Article VI

The Protocol adds an additional paragraph to Article 20 (Government Services) of the Convention. This paragraph provides a grandfather rule to eliminate the unintended consequences resulting from the 1994 U.S.-Sweden income tax treaty regarding the taxation of local employees (or former employees) of the Embassy in Stockholm and consulate in Gothenburg.

The 1939 U.S.-Sweden income tax treaty generally provided that wages, salaries and similar compensation and pensions paid by one Contracting State to individuals in another Contracting State were exempt from tax in the latter State. The U.S. government reduced the salaries paid to Swedish residents and citizens working at the U.S. Embassy in Stockholm or consulate in Gothenburg to take account of the fact that they were exempt from Swedish income tax. Accordingly, their pensions, which were based on "high-three," were also reduced.

The 1994 U.S.-Sweden income tax treaty generally provides that remuneration (other than a pension) paid by a Contracting State to an individual in respect of services rendered to that State is taxable only that State unless the person was already a resident of the other State before he began working for the first-mentioned State. The 1994 treaty

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also generally provides that a pension paid by a Contracting State to an individual in respect of services to that State are taxable only in the other Contracting State if the individual is a resident and citizen of that State.

Under the 1994 U.S.-Sweden tax treaty, Sweden does tax the pensions of Swedish residents or citizens who worked in the U.S. Embassy in Stockholm and consulate in Gothenburg. The 1994 U.S.-Sweden tax treaty failed to provide a grandfather for former employees whose pension benefits are based on a “high three” that took into account the exemption from Swedish income tax provided for in the 1939 U.S.-Sweden tax, thereby significantly reducing the expected benefits to these former employees.

To rectify this problem, the Protocol adds an additional paragraph to Article 20 (Government Service) of the Convention to provide that Sweden may not tax a pension under the U.S. Civil Service Retirement Pension Plan paid by the United States to employees of the U.S. embassy in Stockholm or the U.S. consulate general in Gothenburg if the individual was hired prior to 1978.