During the last few years, Sweden has seen a steady inflow of Indian nationals coming to Sweden to pursue their professional careers. Often, these people are highly educated engineers, developers, animators, or designers. Arriving in Sweden can be challenging in many ways. One of the key challenges are taxes. In this article we will go through how the tax treaty between Sweden and India can affect the Swedish taxes.
What is a tax treaty?
A tax treaty is a legal agreement between two countries, which governs the right of taxation between the two countries. The main purpose of a tax treaty is to mitigate and/or prevent situations of double taxation, i.e. when two states taxes the same income of a person or company.
A tax treaty usually overrides a country's domestic tax legislation, which have also lead to tax treaties being used for tax planning purposes. Between Sweden and India, a tax treaty has been in force since 1988, although it was renewed in 1997.
What effect has the tax treaty between Sweden and India?
In order to determine what effect the tax treaty can have, one must firstly establish whether the tax treaty is even applicable. If applicable, one must establish in what of the two states (Sweden or India) the person has his/her tax treaty residency. This assessment is depending on many factors, such as the nature of the state's tax claim on the individual, but also factors such as access to a permanent home, economical and social ties, citizenship, and travel pattern, can be regarded.
It is very important that a thorough analysis is done in relation to tax treaty residency, since this has a significant impact on almost every clause of the treaty. In essence, should a person have his tax treaty residency in India, then Sweden will only be able to tax income with source in Sweden, such as employment income from work in Sweden, dividends from Swedish companies, or rental income from letting a Swedish property. Importantly, Sweden's exit tax regime is affected by the tax treaty. This could be very important for Indian nationals, that plan to move back to India after having lived in Sweden. Furthermore, the tax treaty can limit the notorious Swedish tax regime (3:12-rules) that apply to private companies. This is very important for entrepreneurs, investors, and other tax owners. It should be duly noted, that the Swedish 3:12-rules do apply to holdings in Indian companies.
Conversely, should a person have his tax treaty residency in Sweden, India will be hindered from applying tax on income that does not have its source in India.
How do I apply the Swedish-Indian tax treaty?
If a person wants to claim benefits from the tax treaty, i.e. the application of the tax treaty's provisions, one has to include such a claim in the annual Swedish Tax Return. There is no form available for tax treaty claims. Instead, a Swedish lawyer would draft a legal writ that is attached to the annual Tax Return. This is complicated, since it requires legal arguments regarding the following aspects:
Applicability of the tax treaty
Determination of tax treaty residency
Income that should be affected by allocation articles of the tax treaty
Application of the so-called method-article
Lastly, the legal arguments and claims usually must be supported by various documentation. If performed correctly, a Indian person living in Sweden can enjoy tax exemption in Sweden on much of the person's income. Also, the person would generally be entitled to tax credit, by applying the so called method article of the tax treaty.
Are you an Indian national that live or plan to live in Sweden? We have long experience of assisting Indian clients with their Swedish taxes. Please reach out to us, if you want to learn more.
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