As the world is becoming increasingly global, it is not uncommon that a person has worked in different countries during his/her/their life. When it is time for retirement, this can lead to confusion, especially when living in a foreign country. In this post, we will cover the tax aspects you need to be aware of, when receiving foreign pension income as a Swedish tax resident.
Is foreign pension income taxed in Sweden?
For a Swedish tax resident, Sweden will want to levy tax on pension income from abroad. This is due to the Swedish tax system being not a so-called territorial tax system. As a result, if one becomes tax resident, Sweden will have a tax claim on the global income of the tax resident, regardless whether income is remitted to Sweden or not. Whether the pension is earned through work in Sweden is also irrelevant for the Swedish tax claim. This can have effect under a tax treaty though.
Foreign pension income is taxed with 30 to 55 % Swedish tax, for Swedish tax residents.
By contrast, Swedish non tax residents are only liable to Swedish tax, if the pension is originating from the Swedish state, or has been earned through working in Sweden. This implies that Swedish non tax residents will not be liable to Swedish tax, if they for example receive pension income from Germany.
If pension income of a non tax resident is taxed in Sweden, it will be subject to the 25 % SINK tax.
As said however, only pension income from Swedish sources are subject to tax if the receiver is a non tax resident.
It is important, however, to make a proper assessment of whether one is tax resident in Sweden or not. Unfortunately, the legal situation on tax residency is somewhat ambiguous, due to contradictory case law in combination with imprecise statements in the law’s preparatory comments. If you are uncertain on whether you are tax resident, or non tax resident, you should always consult a tax lawyer.
For Swedish tax purposes, a foreign pension regime/program can be classified as one of the following:
A pension insurance (taxed upon withdrawal)
An endowment insurance (tax free withdrawals)
A brokerage account (liable to Swedish Capital Tax)
Pension that is not a pension insurance (taxed upon withdrawal)
Clearly, it his quite beneficial if one's pension regime is classified as an endowment insurance. To determine this, a substantial review must be made of the regime's mechanisms, from a Swedish tax perspective.
Tax treaty’s impact on Swedish taxation of foreign pension income
Even though Sweden aspires to tax all tax residents also on their foreign pension income, Sweden can be prevented from doing this due to a tax treaty. Sweden is part to a rather high number of tax treaties with countries all over the world.
A tax treaty can restrict Sweden from taxing foreign pension income of an individual living in Sweden. For this to happen, generally speaking, the person must have his/her/their tax treaty residency in the other country, i.e. not in Sweden. If you have only lived in Sweden for a limited time period, and/or if you have ties to other state(s) than Sweden, it could very well be the case that you have your tax treaty residency in another state.
In order to benefit from a tax treaty, legal arguments has to be brought forward in your tax return. This is highly complex and should be done by a professional.
Furthermore, every tax treaty is unique, since the two states bound by it have negotiated the terms of the treaty. Therefore, even if a person has tax treaty residency in another country than Sweden, this would not automatically mean that Sweden is prevented from taxing the pension income from abroad.
Consequently, a case-by-case analysis must be made, examining:
If the person is tax resident in Sweden in accordance with domestic law
If the person has tax treaty residency in another state, in accordance with a tax treaty concluded with Sweden and that other state
If the tax treaty’s provisions, in relation to the person and income, can limit Sweden’s right to tax the pension income
How do I pay Swedish tax on my foreign pension income
If it has been determined that Swedish tax should be due on your foreign pension income, you will be obligated to include this income in your annual tax return. This has to be done manually after making necessary currency conversion.
How to prevent foreign pension income from being subject to double taxation
Another issue that is quite normal when receiving foreign pension income, is that the country where the pension is paid from is also taxing the income. A tax treaty should be applied in other to prevent the double taxation from occurring. As said above, sometimes a tax treaty generates the effect that Sweden is totally prevented from taxing the income. More often, however, tax treaties imply that Sweden is allowed to tax the foreign pension income, albeit Sweden is obligated to grant a Foreign Tax Credit when calculating the Swedish tax.
In some jurisdictions, contributions to a pension policy is taxed at the moment of contribution. In Sweden, this is not the case, as pension income is only taxed when receiving the actual pension. The said implies that sometimes, a person’s pension is subject both to tax when earned, as well as when withdrawn. Luckily, there are ways to prevent this from happening, due to a recent verdict from the Supreme Administrative Court (HFD case no. 642-23).
Concluding remarks
Let a tax lawyer assess whether your foreign pension is liable to Swedish tax. If not, this has to be argued for in the annual tax return. It is crucial to both evalute your own personal tax status in Sweden, as well as to classify the pension regime under Swedish tax law.
If the foreign pension is subject to Swedish tax, it has to be assessed whether Sweden is obligated to grant a credit with any other state’s taxes on the pension income. It could also be possible that Sweden's tax claim is prevented by applying a tax treaty.
Please contact us if you have any question regarding Swedish tax treatment of foreign pension income.
Comentarios