A common question for expats living in Sweden, is how to get a foreign tax credit in Sweden with taxes paid in another country.
Typically, income that is sourced in another country (e.g. dividends from a German company, rental income from letting real estate in Spain, or similar), will also be subject to tax in that country. By reason of Sweden taxing its tax residents on their global income, this will often lead to income being subject to taxes both in Sweden and in another country. This is called double taxation. Thankfully, there are ways to prevent double taxation from occurring.
Foreign tax credits under double taxation treaties
Sweden is party to a hefty number of bilateral tax treaties. This means that Sweden has entered into an agreement with another state, with the purpose of avoiding double taxation of income. In more detail, a tax treaty can govern which of the two state that is allowed to tax certain income. Sometimes both states are allowed to tax the same income. However, when this is the case, one of the states are usually obligated to grant a foreign tax credit with the other state’s tax.
A very important consideration when applying the provisions of a tax treaty, is to establish in what of the states the taxed person has his/her treaty residency in. This assessment can be complicated, especially for individuals who for example maintains a home in the other state, while living permanently in Sweden. Sometimes, an overall assessment of the person's affiliation to the states has to be done.
After the treaty residency of the person is determined, the treaty’s provisions can be claimed in the annual Swedish tax return. Let’s illustrate this with an example.
Anna moved from Germany to Sweden last year, and has received dividends from a German company while living in Sweden. Both Sweden and Germany wants to tax this income. Provided that Anna has her treaty residency in Sweden (which has to be thoroughly assessed!), Germany will only be allowed to tax the dividend income with maximum 15 % tax. Sweden will be allowed to tax the dividend income, but has to credit the 15 % German tax. Considering that the Swedish tax rate on dividends is usually 30 %, this implies that Anna will pay 15 % in Germany, and 15 % in Sweden. In order to get the tax credit in Sweden, she has to claim this is her tax return. And same goes for Germany – she would most likely have to actively claim that Germany only tax her with 15 % due to the tax treaty with Sweden.
Double taxation treaties are also applicable on for example employment income, pension income and capital gains.
Foreign tax credits under the Swedish tax credit law
Unfortunately, Sweden has not concluded a tax treaty with every state in the world. In fact, there are many states that Sweden does not have a tax treaty with. So what can one do, if double taxation is occurring due to taxation of a state that doesn’t have a tax treaty with Sweden?
Luckily, Sweden also has the Swedish tax credit law, that can enable one to receive a foreign tax credit, even in absence of a double taxation treaty. Despite this, there are some limitations to the Swedish tax credit law. Usually, it has to be proven that the income was taxed in the other state, due to it having its source in that state. Also, the Swedish tax credit law can never limit Sweden’s right to tax a certain income, which is the case for many tax treaties. This means that the Swedish tax credit law generally speaking cannot be used for tax planning purposes.
Furthermore, there are also two special tax rules in the Swedish legislation, that enables a Swedish tax residents to have their employment income derived from working outside of Sweden exempt from Swedish tax.
Requirements for a foreign tax credit
In order to be granted a foreign tax credit, one has to prove that the foreign taxes are final and paid. This is usually done by presenting a final tax assessment from the other country. This requirement can lead to severe problems with for example the United Kingdom, since it applies a broken tax year, and not the calendar year.
Also, if one wants to claim the application of a tax treaty, one has to be able to legally prove their residency according to the treaty. Usually, this requires some legal arguments being presented together with backing evidence. Always consult a tax lawyer for this, as it is a complicated procedure.
Also, an important requirement when claiming a foreign tax credit under a tax treaty, is that the income cannot be taxed in violation of the treaty by the other state.
How to claim a foreign tax credit in Sweden
Usually speaking, a Swedish tax resident will claim the foreign tax credit in its annual tax return. This is mostly done in a separate appendix, that is drafted by a tax lawyer. If Sweden has a tax treaty with the other state taxing the income, the treaty must be applied. This means that the tax treaty residency must be assessed, as well as the treaty’s impact on the income. The appendix will therefore include arguments for the tax treaty residency, as well as how the tax treaty’s method article should apply to the income.
After having filed the tax return, the Swedish Tax Agency will assess the claim manually, and eventually ask for more evidence before granting the credit. Sometimes, the application of tax treaties can be highly advantageous for an individual, since Sweden can be prevented from taxing certain income.
Conclusions
Sweden is part to a number of tax treaties that can be applied to receive a foreign tax credit. Tax treaties can also imply that Sweden exempt the income from tax.
When there is no tax treaty between Sweden and the other state, the Swedish foreign tax credit law can be applied.
Claiming a foreign tax credit is normally done in the annual income tax return. The claim is put forward in an appendix, drafted by a professional tax lawyer.
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