When Sarah Johnson moved from Chicago to Stockholm to work for Spotify, she discovered her $85,000 salary faced taxation in both countries. The US-Sweden tax treaty saved her from paying twice. This agreement protects thousands of American professionals working for Swedish companies like Volvo and Ericsson.
Introduction to Double Taxation Treaties
What is a double taxation treaty?
Double taxation treaties are bilateral agreements between countries. They prevent individuals from paying income tax twice on the same earnings. The US has treaties with over 60 nations including Sweden. These agreements determine which country has primary taxing rights.
Why the US-Sweden treaty matters for remote workers
The treaty specifically addresses cross-border employment situations. Americans working remotely from Sweden for Swedish companies benefit greatly. Without the treaty, they could face combined tax rates exceeding 60%. The agreement provides clear rules for income allocation.
Key Provisions of the US-Sweden Tax Treaty
Residency rules and tie-breaker tests
The treaty uses a tie-breaker test for dual residents. It considers permanent home location first. Then it examines personal and economic relations. Center of vital interests determines final residency. This prevents dual tax residency claims.
Income types covered: employment, dividends, pensions
Employment income gets taxed where work is performed. Dividend payments face 15% maximum withholding. Pension payments typically go to the residence country. Capital gains rules vary by asset type. The treaty covers all major income categories.
Tax credits and exemptions explained
Sweden grants exemptions for certain US-sourced income. The US provides foreign tax credits for Swedish taxes paid. These mechanisms prevent double taxation. Credits apply dollar-for-dollar against US tax liability.
Practical Tax Scenarios for US Citizens
Working remotely from Sweden for a Swedish company
Americans employed by Klarna or H&M face Swedish income tax first. Rates range from 29% to 55% depending on income. The US then taxes worldwide income but offers relief. The Foreign Earned Income Exclusion eliminates up to $120,000 of foreign earnings from US tax.
Short-term vs. long-term assignments
Short-term assignments under 183 days may avoid Swedish taxation. Long-term residents face full Swedish tax obligations. The 183-day rule has specific counting methods. Breaks and vacation days affect the calculation.
Handling social security taxes and totalization
The US-Sweden Totalization Agreement coordinates social security. Americans on temporary assignments may remain in US system. Long-term residents join the Swedish system. This prevents dual social security contributions.
Steps to Avoid Double Taxation
Filing US tax returns with Foreign Earned Income Exclusion
File Form 2555 with your US tax return. Claim the Foreign Earned Income Exclusion. This excludes up to $120,000 of foreign earnings. You must meet either Physical Presence Test or Bona Fide Residence Test.
Claiming foreign tax credits on Form 1116
Use Form 1116 for foreign tax credits. Report Swedish taxes paid on the form. Credits reduce your US tax dollar-for-dollar. Carry forward unused credits for ten years.
Using the treaty to reduce Swedish tax liability
Submit a treaty benefits claim to Swedish Tax Agency. Use Form SKV 4350 for reduced withholding. Provide US residency certification. This ensures proper treaty application.
Common Pitfalls and Compliance Tips
Reporting foreign bank accounts (FBAR)
File FinCEN Form 114 for accounts exceeding $10,000. Use the BSA E-Filing System. Deadline is April 15 with automatic extension. Penalties reach $10,000 per violation.
Avoiding penalties for missed deadlines
File US taxes by June 15 with automatic extension. Pay estimated taxes quarterly. Use IRS Direct Pay for payments. Set calendar reminders for all deadlines.
When to seek professional tax advice
Consult experts when income exceeds $120,000. Get help with complex investments or business ownership. Use firms like PwC Sweden or KPMG Stockholm. Expect costs from $2,000 to $5,000 annually.
Frequently Asked Questions
Can I avoid US taxes completely by moving to Sweden?
No. US citizens must file taxes regardless of residence. The Foreign Earned Income Exclusion helps but doesn't eliminate filing requirements. You still report worldwide income.
What happens if I work remotely for a US company from Sweden?
Sweden taxes income earned while physically present there. The US also taxes your worldwide income. Use foreign tax credits to avoid double taxation. The treaty determines primary taxing rights.
How do I prove Swedish tax residency?
Get a tax residency certificate from Swedish Tax Agency. Use Form SKV 7940 for the application. Processing takes four to six weeks. Keep copies for both tax authorities.
What Swedish tax forms do Americans need?
File Swedish tax return Form INK1-S. Submit employment income declaration Form KU10. Use Form SKV 4350 for treaty benefits. All forms available at Skatteverket.se.
When should I hire a tax professional?
Hire help when dealing with investments exceeding $50,000. Get assistance with business ownership or rental properties. Complex situations justify the $2,000-$5,000 cost.
How does the 183-day rule work exactly?
Count all days physically present in Sweden. Include partial days as full days. Exclude days in transit between countries. The test applies to any 12-month period.
What happens if I miss FBAR filing?
File delinquent FBAR immediately. Include statement explaining reasonable cause. Penalties can be mitigated with prompt correction. Willful violations face severe penalties.