Most Americans living abroad are aware that the U.S. applies “Citizen Based Taxation,” meaning that U.S. citizens, even those residing in Sweden, remain subject to U.S. tax obligations. When an individual is taxable in two countries, there’s a substantial risk of double taxation. Fortunately, there are various means to mitigate this, including the U.S.-Sweden tax treaty. This article explores how Americans residing in Sweden can avoid double taxation.
When Do I Become a Tax Resident in Sweden?
According to Swedish tax law, there are three categories of individuals who are considered tax residents in Sweden:
Individuals permanently residing in Sweden
Individuals with a “habitual abode” in Sweden
Individuals who have previously lived in Sweden but still maintain “essential ties” to Sweden
For newly relocated individuals, “habitual abode” determines if and when they become tax residents in Sweden. Unfortunately, Sweden does not employ a fixed-day standard, such as a 183-day rule, to assess whether an individual has a habitual abode in Sweden.
Instead, the evaluation depends on principles and statements established through Swedish case law, primarily by the Supreme Administrative Court of Sweden. This precedent shows that as few as 79 days in Sweden can establish tax residency, provided that the stays are regular and exhibit a consistent pattern.
Do I Risk Double Taxation as an American Moving to Sweden?
If an individual is deemed to have a habitual abode in Sweden, they become a tax resident, meaning Sweden will tax all worldwide income. U.S. 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. Given that the U.S. typically also seeks to tax such income, there is a high risk of double taxation.
What is the U.S.-Sweden Tax Treaty?
Countries enter into tax treaties to prevent double taxation. Sweden and the U.S. have a tax treaty dating back to 1994. But how does a tax treaty work?
A tax treaty supersedes national law, meaning that Sweden’s right to tax you can be limited through treaty application. It’s crucial to determine in which of the two countries (U.S. or Sweden) you are a tax resident under the treaty. This residency determination can range from relatively simple to complex, entirely depending on the specifics of the case. In certain situations, we advise our clients to structure their affairs to establish treaty residency in the most advantageous country. Therefore, tax treaties can be used for tax optimization, meaning the minimization of taxes.
How Does the U.S.-Sweden Tax Treaty Affect Me?
As noted above, the initial step is to determine your treaty residency in either the U.S. or Sweden. Following this, the treaty’s impact can be evaluated.
The U.S.-Sweden tax treaty is unique in that it includes a “saving clause” allowing the U.S. to override treaty provisions when it comes to taxing U.S. citizens and green card holders. In these cases, double taxation relief requires a complex process where both countries may need to provide credit for the same income.
It’s worth noting that Sweden lacks a specific form for treaty application. Instead, individuals must include a separate written attachment claiming treaty benefits and present documentation supporting the claim. Often, a “tax treaty residency certificate” from the IRS is required for the Swedish Tax Agency to apply the treaty’s provisions.
What is the Swedish Foreign Tax Credit Law?
In addition to the U.S.-Sweden tax treaty, Sweden’s internal foreign tax credit law provides another option to mitigate double taxation. However, the foreign tax must have been levied by the source country (in this case, the U.S.) because the income is considered sourced in that country. This can present challenges when using the Swedish tax credit law.
Are You an American Residing in Sweden or Considering Relocating? If you are an American currently residing in Sweden or contemplating a move, contact us for comprehensive advice on your tax and legal matters. Also, we recommend you to read our guide for Americans coming to Sweden.
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