Article 23 describes the manner — U.S. Income Tax Treaty

State undertakes to relieve double taxation. The United States uses the foreign tax credit method exclusively. Sweden uses a combination of foreign tax credit and exemption methods, depending on the nature of the income involved.

In paragraph 1, the United States agrees to allow to its citizens and residents a credit against U.S. tax for income taxes paid or accrued to Sweden. The credit under the Convention is allowed in accordance with the provisions and subject to the limitations of U.S. law, as that law may be amended over time, so long as the general principle of this Article (i.e., the allowance of a credit) is retained. Thus, although the Convention provides for a foreign tax credit, the terms of the credit are determined by the provisions of U.S. law at the time a credit is given.

Paragraph i also provides for a deemed—paid credit, consistent with section 902 of the Code, to a U.S. corporation in respect of dividends received from a Swedish corporation in which the U.S. corporation owns at least 10 percent of the voting stock. This credit is for the tax paid by the Swedish corporation on the earnings out of which the dividends are considered paid.

As indicated, the U.S. credit under the Convention is subject to the limitations of U.S. law, which generally limit the credit against U.S. tax to the amount of U.S. tax due with respect to net foreign source income within the relevant foreign tax credit


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limitation category (see Code section 904(a)). Nothing in the Convention prevents the limitation of the U.S. credit from being applied on a per-country or overall basis or on some variation thereof. In general, where source rules are provided in the Convention for purposes of determining the taxing rights of the Contracting States, these are consistent with the Code source rules for foreign tax credit and other purposes. Where, however, there is an inconsistency between Convention and Code source rules, the Code source rules (e.q., Code section 904(g)) will be used to determine the limits for the allowance of a credit under the Convention. (Paragraph 3 of the Article provides an exception to this general rule with respect to certain U.S. source income of U.S. citizens resident in Sweden.)

Paragraph 1 also provides that the Swedish income taxes specified in subparagraph 1(b) and paragraph 2 of Article 2 (Taxes covered) are to be treated as income taxes for purposes of allowing a credit under the Convention. However, the Swedish capital tax (specified in Article 2(l)(b)(v)) and the Swedish excise tax imposed on insurance premiums paid to foreign insurers (specified in Article 2(1)(b)(vi)) are not considered income taxes. It is not U.S. policy to allow credit by treaty for taxes which are not creditable under the Code, and it was the understanding of the negotiators that each of the Swedish income taxes for which credit is allowed under Article 23 are creditable taxes under the Code. If, however, it should be the case that a credit is being allowed under the Convention for a Swedish tax which is not a creditable income tax under the Code, the credit shall be limited on a per-country basis (i.e., only allowed to offset net Swedish source income within the relevant foreign tax credit limitation category under Code section 904(a)).

Paragraph 2 of the Article provides the rules by which Sweden, in imposing tax on its residents, provides relief for U.S. taxes paid by those residents. Subparagraph 2(a) specified that where a resident of Sweden derives income which is subject to U.S. tax under this Convention (other than income taxed in accordance with the saving clause of Article 1(4)), Sweden will allow as a deduction from Swedish tax an amount equal to the income tax paid in the United States. The amount of this deduction is subject to the provisions of Swedish law, as it may be amended from time to time without changing the general principle of the Article (i.e., the allowance of a credit). This paragraph also applies to Swedish taxation pursuant to Article 13(7) of certain individuals who had been residents of Sweden but who have become residents of the United States.

Under subparagraph 2(b), when a resident of Sweden earns income only taxable in the United States pursuant to paragraph 2 of Article 19 (Pensions and annuities) or Article 20 (Government service), Sweden may compute the exemption with progression. That is, in determining the rate of tax applicable under a progressive


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rate structure to the income which is not exempt, Sweden may take the exempt income into account.

Subparagraph 2(c) specifies that dividends paid by a U.S. resident company to a Swedish resident company will be exempt from Swedish tax to the extent that the dividend would have been exempt under Swedish law if both companies had been Swedish companies (e.g., the company receiving the dividends owns at least a 25 percent interest in the company paying the dividends). The exemption only applies if the profits out of which the U.S. resident paid the dividends have been subjected to normal U.S. corporate tax.

Paragraph 3 modifies the rules in paragraphs 1 and 2 for certain types of income derived from U.S. sources by U.S. citizens who are resident in Sweden. Since U.S. citizens are subject to United States tax at ordinary progressive rates on their worldwide income, the U.S. tax on the U.S. source income of a U.S. citizen resident in Sweden will often exceed the U.S. tax allowable under the Convention on an item of U.S. source income derived by a resident of Sweden who is not a U.S. citizen.

Subparagraph 3(a) provides special Swedish tax rules for the taxation of U.S. citizens residing in Sweden. In this case, Sweden will allow as a deduction from Swedish tax U.S. income taxes paid on U.S. source income. The amount of this deduction is subject to the provisions of Swedish law, as it may be amended from time to time without changing the general principles thereof. In allowing the deduction, Sweden will not allow a bigger deduction than the amount of tax that would have been paid to the United States if the resident were not a U.S. citizen.

Subparagraph 3(b) deals with the potential for double taxation which can arise as a result of the absence of a full Swedish foreign tax credit, because of subparagraph 3(a), for the U.S. tax imposed on its citizens resident in Sweden. The subparagraph provides that the United States will credit the Swedish income tax paid, after allowance of the credit provided for in subparagraph 3(a). The credit allowed by the United States is subject to the limitations of the law of the United States, as it may be amended from time to time without changing the general principles hereof. It further provides that in allowing the credit, the United States will not reduce its tax below the amount which is allowed as a creditable tax in Sweden under subparagraph 3(a).

Since the income which is dealt with in paragraph 3 is U.S. source income, special rules are required to resource some of the income as Swedish source in order for the United States to be able to credit the Swedish tax. This resourcing is provided for in subparagraph 3(c), which deems the items of income referred to in subparagraph 3(a) to be from Swedish sources to the extent necessary to avoid double taxation under subparagraph 3(b).


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Paragraph 4 provides rules to determine source of income to ensure that double tax is avoided under this Convention. The rules of this paragraph are subject to source rules in the domestic laws of the Contracting States. Paragraph 4 specifies two special source rules. First, income derived by a resident of a State is deemed to be from sources in the other State if it may be taxed by the other State in accordance with this Convention. This rule does not apply to income taxed by the other State exclusively by reason of citizenship (Article 1(4)) or former residency (Article 13(7)). Second, income derived by a resident of a State which may not be taxed under this Convention by the other State is deemed to be from sources in the first-mentioned State. Paragraph 4 does not apply in determining U.S. foreign tax credits for taxes other than the taxes referred to in paragraphs 1(b) and 2 of Article 2 (Taxes covered).

As specified in paragraph 5(a) of Article 1 (Personal scope), Article 23 is not subject to the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a credit to its citizens and residents in accordance with the Article, even if such credit were to provide a benefit not available under the Code.