Article 10 provides rules for both — U.S. Income Tax Treaty

country taxation of dividends and similar amounts paid by a company resident in one State to a resident of the other. Generally, the Article limits the source country's right to tax dividends and amounts treated as dividends or dividend equivalents.

Paragraph 1 preserves the residence country's general right to tax dividends arising in the source country by permitting the residence country to tax its residents on dividends received from a company that is a resident of the source country.

Paragraph 2 grants the source country the right to tax dividends paid by a company that is a resident of the source country. If the beneficial owner of the dividends is a resident of the other Contracting State, the source country tax is limited to 5 percent of the gross amount of the dividends if the beneficial owner is a company that holds directly at least 10 percent of the


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voting power of the company paying the dividends. Source country taxation is limited to 15 percent of the gross amount of the dividends in all other cases. Indirect ownership of voting shares (e.g., through tiers of corporations) and direct ownership of nonvoting shares are not considered for purposes of determining eligibility for the 5 percent direct dividend rate. Paragraph 3 provides special rules for certain U.S. conduit entities. Withholding rates for dividends under the prior Convention are the same, except that the requirements for applicability of the 5 percent rate are somewhat different.

The term "beneficial owner", as used in paragraph 2, is not defined in the Convention, and is, therefore, defined as under the internal law of the country imposing tax (i.e ., the source country). The beneficial owner of the dividend for purposes of Article 10 is the person to which the dividend income is attributable for tax purposes under the laws of the source state. Thus, if a dividend paid by a corporation of one of the States is received by a nominee or agent that is a resident of the other State on behalf of a person that is not a resident of that other State, the dividend is not entitled to the benefits of this Article. However, a dividend received by the nominee on behalf of a resident of that other State would be entitled to the benefits.

This paragraph does not affect the taxation of the profits out of which the dividends are paid, but affects the taxation only of the dividend itself.

Special limitations on the rate of source country taxation are also provided in paragraph 3 for dividends paid by U.S. Regulated Investment Companies and Real Estate Investment Trusts ("RICs" and "REITs"). Dividends paid by RICs are denied the 5 percent direct dividend rate and subjected to the 15 percent portfolio dividend rate regardless of the percentage of voting shares held directly by a Swedish corporate recipient of the dividend. Dividends paid by a REIT are generally taxed at source at the full 30 percent statutory rate. However, dividends paid by REITs are taxed at source at the 15 percent portfolio dividend rate if the beneficial owner of the dividend is a Swedish individual who owns less than a 10 percent interest in the REIT.

The denial of the 5 percent withholding rate at source to all RIC and REIT shareholders, and the denial of the 15 percent rate to most shareholders of REITs, is intended to prevent the use of these conduit entities to gain unjustifiable benefits for certain shareholders. For example, a Swedish corporation that wishes to hold a diversified portfolio of U.S. corporate shares may hold the portfolio directly and pay a U.S. withholding tax of 15 percent on all of the dividends that it receives. Alternatively, it may place the portfolio of U.S. stocks in a RIC, in which the Swedish corporation owns more than 10 percent of the shares, but in which the corporation has arranged to have a sufficient number of small


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shareholders to satisfy the RIC diversified ownership requirements. Since the RIC is a pure conduit, there are no U.s. tax costs to the Swedish corporation of interposing the RIC as an intermediary in the chain of ownership. In the absence of the special rules in paragraph 2, however, the interposition would transform portfolio dividends into direct investment dividends, taxable at source by the United States at only 5 percent.

Similarly, a resident of Sweden may hold U.S. real property directly, and pay U.S. tax either at a 30 percent rate on gross income or at the ordinary income tax rates specified in Code sections 1 or 11 on the net income. As in the preceding example, by placing the real estate holding in a REIT, the Swedish investor could transform real estate income into dividend income, and absent the special rule, transform high-taxed income into much lower-taxed income. In the absence of the special rule, if the REIT shareholder is a Swedish corporation that owns at least a 10 percent interest in the REIT, the withholding rate would be 5 percent; in all other cases it would be 15 percent. In either event, a tax of 30 percent or more would be significantly reduced. One exception to this rule is the relatively small individual investor who might be subject to a U.S. tax of 15 percent of the net income even if he earned the real estate income directly. Under the special rule in paragraph 3, such individuals, defined as those holding less than a 10 percent interest in the REIT, remain taxable at source at a 15 percent rate.

Paragraph 4 defines the term dividends as used in the Convention. The term includes income from shares or other rights (not being debt-claims) participating in profits, as well as other income derived from other corporate rights that is subjected to the same taxation treatment as income from shares by the laws of the Contracting State of which the company making the distribution is a resident. The term also includes income from arrangements (including debt obligations) that carry the right to participate in profits to the extent so characterized under the laws of the Contracting State in which the income arises.

Paragraph 5 excludes dividends paid with respect to holdings that form part of the business property of a permanent establishment or fixed base from the general source country limitations of paragraph 2. Such dividends will be taxed on a net basis using the rates and rules of taxation generally applicable to residents of the state in which the permanent establishment or fixed base is located, as modified by Articles 7 (Business profits) or 14 (Independent personal services) of the Convention.

Paragraph 6 bars one State from imposing any tax on dividends paid by a company resident in the other State, except insofar as such dividends are otherwise subject to net basis taxation in the first-mentioned Contracting State because such dividends are paid to a resident of such first-mentioned Contracting State, or the


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holding in respect of which the dividends are paid forms part of the business property of a permanent establishment or pertains to a fixed base situated in such first-mentioned State.

Paragraph 7 provides an exemption from U.S. excise taxes on private foundations in the case of a religious, scientific, literary, educational, or charitable organization which is resident in Sweden, but only if such organization has received substantially all of its support from persons other than citizens or residents of the United States. This provision is designed to ensure that the Nobel Foundation, a Swedish charitable organization, will not be subject to U.S. excise taxes. This provision is similar to paragraph 4 of Article XXI of the income tax treaty between the United States and Canada.

Paragraph 8 provides for the imposition of a branch profits tax. This paragraph provides the basic authority under the Convention for a State to impose an additional tax (e.q., a branch profits tax such as that imposed by section 884(a) of the Code) on a company that is resident in the other Contracting State and that has a permanent establishment in the first-mentioned State or that is subject to net basis taxation in such State under Article 6 (Income from real property) or under paragraph 1 of Article 13 (Gains). In the case of the United States, the base to which the tax is applied includes only the portion of the business profits of a company attributable, under the Convention, to the permanent establishment and the net income subject to tax under Article 6 or paragraph 1 of Article 13. This amount is only subject to the branch profits tax to the extent that it represents the "dividend equivalent amount," as the term is defined under United States law, and as that statutory definition may be amended from time to time, but only to the extent that the amended definition remains in conformity with the principles described in paragraph 8.

For example, the United States may impose its branch profits tax on business profits of a Swedish company attributable to a permanent establishment in the United States. In addition, the United States may impose its branch profits tax on income of a Swedish corporation subject to taxation on a net basis because the Swedish corporation has elected under Code section 882(d) to treat income from real property not otherwise taxed on a net basis as effectively connected income, or because the gain arises from the disposition of a United States Real Property Interest other than an interest in a United States corporation. The United States may not impose its branch profits tax on the business profits of a Swedish corporation that are effectively connected with a U.S. trade or business but that are not attributable to a permanent establishment and are not otherwise subject to U.S. taxation under Article 6 or paragraph 1 of Article 13.

Although paragraph 8 is drafted in a reciprocal fashion, thus allowing both States to impose a branch tax, as of the time of


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signature of the Convention only the United States imposed such a tax.

Paragraph 9 provides that the branch profits tax permitted by paragraph 8 shall not be imposed at a rate exceeding the direct dividend withholding rate of five percent that is provided for in paragraph 2 (a).

Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 (Personal scope) permits the United States to tax dividends received by its residents and citizens, subject to the special foreign tax credit rules of paragraph 3 of Article 23 (Relief from double taxation), as if the Convention had not come into effect.

As with any benefit of the Convention, a resident of one of the States claiming the benefit of this Article must be entitled to the benefit under the provisions of Article 17 (Limitation on benefits).