Moving to Sweden from America (USA), can be challenging in many aspects. A major difficulty for Americans living permanently in Sweden, is taxes. Since America applies citizen based taxation, every American in Sweden will be subject to a tax claim both from America and Sweden. To avoid double taxation of its citizens and corporations, Sweden and America have entered a tax treaty. For a high level approach to taxes for Americans living in Sweden, we have published a separate article.
What is the purpose of the Tax Treaty?
The Swedish-American tax treaty's main purpose is to mitigate double taxation of individuals and corporations. As mentioned above, double taxation is unfortunately very common for Americans living in Sweden, by reason of the special stance America applies when taxing its citizens and permanent residents (green card holders).
What is my Tax Treaty Residency?
In order to apply the Swedish-American tax treaty, one must firstly establish in what state the individual has his/her/their tax treaty residency. This is done by applying article 4 of the treaty, which unfortunately differs significantly from how tax treaties are usually drafted. Put simply, all American citizens who has a substantial presence, permanent home, or habitual abode in the United States, are automatically tax treaty residents, irrespective of US domestic law, which means that the "tie-breaker rule" should be applied to decide whether Sweden or USA is the state of residency according to the treaty. Indeed, this is a very complex assessment.
USA can disregard the tax treaty, for its citizens
After determining whether Sweden or USA is the tax treaty residency state of an American living in Sweden, one should be aware of the very special clause in the tax treaty, which states that USA is allowed to disregard the tax treaty completely, in relation to its citizens, former citizens, and long term residents, as well as residents according to the treaty.
The special clause implies that USA always have the right to tax American citizens living in Sweden. However, USA is required to grant a foreign tax credit, with taxes paid in Sweden, although this rule have some exceptions. The clause governing the foreign tax credit is also deviating from most tax treaties, since both Sweden and America are required to grant foreign tax credits on the same income, if USA is applying is right to override the tax treaty.
Due to the special or unique approach, that USA applies to its citizens (Citizen Based Taxation), some Americans even decides to renounce their citizenship, in order to escape the sort of 'eternal tax liability' that a American citizenship brings with it.
Limitations of applicability
In fact, the American tax treaty is only applicable on American Federal Tax, which can sometimes be problematic. In relation to American state tax, the Swedish Internal Tax Credit Law ("Avräkningslagen") must be applied to get relief from double taxation. There are a number of limitations stipulated in the Swedish Internal Tax Credit Law, which can sometimes imply that tax credit will not be granted in Sweden. Often, however, a credit can instead be granted in America in these cases.
What benefits can one claim from the Tax Treaty?
There are a big amount of varying rights that one can be entitled to, from applying the Tax Treaty. However, to give you an impression of how the tax treaty can be applied, and what effects on taxation it might have, we would like to highlight the following examples:
American statutory pension income can be fully exempt from tax in Sweden
Pension income from private employment can be be fully exempt from tax in Sweden, provided that the individual obtaining the pension has tax treaty residency in America
Dividend distributions from a Swedish company, to an American company, can in some cases only be taxed with 5 % Swedish Withholding Tax, instead of the 30 % normal rate
Dividend distributions from a Swedish company, to an American tax treaty resident, can only be taxed with 15 % Swedish Withholding Tax, instead of the 30 % normal rate
One should always be aware, however, that the application of the treaty can vary significantly from one person to another, by reason of tax treaty residency, citizenship, classification of income, and similar factors.
How to claim the application of the tax treaty?
In order to have Sweden apply the provisions of the tax treaty, one needs to claim this in the annual Swedish Tax Return. Unfortunately, there is no form or similar available for this sort of claim, which implies that a Swedish Tax Lawyer should prepare the claim for you.
For the claim to be successful, i.e. accepted by the Swedish Tax Agency, we first argue for the tax treaty residency of the person, since this is affecting the provisions governing right to tax, and right to foreign tax credit. As a second step, claims of the treaty's limiting effect, or right to credit, are put forward. Usually, we also append specific documentation (legal certificates, pay slips, etc.) that is used as proof both for the residency part, but also for the income part of the claims. Learn more about Swedish Tax Return filing for Americans living in Sweden, in this article by us.
Are you an American living in Sweden? Us, the team at nomadtax are Swedish tax lawyers, with long experience of the Swedish-American tax treaty, and its effects on Americans living in Sweden. Please do not hestitate to reach out to us if you are in need of tax advice or assistance with your Swedish Tax Return.
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