Moving to Sweden as an American can lead to challenges with regard to taxes. The main reason is the US so-called Citizen Based Taxation (CBT), which implies that an American in Sweden would be fully liable to taxes in both America and Sweden. In particular, difficulties can arise for individuals that hold stocks in an American LLC, that are taxed as a so-called S-corp.
What is an American LLC?
An American LLC is a company form, offering limited liability to owners while allowing them to pass through business income and losses directly to their personal tax returns. Unlike traditional corporations, LLC's that chooses to become taxed as S-Corps do not pay federal income taxes themselves. Instead, shareholders report their share of income or losses on their individual tax returns.
Despite the owners being liable to tax on the LLC's profits, these can be distributed to the owner, which leads to taxation of the owner. Salary can also be distributed.
How is an American LLC treated for Swedish tax purposes?
In Sweden, there is a company form that share similarities with an LLC taxed as an S-Corp. The name of that company form is a “Handelsbolag” or a “Kommanditbolag”. Just like the LLC, it is the shareholder that is liable to Swedish Corporate Income Tax on any profits made by a “Handelsbolag” or “Kommanditbolag”.
According to the Swedish Income Tax Act, Swedish tax residents are also liable to Swedish Corporate Income Tax, on any holding in a foreign (non-Swedish) company, that is taxed at the ownership level, according to the domestic legislation where the company is formed. Since this is the case for American LLCs, all shareholders of an American LLC that are also tax residents in Sweden, are subject to a Swedish tax claim on the shareholder’s part of the company’s eventual profit. However, there are exceptions (see more below).
Will an American LLC owner living in Sweden become double taxed?
By reason of America’s CBT-based taxation, an individual that is tax resident in Sweden and owns shares in a LLC, would be liable to taxes on the LLC’s profit both in Sweden and America.
This is problematic, since it implies that double taxation could occur. However, for the purpose of avoiding double taxation, one can apply the Swedish-American tax treaty. The application of the treaty would vary, however, from situation to situation, based on factors such as in which state the shareowner has his/her tax treaty residency, and whether the LLC does have a ‘Permanent Establishment’ in Sweden. Also, since the Swedish-American tax treaty is not applicable to US state tax, claiming the application of the Swedish Foreign Tax Credit Law would be necessary to offset any paid US state tax.
If one is to apply the tax treaty’s provisions, this should be done by a lawyer, by producing an appendix to the Swedish Tax Return of the individual, with claims supported by legal arguments.
How would an owner of an American LLC become taxed in Sweden?
As a main rule, Swedish tax provisions would apply when determining the taxation of a LLC's owner. This implies that the individual’s part of the LLC's annual result would be subject to Swedish tax, irrespective of whether any profit has been distributed. The applicable tax rate would amount to 30 – 55 %, depending on the profit’s size and other factors. Also, Swedish Social Security Fees (24,26 % as a main rule) would be due on the LLC's annual result, which implies that the tax bill can be very high for a shareholder of an LLC that is tax resident in Sweden. However, the Swedish-American Social Security Treaty can affect the Social Security Fees.
Are you the owner of an American LLC and live in Sweden? Would you like to receive guidance on how to treat this, from a tax perspective? Please do not hesitate to contact us.
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