Taxes are complex - we know. Many people seek professional assistance when filing taxes in their home countries. The need for assistance usually increases when an individual moves abroad.
It is important to understand and be compliant with foreign tax legislation, since there is otherwise risk for double taxation, fines and penalties. For Americans abroad, the risk is increased by the United State’s special tax regulation that affects all citizens — no matter where they are in the world.
In this article, we’ll examine these unique ‘regulations’ and discuss how they can impact Americans in Sweden. For general information about Sweden’s tax system, read our taxguide for expats.
How do you become tax resident in Sweden?
When an American moves to Sweden, they usually become a tax resident immediately. This means that Sweden has a tax claim on their global income from day 1 of arriving in Sweden. This claim includes US-sourced income, such as dividends from American corporations, selling of American stocks, employment income from US employers, and pension income from USA. This income must be manually included in the annual Swedish tax return.
However, there are some instances in which Swedish tax residency begins after the first day of arrival, for example, when a person commutes back and forth from Sweden.
Therefore, an assessment that determines when an individual’s tax residency begins must be made by examining case law. Unfortunately, Sweden does not have a set threshold (i.e. amount of days), that determines when a person becomes a tax resident in Sweden. Instead, one has to consider how a person's stay in Sweden is viewed under principles stipulated in Swedish case law derived from the Swedish Supreme Administrative Court, with special regard to frequency, regularity, and extent of stay.
How does the US tax Americans abroad?
The United States is one of few countries that applies the Citizen-Based Taxation (CBT), instead of the more common Residency-Based Taxation (RBT). Under CBT, the United States has a tax claim on all American citizens and green card holders, regardless of where that person lives — including across international borders.
Contrarily, Sweden enforces RBT. This means that a person becomes a tax resident in Sweden based on whether they live in Sweden, spends significant time in Sweden, or has heavy ties to the country after moving abroad.
Due to the United State’s CBT, an American that permanently resides in Sweden, would face tax claims both from America (by reason of citizenship) and Sweden (by reason of residency). Consequently, the risk of an American person living in Sweden being subject to double taxation, is rather high. Of course, this is far from optimal, especially considering the high tax rates of Sweden.
Some Americans even drop their United States citizenship to forego their tax obligations.
What is the Swedish-American tax treaty?
In order to ensure that a person or corporation is not subject to double taxation, countries agree to bilateral tax treaties with one another. These tax treaties stipulate which state is allowed to tax certain income. Sometimes, both countries are allowed to tax the same income, but one of the countries is then usually required to grant a credit, with the other country’s tax.
The Swedish and American governments have agreed to a tax treaty which includes an unusual provision. This provision stipulates that the United States is not obligated to apply the tax treaty all, in relation to US citizens. However, if the United States is taxing the income of a person that has residency in Sweden, Sweden is generally obligated to grant credit with the American taxes. Furthermore, the tax treaty is not applicable on American state tax. One has to apply the Swedish internal credit law ("Avräkningslagen"), in order to mitigate double taxation due to US state tax.
Complicated? Yes - we agree.
However, Americans living in Sweden can usually avoid double taxation by applying the American Foreign Earned Income Exclusion (FEIE) rule. This effectively prevents the United States from taxing income earned in Sweden, up to a certain threshold. One should be aware that the FEIE is not applicable on passive income such as dividend or interest income. It is also possible to claim a Foreign Tax Credit, based on internal US legislation, as well as Swedish internal legislation.
How do US nationals file their Swedish Tax Return?
An American living in Sweden is obligated to include his/her/their global income in their annual Swedish tax return. Income earned in Sweden, e.g. salary from Swedish employers, or dividends received in a Swedish trading account, is normally pre-filled in the tax return. This is not the case for US sourced income, such as capital gains, capital income received in an American brokerage account, or withdrawals from a 401(k) plan.
Therefore, one must manually include all transactions made in American brokerage accounts, distributions from American trusts, and similar sources of income. This can be quite tricky, since Sweden does not calculate capital gains using the same method as the United States. Also, in Sweden, there is no such thing as Short-Term Capital Gains, or Long-Term Capital Gains.
Conclusions
Americans living in Sweden are subject to a Swedish tax claim on their global income. Hence, American-sourced income must be included in the Swedish tax return manually.
The Swedish-American tax treaty offers possibilities to avoid double taxation. However, the tax treaty is not applicable on US state tax. There are also possibilities to avoid double taxation by applying internal Swedish and/or American law.
Taxes for US nationals living in Sweden are very complicated, due to the United State’s unique tax system. We recommend you consult a Swedish tax lawyer to prepare and file the Swedish tax return.
Please contact us if you have questions on taxation of Americans living in Sweden, or if you would need assistance with your Swedish tax return.
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