Tax treaties, or double taxation treaties, are concluded between countries to prevent double taxation of companies and individuals. Since 1997, the "Nordic Tax Treaty" has been in effect between the Nordic countries, namely Sweden, Finland, Norway, Iceland, and Denmark. But what does this tax treaty actually mean for a company or an individual? Let’s go through it.
What is a Tax Treaty?
A tax treaty is an international agreement between sovereign states. In Sweden, tax treaties also constitute domestic law, as the Swedish legal system apply a so-called "dualist approach," meaning that an "implementation law" is approved by the parliament after the government has entered into a tax treaty. This allows authorities and courts to apply domestic law when the provisions of the treaty are to be enforced.
Since the Nordic countries have long had close cooperation in legal and other matters, it seemed natural for the countries to jointly conclude a tax treaty. In most cases, tax treaties are entered into between two countries. However, the method articles of the Nordic tax treaty differ significantly depending on which country is applying the method article. These articles are the result of negotiations between the states.
What Effect Does the Nordic Tax Treaty Have?
Generally, the Nordic tax treaty allocates which Nordic country has the right to tax a certain income. Sometimes two or more states have the right to tax the same income, but in such cases, one state will often allow a credit for the tax paid to the other state. This can lead to tax being paid only in one state.
In other instances, the tax treaty may mean that only one state is entitled to tax an income, but another state may consider the income when determining the marginal tax rate for an individual. This means that only a certain income is considered for "progressive purposes."
When applying a tax treaty, it is crucial to assess and establish in which state a person is deemed to have their residence according to the treaty. This assessment must be made in each individual case and depends on the circumstances of that specific case. In some situations, one can influence the circumstances in such a way that residence is obtained in the most tax-advantageous state. Evidently, this means that the Nordic tax treaty can be used for tax planning purposes.
How Can I Ensure the Nordic Tax Treaty Is Applied?
This varies from country to country, but in Sweden, there is no specific form for applying tax treaties. Instead, a claim is usually written manually in a separate text annex to the Swedish Tax Return. This is often done by a tax lawyer. Usually, certain evidence, such as a tax treaty residency certificate, must be attached for the Swedish Tax Agency to accept a claim for the application of a tax treaty.
Does the Nordic Tax Treaty Contain Any Special Provisions?
The Nordic tax treaty contains special provisions in the form of the so-called "cross-border commuter rules." These rules apply to individuals who commute daily between Sweden, Finland, and Norway and allow a person, in certain cases, to be taxed only in their country of residence, even if they work in a neighboring state. Between Sweden and Denmark, there is also the so-called "Öresund Treaty," which applies to individuals commuting between Sweden and Denmark in the Öresund region.
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