Article 2. TAXES COVERED — U.S. Income Tax Treaty

This Article identifies the U.S. and Swedish taxes to which the Convention applies. The covered taxes of the United States are specified in subparagraph 1(a). They are the Federal income taxes imposed by the Code (excluding the accumulated earnings tax and the personal holding company tax), the excise taxes imposed on insurance premiums paid to foreign insurers (Code section 4371), and the excise taxes imposed with respect to private foundations (Code sections 4940 through 4948). The Convention does not apply to social security taxes (Code sections 1401, 3101, 3111 and 3301). U.S. and Swedish social security taxes are dealt with in the bilateral Social Security Totalization Agreement, which entered into force on January 1, 1987.

The Convention applies to the U.s. excise tax on insurance premiums only to the extent that the risks covered by such premiums are not reinsured (directly or indirectly) with a person not entitled (under this or any other convention to which the United States is a party) to exemption from the tax. Providing Convention coverage for the U.S. insurance excise tax effectively exempts from the tax Swedish companies that insure U.S. risks, subject to the anti-conduit rule for reinsurance described above. This result is confirmed in paragraph 8 of Article 7 (Business profits). Under the Code, the tax applies to a Swedish company only if it earns premiums that are not attributable to an active trade or business in the United States or that are exempt by treaty from net basis U.S. income tax (because they are not attributable to a permanent establishment). Under Article 7 (Business profits), the United States does not subject the business profits of a Swedish enterprise to a covered tax if the income of the enterprise is not attributable to a permanent establishment that the enterprise has in the United States. In contrast with this Convention, the prior Convention did not cover the insurance excise tax, allowing it to be imposed on premiums paid to Swedish insurers if such premiums were not attributable to a permanent establishment of the insurer in the United States.

Except with respect to Article 24 (Non-discrimination), state and local taxes in the United States are not covered by the Convention. Article 24 prohibits discriminatory taxation with respect to all taxes, whether or not they are covered taxes under


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Article 2, and whether they are imposed by the Contracting States, their political subdivisions or local authorities.

Sub-paragraph 1(b) specifies the existing Swedish taxes to which the Convention applies. These are: (i) the State income tax, including the sailor's tax and the coupon tax; (ii) the special income tax on non-residents; (iii) the special income tax on nonresident entertainers and artistes; (iv) the communal income tax; (v) the State capital tax; and (vi) the excise tax imposed on insurance premiums paid to foreign insurers. The State capital tax is covered only as described in paragraph 3 of the Article (see below).

Under paragraph 2, the Convention will apply to any taxes that are identical, or substantially similar, to those enumerated in paragraph 1, and that are imposed in addition to, or in place of, the existing taxes after September 1, 1994 (the date of signature of the Convention). The paragraph further provides that the U.S. and Swedish competent authorities will notify each other of significant changes in their taxation laws. This requirement refers to changes that are of significance to the operation of the Convention. It also provides that the competent authorities notify each other of any significant published materials dealing with the Convention. Such materials include official explanations, regulations, rulings or judicial decisions.

Paragraph 3 provides rules that limit the extent to which the Swedish State capital tax will apply under the Convention to certain classes of U.S. citizens and residents (as determined under Article 4 (Residence)). The base of the tax applicable to those persons (described below) is limited to real property situated in Sweden and to movable property attributable to a Swedish permanent establishment of the U.S. taxpayer or to a fixed base available to the taxpayer in Sweden for the purpose of performing independent personal services. Thus, such persons will not be subject to the Swedish capital tax on non-Swedish property. The persons subject to the tax only on this limited basis are specified in subpara graphs (a) through (e) of paragraph 3. They are: (a) an individual who is both a citizen and resident of the United States, and who is not a citizen of Sweden; (b) an individual U.S. resident, regardless of his citizenship, who has been a U.S. resident for three successive taxable years prior to the effective date of the Convention (i,e., the first year beginning after the exchange of instruments of ratification) and for each taxable year thereafter; (c) a U.S. citizen who is not also a Swedish citizen, and who visits Sweden for a period not exceeding two years, and who is, or was immediately prior to such visit, a resident of the United States; (d) the estate of any of the individuals described in the three preceding subparagraphs; and (e) any company resident in the United States.


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Article 3. GENERAL DEFINITIONS

Paragraph 1 of Article 3 defines a number of basic terms used in the Convention. Terms that are not defined in the Convention are dealt with in paragraph 2. Certain other terms are defined in other articles of the Convention. For example, the term "resident of a Contracting State" is defined in Article 4 (Residence). The term "permanent establishment" is defined in Article 5 (Permanent establishment). The terms "dividends," "interest" and "royalties" are defined in Articles 10, 11 and 12, respectively, which deal with the taxation of those classes of income.

Subparagraph 1(a) defines the term "person" to include an individual, an estate, a trust, a partnership, a company and any other body of persons. The term "company" is defined in subparagraph 1(b) as an entity treated as a body corporate for tax purposes. Since the term "body corporate" is not defined in the Convention, in accordance with paragraph 2 of this Article, it has the meaning that it has under the law of the Contracting State whose tax is being applied. Thus, for U.S. tax purposes, the principles of Code section 7701 will be applied to determine whether an entity is a body corporate.

The terms "enterprise of a Contracting State" and "enterprise of the other Contracting State" are defined in subparagraph 1(c) as an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State, respectively. The term "enterprise" is not defined in the Convention.

Subparagraph 1(d) defines the term "international traffic." This definition is significant principally in relation to Article 8 (Shipping and air transport), but also is relevant to Article 15 (Dependent personal services). The term means any transport by a ship or aircraft except when the vessel is operating solely between places within a Contracting State. The exclusion from international traffic of transport solely between places within one of the States means, for example, that carriage of goods or passengers between New York and Chicago by either a U.S. or a Swedish carrier would not be treated as international traffic. The substantive taxing rules of the Convention relating to the taxation of income from transport, principally Article 8 (Shipping and air transport), therefore, would not apply to income from such carriage. If the carrier is a Swedish resident (if that were possible under U.S. law) the United States would not be required to exempt the income under Article 8. The income would, however, be treated as business profits under Article 7 (Business profits), and, therefore, would be taxable in the United States only if attributable to a U.S. permanent establishment, and then only on a net basis. The gross basis U.S. tax would not apply under the circumstances described. If, however, goods or passengers are carried from Stockholm to New York, and some of the goods or


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passengers are carried only to New York, while the rest are taken to Philadelphia, the entire transport, including the New York to Philadelphia portion, would be international traffic.

Subparagraphs 1(e)(i) and (ii) define the term "competent authority" for the United States and Sweden, respectively. The U.S. competent authority is the Secretary of the Treasury or his delegate. The Secretary of the Treasury has delegated the competent authority function to the Commissioner of Internal Revenue, who has, in turn, redelegated the authority to the Assistant Commissioner (International). With respect to interpretative issues, the Assistant Commissioner acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue Service. The competent authority of Sweden is the Minister of Finance, his authorized representative, or the authority which is designated as competent authority for the purposes of the Convention.

The terms "United States" and "Sweden" are defined in subparagraphs 1(f) and (g), respectively. The term "United States" is defined to mean the United States of America, not including Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or territory. The U.S. continental shelf (with respect to the exploration or exploitation of natural resources) is also specifically included within the definition of the United States. The term "Sweden" means the Kingdom of Sweden. The term includes the Swedish continental shelf (with respect to the exploration or exploitation of natural resources).

Paragraph 2 establishes a procedure for determining a definition for a term, for purposes of the Convention, that is not otherwise defined in the Convention. The paragraph provides the general rule that any such term will have the meaning that it has under the law of the Contracting State whose tax is being applied. A meaning other than this statutory meaning may be used, however, if the context so requires, or if the competent authorities, pursuant to the authority granted to them in paragraph 3 of Article 25 (Mutual agreement procedure), so agree. If, for example, the meaning of a term cannot be readily determined under the law of a Contracting State, or if there is a conflict in meaning under the laws of the two States which creates problems in the application of the Convention, the competent authorities may establish a common meaning in order to prevent double taxation or further any other purpose of the Convention. This common meaning need not conform to the meaning of the term under the laws of either Contracting State.