tax relief where both countries assert taxing jurisdiction.

What is my tax treaty residency

In order to apply the Swedish American tax treaty, it is first necessary to determine in which state an individual is considered resident for treaty purposes.

Article 4 and treaty residency

This assessment is made under Article 4 of the treaty, which differs significantly from how residency articles are normally drafted in tax treaties.

In simplified terms, American citizens who maintain a permanent home, habitual abode, or substantial presence in the United States are treated as United States treaty residents regardless of how they are classified under United States domestic tax law. As a result, the tie breaker rules must be applied to determine whether Sweden or the United States is the state of residence under the treaty. This is a complex and fact specific assessment.

The United States right to disregard the tax treaty

After determining treaty residency, one must also consider a special provision in the Swedish American tax treaty.

Treaty override for American citizens

Under this provision, the United States is allowed to disregard the tax treaty in relation to its citizens, former citizens, and certain long term residents, even if they are treated as residents of Sweden under the treaty.

This means that the United States generally retains the right to tax American citizens living in Sweden. However, the United States is required to grant a foreign tax credit for Swedish taxes paid, subject to certain limitations and exceptions.

The treaty also deviates from standard international practice by requiring both Sweden and the United States to grant foreign tax credits on the same income in situations where the United States exercises its right to override the treaty.

Due to this unique approach, some Americans ultimately decide to renounce their United States citizenship in order to avoid what is often perceived as a form of permanent tax liability.

Limitations on the applicability of the tax treaty

It is important to note that the Swedish American tax treaty applies only to United States federal income tax.

State taxes and foreign tax credits

United States state taxes are not covered by the treaty. Relief from double taxation in relation to state taxes must instead be sought under Sweden’s domestic foreign tax credit rules, set out in the Swedish Foreign Tax Credit Act, ("Avräkningslagen").

These rules contain several limitations, which in some cases may imply that a tax credit is not granted in Sweden. In practice, relief may instead need to be obtained through the United States tax system in such situations.

What benefits can be claimed under the tax treaty

The treaty contains a wide range of provisions that may significantly affect an individual’s or a company’s tax position. By way of illustration, the following benefits may be available depending on the specific circumstances.

Examples of treaty benefits

Certain statutory pension income from the United States may be fully exempt from tax in Sweden.

Pension income from private employment may be exempt from Swedish tax, provided that the individual receiving the pension is a treaty resident of the United States.

Dividend distributions from a Swedish company to a qualifying United States company may in some cases be subject to a reduced Swedish withholding tax rate of five percent instead of the standard thirty percent rate.

Dividend distributions from a Swedish company to an individual who is a treaty resident of the United States are generally limited to a Swedish withholding tax rate of fifteen percent.

The application of these provisions varies significantly depending on treaty residency, citizenship, income classification, and other relevant factors.

How the tax treaty is applied in practice

To have Sweden apply the provisions of the tax treaty, the treaty must be claimed in the annual Swedish income tax return.

Claiming treaty relief in Sweden

There is no standardized form for making such a claim. In practice, the claim must be prepared as a formal legal appendix, which is why it is typically handled by a Swedish tax lawyer.

The process usually involves establishing the individual’s treaty residency, as this affects taxing rights and entitlement to foreign tax credits. Thereafter, the relevant treaty provisions limiting Sweden’s taxing rights or granting tax relief are invoked. Supporting documentation such as residency certificates, pay slips, or pension statements is normally appended to substantiate the claims.

For further information on Swedish tax return filing for Americans living in Sweden, we refer to our separate article on this topic.

Final remarks

Are you an American living in Sweden and unsure how the Swedish American tax treaty affects your tax situation.

We at nomadtax are Swedish tax lawyers with extensive experience advising on the Swedish American tax treaty and its effects on Americans living in Sweden. Please do not hesitate to contact us if you require tax advice or assistance with your Swedish income tax return.