It is becoming increasingly common for Swedes to acquire properties abroad. The typical scenario involves purchasing a vacation home in a south-European country, such as Spain or Portugal. Buying properties outside of Europe, for example in Thailand or Indonesia, is also an emerging trend. An attractive option for those owning property abroad is to rent it out. But how does Swedish taxation work when renting out a property located abroad?
Is Foreign-sourced Rental Income Taxed in Sweden?
According to Swedish tax law, an individual can have tax residency status as either non tax resident or tax resident. Individuals residing in Sweden are considered tax residents, meaning they are liable to tax on their global income.
Thus, rental income from a property located abroad falls under Sweden's tax claim for individuals who are tax residents. Sweden aims to tax the rental income in the same manner as if a property in Sweden were rented out, provided that the owner is a tax resident in Sweden.
As a general rule, rental income is taxed with Swedish capital gains tax at 30%, after certain standard deductions. Rental income can also be taxed as business income, which means the taxation occurs on a progressive tax scale (30 – 55%). Additionally, Social Security Contributions are levied on the income, making rental income classified as business income highly taxed in Sweden. When Social Security Contributions are added to the income tax, the marginal tax rate can be up to 70%.
To determine if rental income is taxed as capital income or business income, the property in question must be assessed/classified. If it is a commercial property (for tax purposes), rental income is automatically considered business income. If instead, a property is regarded as a private residence (capital asset), rental income is taxed with capital tax. In some cases, a property can shift from being a private residence to a commercial property and vice versa. It is crucial to make a correct assessment as the taxation differs significantly between the two classifications. Sometimes there is room for argumentation regarding the classification in the annual tax return. It is important to include an Open Disclosure in the tax return, to mitigate the risk of the Swedish Tax Agency applying tax penalties.
Are Foreign Rental Incomes Taxed in the Country Where the Property is Located?
Most countries in the world have a tax claim on rental income from properties located in that country. This tax claim usually applies to non tax residents, which means, for example, that a person residing in Sweden who owns a vacation home in Spain is liable to pay tax in Spain on rental income from renting out that particular home.
Thus, it is clear that there is a significant risk for Swedish tax residents receiving foreign rental income to be taxed on it both in Sweden and in the country where the property is located. This is called double taxation. To avoid double taxation, any tax treaty that Sweden has with the other country should be applied. In the absence of a treaty, it is generally possible to resolve double taxation by applying the Swedish Tax Credit Act. In some cases, provisions in tax treaties result in Sweden having no right to tax foreign rental income. However, this requires that the property owner is considered a resident according to the treaty in the other country.
In summary, there is a significant risk that foreign rental incomes will be subject to double taxation, which should be resolved by applying tax treaties. This is usually done by a tax lawyer in a separate appendix to the annual Swedish tax return. Contact us if you want to know more or need legal tax assistance regarding rental income.
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