Technical Explanation PDF

TREASURY DEPARTMENT
TECHNICAL EXPLANATION OF THE CONVENTION
BETWEEN THE GOVERNMENT OF THE UNITED STATES
OF AMERICA AND THE GOVERNMENT OF SWEDEN FOR THE
AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION
OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
SIGNED AT STOCKHOLM ON SEPTEMBER 1 / 1994
INTRODUCTION
T h i s d o c u m e n t i s a t e c h n i c a l e x p l a n a t i o n o f t h e C o n v e n t io n
b e t w e e n t h e U n i t e d S t a t e s a n d S w ed en s i g n e d o n S e p t e m b e r 1 , 1 9 9 4
( " t h e C o n v e n t i o n " ) . R e f e r e n c e s a r e m ade t o t h e C o n v e n t io n b e t w e e n
t h e U n i t e d S t a t e s a n d S w ed en f o r t h e a v o i d a n c e o f d o u b l e t a x a t i o n
a n d t h e e s t a b l i s h m e n t o f r u l e s o f r e c i p r o c a l a d m i n i s t r a t i v e a s s i s -
t a n c e i n t h e c a s e o f in c o m e a n d o t h e r t a x e s s i g n e d o n M arch 2 3 ,
1 9 3 9 , a s a m en d e d b y t h e S u p p le m e n t a r y P r o t o c o l s i g n e d o n O c t o b e r
2 2 , 1 9 6 3 ( " t h e p r i o r C o n v e n t i o n " ) . T h e C o n v e n t io n r e p l a c e s t h e
p r i o r C o n v e n t i o n . R e f e r e n c e s i n t h i s E x p l a n a t i o n t o t h e "OECD
M o d e l" a r e t o t h e M o d e l T a x C o n v e n t io n o n In c o m e a n d o n C a p i t a l ,
p u b l i s h e d b y t h e OECD i n 1 9 9 2 , a s am en ded i n 1 9 9 4 .
T h e T e c h n i c a l E x p l a n a t i o n i s a n o f f i c i a l g u i d e t o t h e
C o n v e n t i o n . I t r e f l e c t s t h e p o l i c i e s b e h i n d p a r t i c u l a r C o n v e n t io n
p r o v i s i o n s , a s w e l l a s u n d e r s t a n d i n g s r e a c h e d w i t h r e s p e c t t o t h e
a p p l i c a t i o n a n d i n t e r p r e t a t i o n o f t h e C o n v e n t io n .
T h e C o n v e n t i o n w a s a c c o m p a n ie d b y a n e x c h a n g e o f n o t e s d e a l i n g
w i t h t w o p r o v i s i o n s o f t h e C o n v e n t i o n . T h e s e n o t e s w i l l b e
d i s c u s s e d i n t h e e x p l a n a t i o n s o f t h e r e l e v a n t A r t i c l e s .
A r t i c l e 1 . PERSONAL SCOPE
P a r a g r a p h 1 p r o v i d e s t h a t t h e C o n v e n t io n i s a p p l i c a b l e t o
r e s i d e n t s o f t h e U n i t e d S t a t e s o r S w ed en e x c e p t w h e r e t h e t e r m s o f
t h e C o n v e n t i o n p r o v i d e o t h e r w i s e . U n d e r A r t i c l e 4 ( R e s i d e n c e ) a
p e r s o n i s t r e a t e d a s a r e s i d e n t o f a C o n t r a c t i n g S t a t e i f t h a t
p e r s o n i s , u n d e r t h e l a w s o f t h a t S t a t e , l i a b l e t o t a x t h e r e i n b y
r e a s o n o f h i s d o m i c i l e , r e s i d e n c e o r o t h e r s i m i l a r c r i t e r i a ,
s u b j e c t t o c e r t a i n l i m i t a t i o n s d e s c r i b e d i n A r t i c l e 4 . I f ,
h o w e v e r , a p e r s o n i s , u n d e r t h o s e c r i t e r i a , a r e s i d e n t o f b o t h
C o n t r a c t i n g S t a t e s , a s i n g l e S t a t e o f r e s i d e n c e ( o r n o S t a t e o f
r e s i d e n c e ) i s a s s i g n e d u n d e r A r t i c l e 4 . T h i s d e f i n i t i o n g o v e r n s
f o r a l l p r o v i s i o n s o f t h e C o n v e n t i o n . C e r t a i n p r o v i s i o n s a r e
a p p l i c a b l e t o p e r s o n s who may n o t b e r e s i d e n t s o f e i t h e r C on-
t r a c t i n g S t a t e . F o r e x a m p l e , p a r a g r a p h 1 o f A r t i c l e 24 (N on -
d i s c r i m i n a t i o n ) a p p l i e s t o c i t i z e n s o f t h e C o n t r a c t i n g S t a t e s,
i r r e s p e c t i v e o f t h e i r r e s i d e n c e . U n d e r A r t i c l e 2 6 ( E x c h a n g e o f
i n f o r m a t i o n ) i n f o r m a t i o n may b e e x c h a n g e d w i t h r e s p e c t t o r e s i d e n t s
o f t h i r d S t a t e s .

Paragraph 2 of Article 1, like the comparable provision of
other U.S. treaties, describes the relationship between the rules
of the Convention, on the one hand, and the laws of the Contracting
States and other agreements between the Contracting States, on the
other. This paragraph makes explicit the generally accepted
principle that no provision in the Convention may restrict any
exclusion, exemption, deduction, credit or other allowance accorded
by the tax laws of the Contracting States. For example, if a
deduction would be allowed under the Internal Revenue Code (the
"Code") in computing the taxable income of a resident of Sweden,
the deduction will be available to that person in computing income
under the Convention. In no event may the application of the
Convention increase the tax burden on a resident of a Contracting
State beyond that permitted under the State's internal law. Thus,
a right to tax given by the Convention cannot be exercised by the
United States unless that right also exists under the Code.
A taxpayer may generally rely on more favorable treatment
afforded under the Code. A taxpayer may not, however, pick and
choose among Code and Convention provisions in an inconsistent
manner in order to minimize tax. For example, assume a resident of
Sweden has three separate businesses in the United States. One is
a profitable permanent establishment and the other two are trades
or businesses that do not meet the permanent establishment
threshold tests of the Convention. One is profitable and the other
incurs a loss. Under the Convention, the income of the permanent
establishment is taxable, and both the profit and the loss of the
other two businesses are ignored. Under the Code, all three would
be taxable. The loss would be offset against the profits of the
two profitable ventures. The taxpayer may not invoke the
Convention to exclude the profits of the profitable trade or
business and inv oke the Code to offset th e loss of the lo ss trad e
or business against the profit of the permanent establishment.
(See Rev. Rul. 84-17 C.B. 1984-1, 10.) If the taxpayer invokes the
Code to subject all three ventures to U.S. tax, he would not be
precluded from invoking the Convention with respect to, for
example, any dividend income he may receive from the United States
that is not effectively connected with any of his business
activities in the United States.
Similarly, nothing in the Convention can be used to deny any
benefit granted by any other agreement between the United States
and Sweden. For example, if certain protections, not found in the
Convention, are afforded under a Consular Convention or under a
Treaty of Friendship, Commerce and Navigation, those protections
will be available to residents of the Contracting States regardless
of any provisions to the contrary (or silence) in the Convention.
Paragraph 3 of Article 1 affects obligations undertaken by the
Contracting States under other agreements. Subparagraph (a)
provides that, notwithstanding any other agreement to which the
Contracting States may be parties, a dispute concerning whether a

measure is within the scope of this Convention shall be considered
only by the competent authorities of the Contracting States, and
the procedures under this Convention exclusively shall apply to the
dispute. Thus, procedures for dealing with disputes that may be
incorporated into trade, investment, or other agreements between
the Contracting States shall not apply for the purpose of determine
the scope of the Convention.
Subparagraph (b) of paragraph 3 provides that, unless the
competent authorities determine that a taxation measure is not
within the scope of this Convention, the nondiscrimination
obligations of this Convention exclusively shall apply with respect
to that measure, except for such national treatment or most-
favored-nation ("MFN") obligations as may apply to trade in goods
under the General Agreement on Tariffs and Trade (’’GATT"). No
national treatment or MFN obligation under any other agreement
shall apply with respect to that measure. Thus, unless the
competent authorities agree otherwise, any national treatment and
MFN obligations undertaken by the Contracting States under
agreements other than the Convention shall not apply to a taxation
measure with the exception of GATT as applicable to trade in goods.
Subparagraph( c) of paragraph 3 defines a "measure" as a law,
regulation, rule, procedure, decision, administrative action, or
any other form of measure.
The provisions of paragraph 3 are an exception to the rule
provided in paragraph 2 of this Article under which the Convention
shall not restrict in any manner any exclusion, exemption,
deduction, credit, or other allowance now or hereafter accorded by
any other agreement between the Contracting States.
Paragraph 4 contains the traditional saving clause, and
paragraph 5 contains exceptions. In many U.S. treaties the
provision is reciprocal. Sweden, however, was not interested in
preserving its taxing right over Swedish citizens and residents, so
the provision was made unilateral, affecting only U.S . taxing
rights. Under paragraph 4 the United States reserve its right,
except as provided in paragraph 5, to tax its residents and
citizens notwithstanding any Convention provisions to the contrary.
The concept of "residence" for purposes of the Convention,
including the saving clause, is defined in Article 4 (Residence).
The saving clause operates as follows: If, for example, a Swedish
resident performs independent personal services in the United
States and the income from the services is not attributable to a
fixed base in the United States, Article 14 (Independent personal
Services) would normally prevent the United States from taxing the
income. If, however, the Swedish resident is also a citizen of the
United States, the saving clause permits the United States to
include the remuneration in the worldwide income of the citizen and
subject it to tax under the normal Code rules. (For special
foreign tax credit rules applicable to the U.S. taxation of certain
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U.S. income of its citizens resident in Sweden see paragraph 3 of
Article 23 (Relief from double taxation)). If an individual who is
not a U.S. citizen is a resident of the United States under the
Code, and is also a resident of Sweden under Swedish law, and that
individual has a permanent home available to him in Sweden and not
in the United States, he would be treated as a resident of Sweden
under Article 4 and for purposes of the saving clause. The United
States would not be permitted to apply its statutory rules to that
person if they are inconsistent with the Convention.
Also under paragraph 4, the United States reserves its right
to tax former U.S. citizens whose loss of citizenship had as one of
its principal purposes the avoidance of U.S. tax. Such a former
citizen is taxable in accordance with the provisions of section 877
of the Code for 10 years following the loss of citizenship.
Paragraph 5 sets forth certain exceptions to the saving clause
in cases where its application would contravene policies underlying
provisions of the Convention that are intended to extend U.S.
benefits to its citizens and residents. Subparagraph 5(a) lists
certain provisions of the Convention that will be applicable to all
U.S. citizens and residents, despite the general saving clause rule
of paragraph 4: (1) Paragraph 2 of Article 9 (Associated
enterprises) grants the right to a correlative adjustment, and,
particularly, permits the override of the statute of limitations
for the purpose of refunding tax under such a correlative
adjustment. (2) Paragraph 2 of Article 19 (Pensions and annuities)
deals with social security benefits. Its inclusion in the
exceptions to the saving clause means that social security benefits
paid by Sweden to a U.S. resident will, as intended, be taxed only
by Sweden. (3) Article 23 (Relief from double taxation) confers
the benefit of double taxation relief by a Contracting State on its
citizens and residents. To apply the saving clause to this Article
would render the Article meaningless. (4) Article 24 (Non-
discrimination) generally prohibits discriminatory taxation by one
Contracting State of the citizens and residents of the other.
These prohibitions are intended to apply even if the citizen or
resident is also a citizen or resident of the taxing State. (5)
Article 25 (Mutual agreement procedure) may confer benefits by a
State on its citizens and residents. For example, the statute of
limitations may be waived for refunds or the competent authorities
may use a definition of a term which differs from the internal law
definition. As with the foreign tax credit, these benefits are
intended to be granted by a State to its citizens and residents.
Subparagraph 5(b) provides a different set of exceptions to
the saving clause. The effect of this provision is to extend
certain benefits to persons who are neither U.S. citizens nor
lawful permanent residents (i.e., "green card" holders). If, for
example, beneficiaries of these provisions come to the United
States from Sweden and remain in the United States long enough to
become residents under the Code, but do not acquire immigrant
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status (i.e., they do not become "green card" holders) and are not
United States citizens, the United States will continue to grant
these benefits even if they conflict with the Code rules. The
benefits preserved by this paragraph are the host country
exemptions for the following items of income: government service
salaries and pensions under Article 20 (Government service);
certain income of students and trainees under Article 21 (Students
and trainees); and the income of diplomatic and consular officers
under Article 28 (Diplomatic agents and consular officers).
Article 2. TAXES COVERED
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 insur-
ance 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 non-
resident 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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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 subpara-
graph 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
Article 3. GENERAL DEFINITIONS
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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 inter-
pretative 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 specif-
ically 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.
Article 4 - RESIDENCE
Article 4 sets forth rules for determining whether a person is
a resident of the United States or Sweden for purposes of the
Convention. As a general matter only residents of the Contracting
States may claim the benefits of the Convention. The definition of
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resident in the Convention is to be used only for purposes of the
Convention. The prior Convention contains no comprehensive
definition of a resident.
In general, a person will be considered a resident of a
Contracting State if he is subject to tax in that State under its
internal law by reason of his residence, domicile, or other similar
criterion. A person who, under this rule, is a resident of one
State and not of the other will (subject to an exception described
below) be treated for purposes of the Convention as a resident of
the State in which he is resident under internal law. If, however,
a person is resident in both Contracting States under their
respective taxation laws, the Article assigns a single State of
residence to such a person for purposes of the Convention through
the use of tie-breaker rules or competent authority agreement.
Paragraph 1 defines the term "resident of a Contracting
State." In general, this definition incorporates the definitions
of residence in U.S. and Swedish law. A resident of a Contracting
State is a person who, under the laws of that State, is subject to
tax there by reason of his domicile, residence, place of
management, place of incorporation or any other criterion of a
similar nature. Nontaxable entities are considered residents of
their state of organization because they are subject to the
taxation laws of that state. Residents of the United States
include aliens who are considered U.S. residents under Code section
7701(b). Unlike certain other U.S. treaties, "citizenship" is not
included among the explicit criteria of residence in the
Convention. However, it is understood to be a "criterion of a
similar nature" under paragraph 1. An exception to this general
rule for certain individuals is described below.
Subparagraph 1(a) specifies that a person liable to tax in a
State only in respect of income from sources within that state will
not be treated as a resident of that State for purposes of the
Convention. For example, a Swedish consular official stationed in
the United States, who may be subject to U.S. tax on his U.S.
source investment income, but is not taxable in the United States
on his salary and non-U.S. source income, by operation both of
Article 20 (Government service) and Code section 893, would not be
considered a resident of the United States for purposes of the
Convention. Similarly, a Swedish enterprise with a permanent
establishment in the United States is not, by virtue of that
permanent establishment, a resident of the United States. The
enterprise is subject to U.S. tax only with respect to its income
attributable to the U.S. permanent establishment, not with respect
to its world-wide income, as is a U.S. resident.
Subparagraph 1(b) makes clear that a partnership, estate or
trust will be treated as a resident of a Contracting State for
purposes of the Convention only to the extent that the income
derived by such person is subject to tax in that State as the
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income of a resident, either in the hands of the person deriving
the income or in the hands of its beneficiaries. Under U.S. law,
a partnership, estate or trust is often not itself a taxable
entity. Thus, for U.S. tax purposes, the question of whether
income received by such an entity is received by a resident will be
determined by the residence for taxation purposes of the person
subject to tax on such income, which may be the partner, grantor,
the beneficiaries or the partnership, estate or trust itself,
depending on the circumstances. This rule regarding the residence
of estates or trusts is applied to determine the extent to which
that person is entitled to treaty benefits with respect to income
that it receives from the other Contracting State.
As noted above, paragraph 1 contains an exception for certain
individuals to the general rule that residence under internal law
also determines residence under the Convention. It is not always
sufficient for an individual to be a resident under the laws of the
United States (or a citizen of the United States) to be treated as
a United States resident under the Convention. A United States
citizen or an alien lawfully admitted for permanent residence (a
"green card holder") who does not have a substantial presence,
permanent home, or habitual abode in the United States and who is
not a resident of Sweden under paragraph 1, will not be treated as
a resident of the United States for purposes of the Convention.
Thus, a U.S. citizen or green card holder who is resident in a
third country and who has a substantial presence, permanent home or
habitual abode in the United States will be entitled to most
benefits under the Convention. If such a person is also considered
a resident of Sweden under Swedish internal law, and therefore
under paragraph 1, the individual will be considered a resident of
both States. Such person's status will be determined under the
tie-breaker rules of paragraph 2 (described below).
If an individual is considered a resident of each State under
its laws, a single State of residence is determined by application
of the tie-breaker rules of paragraph 2. Paragraph 2(a) provides
that such an individual will be resident in the State in which the
individual has a permanent home. If the individual has a permanent
home available to him in both States, he will be considered to be
a resident of the Contracting State to which his personal and
economic relations are closest, i.e., the location of his "center
of vital interests." Under paragraph 2(b), if he has no center of
vital interests or if he does not have a permanent home available
to him in either State, he will be treated as a resident of the
Contracting State in which he maintains an habitual abode. Under
paragraph 2(c), if he has an habitual abode in both States or in
neither of them, he will be treated as a resident of the State of
which he is a citizen. If he is a citizen of both States or of
neither, paragraph 2(d) provides that the competent authorities
will, by mutual agreement, assign a single State of residence.
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Paragraph 3 addresses companies that are treated by each
State, under its laws, as a resident of that State. Paragraph 3
provides that if a company is considered under paragraph 1 to be a
resident of both States, then if it is created under the laws of
either the United States or Sweden it will be considered to be a
resident of the state in which it is created.
Paragraph 4 addresses dual-residence issues for persons other
than individuals or companies that are considered residents of both
States under paragraph 1. Under this paragraph, the competent
authorities are instructed to determine a single State of residence
by mutual agreement.
Article 5 - PERMANENT ESTABLISHMENT
This Article defines the term "permanent establishment." This
definition is relevant under several articles of the Convention.
The existence of a permanent establishment in a Contracting State
is necessary under Article 7 (Business profits) for the taxation by
that State of the business profits of a resident of the other
Contracting State. Since the term "fixed base" in Article 14
(Independent personal services) is understood by reference to the
definition of "permanent establishment," this Article is also
relevant for purposes of Article 14. Articles 10, 11 and 12
(dealing with dividends, interest, and royalties, respectively)
provide for reduced rates of tax at source on payments of these
items of income to a resident of the other State only when the
income is not attributable to a permanent establishment or fixed
base that the recipient has in the source State.
This Article follows closely both the OECD Model provisions
and recent U.S. treaties. The protocol to the prior Convention
contains a similar definition of "permanent establishment".
Paragraph 1 provides the basic definition of the term
"permanent establishment." As used in the Convention, the term
means a fixed place of business through which the business of an
enterprise is wholly or partly carried on.
Paragraph 2 contains a list of fixed places of business that
will constitute a permanent establishment. The list is illustra­
tive and non-exhaustive. According to paragraph 2, the term
permanent establishment includes a place of management, a branch,
an office, a factory, a workshop, and a mine, oil or gas well,
quarry or other place of extraction of natural resources.
Paragraph 3 provides rules to determine when a building site
or a construction or installation project constitutes a permanent
establishment. Only if the site, project, etc. lasts for more than
twelve months does it constitute a permanent establishment. The
twelve-month test applies separately to each individual site or
project. The twelve-month period begins when work (including
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preparatory work carried on by the enterprise) physically begins in
a Contracting State. A series of contracts or projects that are
interdependent both commercially and geographically are to be
treated as a single project for purposes of applying the
twelve-month threshold test. For example, the construction of a
housing development would be considered a single project even if
each house in the development is constructed for a different
purchaser. If the twelve-month threshold is exceeded, the site or
project constitutes a permanent establishment as of the first day
that the work in that State began. This interpretation of the
Article is based on the Commentaries to paragraph 3 of Article 5 of
the OECD Model, which contains language almost identical to that in
the Convention. This interpretation, therefore, constitutes the
generally accepted international interpretation of the language in
paragraph 3 of Article 5 of the Convention.
In addition, installations, drilling rigs, or ships operating
offshore to explore for or exploit natural resources are considered
permanent establishments only if their use exceeds twelve months.
Supply ships are not considered ships used to explore for or
exploit natural resources. Natural resources do not include fish.
Paragraph 4 contains exceptions to the general rule of
paragraph 1 that a fixed place of business through which a business
is carried on constitutes a permanent establishment. The paragraph
lists activities that may be carried on through a fixed place of
business, but that will not give rise to a permanent establishment.
The use of facilities solely to store, display or deliver
merchandise belonging to an enterprise will not constitute a
permanent establishment of that enterprise. The maintenance of a
stock of goods belonging to an enterprise solely for the purpose of
storage, display or delivery, or solely for the purpose of
processing by another enterprise will not give rise to a permanent
establishment of the first-mentioned enterprise. The maintenance
of a fixed place of business solely for the purchases goods or
merchandise, or for activities that have a preparatory or auxiliary
character for the enterprise, such as advertising or the supply of
information and scientific activities, will not constitute a
permanent establishment of the enterprise. Finally, a combination
of these activities will not give rise to a permanent
establishment.
Paragraphs 5 and 6 specify the circumstances under which an
agent will constitute a permanent establishment of the principal.
Under paragraph 5, a dependent agent of an enterprise will be
deemed to be a permanent establishment of the enterprise if the
agent has and habitually exercises an authority to conclude
contracts in the name of that enterprise. If, however, the agent's
activities are limited to those activities specified in paragraph
4, which would not constitute a permanent establishment if carried
on by the enterprise through a fixed place of business, the agent
will not be a permanent establishment of the enterprise.
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Under paragraph 6, an enterprise will not be deemed to have a
permanent establishment in a Contracting State merely because it
carries on business in that State through an independent agent,
including a broker or general commission agent, if the agent is
acting in the ordinary course of its business.
Paragraph 7 clarifies that a company that is a resident of a
Contracting State will not be deemed to have a permanent estab-
lishment in the other Contracting State merely because it controls,
or is controlled by, a company that is a resident of that other
Contracting State, or that carries on business in that other
Contracting State. The determination of whether or not a permanent
establishment exists will be made solely on the basis of the
factors described in paragraphs 1 through 6 of the Article.
Whether or not a company is a permanent establishment of a related
company, therefore, is based solely on those factors and not on the
ownership or control relationship between the companies.
Article 6 - INCOME PROM REAL PROPERTY
Paragraph l of Article 6 provides that income of a resident of
a Contracting State derived from real property situated in the
other Contracting State may be taxed in the Contracting State in
which the property is situated. As clarified in paragraph 3, the
income referred to in paragraph 1 means income from any use of real
property, including, but not limited to, income from direct use by
the owner and rental income from the letting of real property.
Income from real property also includes income from agriculture and
forestry. This Article does not grant an exclusive taxing right to
the situs State, but merely grants it the primary right to tax.
The Article does not impose any limitation in terms of rate or form
of tax on the situs State.
Paragraph 2 provides that the term "real property" has the
same meaning that it has under the law of the situs State. In
addition, the paragraph specifies certain classes of property
which, regardless of internal law definitions, are to be included
within the meaning of the term for purposes of the Convention. The
definition of "real property" for purposes of Article 6, however,
is more limited than the expansive definition of "real property
situated in the other Contracting State" in paragraph 2 of Article
13 (Gains), which includes not only real property itself, but
certain interests in real property.
Paragraph 4 clarifies that the situs State may tax the real
property income of a resident of the other Contracting State even
in the absence of a permanent establishment or fixed base in the
situs State, notwithstanding the requirements of Articles 7
(Business profits) and 14 (Independent personal services) that in
order to be taxable, income must be attributable to a permanent
establishment or fixed base, respectively. Thus, the situs State
may tax income from real property of an enterprise and income from
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real property used for the performance of independent personal
services, regardless of whether the enterprise or individual has a
permanent establishment or fixed base in the situs State.
The Article does not include language found in many U.S.
treaties providing for a taxpayer election to be taxed on real
property income on a net basis. It was thought unnecessary to
include such a provision since both States allow for net basis
taxation of real property income under internal law.
Article 7 - BUSINESS PROFITS
This Article provides rules for the taxation by one of the
States of the business profits of an enterprise of the other.
Paragraph 1 contains the basic rule that business profits of an
enterprise of one State may not be taxed by the other State unless
the enterprise carries on business in that other State through a
permanent establishment (as defined in Article 5 (Permanent
establishment)) situated there. Where this condition is met, the
State in which the permanent establishment is situated may tax the
income of the enterprise, but only so much of the income as is
attributable to the permanent establishment. This rule is broadly
similar to the rule in the prior Convention.
Paragraph 2 provides rules for the attribution of business
profits to a permanent establishment. It provides that the
Contracting States will attribute to a permanent establishment the
profits that it would have earned had it been an independent
entity, engaged in the same or similar activities under the same or
similar circumstances. The computation of the business profits
attributable to a permanent establishment under this paragraph is
subject to the rules of paragraph 3 for the allowance of expenses
incurred for the purpose of earning the income. The profits
attributable to a permanent establishment may be from sources
within or without a Contracting State. Thus, certain items of
foreign source income described in Code section 864(c)(4)(B) may be
attributed to a U.S. permanent establishment of a Swedish
enterprise and subject to tax in the United States. The concept of
"attributable to" in the Convention is narrower than the concept of
"effectively connected" in Code section 864(c). The limited "force
of attraction" rule in Code section 864(c)(3) is not applicable
under the Convention.
Paragraph 2 differs in one respect from the comparable
paragraph in many recent U.S. treaties, but conforms in this
respect to the OECD Model. In certain other U.S. treaties, the
permanent establishment is treated as if it were a "distinct and
independent enterprise," and the reference to it dealing wholly
independently with the enterprise of which it is a permanent
establishment is deleted. The language in other U.S. treaties is
intended to make clear that, as described in paragraph 10 of the
OECD Commentaries to Article 7, the permanent establishment is to
-14-

be treated as if it were a totally independent enterprise, i.e.,
one that deals independently with all related companies, not just
its home office. In the course of the negotiations, the Swedish
negotiators made clear that they subscribed to the interpretation
in the OECD Commentaries, but preferred to retain, at least in
part, the language from the OECD Model. Thus, there should be no
difference in application between paragraph 2 of Article 7 and its
analogue in other U.S. treaties.
Paragraph 3 of the Article provides that in determining the
business profits of a permanent establishment, deductions shall be
allowed for expenses incurred for the purposes of the permanent
establishment. Deductions are to be allowed regardless of where
the expenses are incurred. The paragraph specifies that among the
expenses for which deductions are allowed are a reasonable
allocation of expenses for research and development, interest and
other similar expenses. Also included is a reasonable allocation
of executive and general administrative expenses.
Paragraph 4 provides that no business profits will be
attributed to a permanent establishment merely because it purchases
goods or merchandise for the enterprise of which it .is a permanent
establishment. This rule refers to a permanent establishment that
performs more than one function for the enterprise, including
purchasing. For example, the permanent establishment may purchase
raw materials for the enterprise's manufacturing operation and sell
the manufactured output. While business profits may be
attributable to the permanent establishment with respect to its
sales activities, no profits are attributable to its purchasing
activities. If the sole activity were the purchasing of goods or
merchandise for the enterprise the issue of the attribution of
income would not arise, because, under subparagraph 4(d) of Article
5 (Permanent establishment), there would be no permanent
establishment.
Paragraph 5 provides that only those business profits derived
from a permanent establishment's assets or activities are to be
attributed to the permanent establishment. This rule clarifies, as
noted in connection with paragraph 2 of the Article, that the
Code's limited "force of attraction" principle is not incorporated
into the Convention. To assure continuous and consistent tax
treatment, the same method for determining the profits of a
permanent establishment is to be used from year to year, unless
there is good reason to change.
Paragraph 6 explains the relationship between the provisions
of Article 7 and other provisions of the Convention. Under
paragraph 6, where business profits include items of income that
are dealt with separately under other articles of the Convention,
the provisions of those articles will, except where they specifi-
cally provide to the contrary, take precedence over the provisions
of Article 7. Thus, for example, the taxation of interest will be
-15-

determined by the rules of Article 11 (Interest) , and not by
Article 7, unless, as provided in paragraph 3 of Article 11, the
interest is attributable to a permanent establishment, in which
case the provisions of Article 7 apply.
Paragraph 7 provides a definition of "profits." The term is
defined to mean income derived from any trade or business carried
on by any person or group of persons. With one exception, the
definition of business profits used in many U.S. treaties is
retained in paragraph 7, including specifically the reference to
income from the rental of tangible personal (movable) property.
The definition does not, however, define film rentals as profits.
Instead, film rentals are considered royalties under paragraph 2 of
Article 12 (Royalties). There is little substantive significance
in classifying film rentals under Article 12 instead of Article 7.
Under both articles, film rentals are taxed exclusively by the
residence country, unless they are attributable to a permanent
establishment or a fixed base, in which case they may be taxed on
a net basis in the country in which the permanent establishment or
fixed base is located.
Paragraph. 8 clarifies that the U.S. Federal excise tax on
insurance or reinsurance premiums paid to foreign insurers will not
be imposed on insurance premiums paid to an insurance business
carried on by a Swedish enterprise, whether or not the business is
carried on through a U.S. permanent establishment. The U.S. waiver
of excise taxes applies only to the extent that the relevant risk
is not reinsured, directly or indirectly, with a person not
entitled to relief from such tax. Reinsurance of a relevant risk
includes reinsurance against, or with respect to, underlying
hazards, risks, losses, or liabilities within the United States.
For example, the waiver would not be available if an underlying
U.S. risk were reinsured or retroceded by a Swedish insurer to a
Swiss insurer, because the U.S.-Switzerland income tax convention
does not provide for a waiver of these U.S. excise taxes.
Paragraph 8(b) states the corresponding rule for Swedish excise
taxes on insurance premiums. Sweden does not impose an excise tax
on reinsurance premiums.
The U.S. negotiators agreed to waive these excise taxes only
after a review of Swedish law indicated that the income tax imposed
by Sweden on Swedish resident insurers results in a burden that is
substantial in relation to the U.S. tax on U.S. resident insurers.
On the basis of this analysis, U.S. negotiators concluded that it
was appropriate to waive the U.S. excise taxes in this Convention.
The waiver of the U.S. excise tax in paragraph 8 merely
restates the result that obtains under a combination of U.S. law
and other provisions of the Convention. The nited States may not,
pursuant to the provisions of paragraph 1 of Article 7, impose the
excise tax on the income of any Swedish enterprise that is not
attributable to a permanent establishment in the United States.
-16-

Under Code section 4373, the tax may not be imposed on any amount
that is effectively connected with the conduct of a trade or
business in the United States (unless that amount is exempt from
net basis U.S. income tax pursuant to a treaty obligation of the
United States). Since any amount attributable, under the
Convention, to a permanent establishment in the United States will
also be effectively connected with a U.S. trade or business, the
tax may also not be imposed on any income of a Swedish enterprise
that is attributable to a permanent establishment in the United
States.
Paragraph 9 clarifies that any income, gain or expense
attributable to a permanent establishment during its existence is
taxable or deductible in the State in which the permanent
establishment is situated even if the payment is deferred until
after the permanent establishment no longer exists. This paragraph
incorporates into the Convention the rule of Code section
864(c)(6).
This Article is subject to the saving clause of paragraph 3 of
Article 1 (Personal scope). Thus, if, for example, a citizen of
the United States who is a resident of Sweden derives business
profits from the United States that are not attributable to a
permanent establishment in the United States, the United States may
(subject to the special foreign tax credit rules of paragraph 3 of
Article 23 (Relief from double taxation)) tax those profits as part
of the worldwide income of the citizen, notwithstanding the fact
that this Article generally would exempt such income of a Swedish
resident from U.S. tax.
As with any benefit of the Convention, the enterprise claiming
the benefit of Article 7 must be entitled to the benefit under the
provisions of Article 17 (Limitation on benefits).
Article 8 - SHIPPING AND AIR TRANSPORT
This Article provides rules governing the taxation of profits
from the operation of ships and aircraft in international traffic.
The term "international traffic" is defined in subparagraph 1(d) of
Article 3 (General definitions). It is understood, based on the
provisions of paragraph 2 of Article 1 (Personal scope), that any
benefits to which a resident of one of the States is entitled by
virtue of the exchange of notes between the United States and
Sweden (effective on January 1, 1987) under the authority of Code
section 883 (if any), will continue to be available regardless of
any provisions to the contrary in the Convention.
Paragraph 1 provides that profits of an enterprise of a
Contracting State from the operation of ships or aircraft in
international traffic shall be taxable only in that State. By
virtue of paragraph 6 of Article 7 (Business profits), profits of
an enterprise of a Contracting State that are exempt in the other
-17-

Contracting State under this paragraph remain exempt even if the
enterprise has a permanent establishment in that other Contracting
State.
Paragraph 2 deals with certain income from the rental of ships
or aircraft in international traffic. As indicated in paragraph 5
of the OECD Commentaries to Article 8, income of an enterprise of
a Contracting State from the rental of ships or aircraft on a full
basis (i.e ., with crew) is considered to be income from the
operation of ships and aircraft and is, therefore, exempt from tax
in the other Contracting State under paragraph 1. Paragraph 2
extends the exemption under the Article to certain income from the
bare-boat leasing of ships and aircraft. Unlike certain other U.S.
treaties, however, income from bareboat rentals of ships or
aircraft is included within the definition of profits from the
operation of ships or aircraft in international traffic in the
Convention only to the extent that the rental profits are
incidental to profits from the operation of ships and aircraft.
Thus, an enterprise that is not in the business of operating ships
or aircraft in international traffic and that derives income from
renting ships or aircraft would not be able to claim the benefits
of Article 8. Income from the non-incidental leasing of ships or
aircraft, even if the ships or aircraft are used in international
traffic, is treated as business profits. Such non-incidental
rental income consequently is taxable in the source State only if
it is attributable to a permanent establishment which the lessor
has in the source State. It is understood that if, for example, a
bank is a resident of one of the States and has a permanent
establishment in the other State, and that bank leases an aircraft
to an airline in the other State, the rental income will not be
attributable to the permanent establishment if the permanent
establishment was not involved in negotiating or concluding the
lease agreement. The rental income consequently will not be
subject to tax by that other State. Similarly, if the activities
of the bank in that other State are not sufficient to rise to the
level of a permanent establishment, the lease income will not be
taxable in that other State.
Paragraph 3 provides that the profits of an enterprise of a
Contracting State from the use, maintenance, or rental of
containers (including eguipment for their transport) which are used
for the transport of goods in international traffic will be exempt
from tax in the other Contracting State. This result obtains
regardless of whether the recipient of the income is engaged in the
operation of ships or aircraft in international traffic, and
regardless of whether the enterprise has a permanent establishment
in the other Contracting State. The shipping and air transport
provisions of the prior treaty do not deal with income from the
use, maintenance or rental of containers. Such income, therefore,
is treated under that Convention as business profits.
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Paragraph 4 clarifies that paragraphs 1 and 3 apply equally to
profits from an enterprise of a Contracting State from
participation in a pool, joint business or international operating
agency. Profits derived by the air transport consortium
Scandinavian Airlines System (SAS) are covered by paragraphs 1 and
3, but only to the extent that the SAS profits correspond to the
participation held in that consortium by AB Aerotransport (ABA),
the Swedish partner of SAS. SAS is an entity in the nature of a
partnership which was created jointly by the legislatures of
Sweden, Norway and Denmark. The exemption applies to the income of
the consortium in its entirety because, in addition to the present
Convention, the United States income tax conventions with Norway
and Denmark provide similar exemptions to residents of those
States.
In addition, notes exchanged at the signing of the convention
provide that all income earned by SANA Inc. (Scandinavian Airlines
of North America Inc., a New York corporation) from the operation
in international traffic of aircraft would be treated as income of
SAS, the consortium whose constituent corporate members own the
stock of SANA Inc. SANA Inc. was created and is operated as an
entity apart from SAS to satisfy U.S. regulations regarding foreign
airlines, which SAS as a consortium could not meet. SANA Inc. is
a conduit for SAS with regard to receipts and its expenses are
guaranteed by SAS. Therefore the income of SANA Inc. will be taxed
no differently under the Convention than if it were earned directly
by SAS.
The taxation of gains from the alienation of ships, aircraft
or containers is dealt with in paragraph 4 of Article 13 (Gains) .
This Article is subject to the saving clause of paragraph 4 of
Article 1 (Personal scope). The United States, therefore, may,
subject to the special foreign tax credit rules of paragraph 3 of
Article 23 (Relief from double taxation), tax the shipping or air
transport profits of a resident of Sweden if that Swedish resident
is a citizen of the United States.
As with any benefit of the Convention, an enterprise claiming
the benefit of this Article must be entitled to the benefit under
the provisions of Article 17 (Limitation on benefits).
Article 9 - ASSOCIATED ENTERPRISES
Article 9 incorporates into the Convention the general
principles of Code section 482. It provides that when related
persons (i.e., associated enterprises described in subparagraphs
1(a) and 1(b)) engage in transactions that are not at arm's length,
the Contracting States may make appropriate adjustments to the
taxable income of such related persons to reflect the income these
persons would have earned with respect to such transactions had
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there been an arm's length relationship between the persons. The
prior Convention contains similar rules.
Paragraph 1 deals with the circumstance where an enterprise of
a Contracting State is related to an enterprise of the other
Contracting State, and the enterprises make arrangements or impose
conditions between themselves in their commercial or financial
relations different from those that would be made between
independent persons. Under these circumstances a Contracting State
may adjust the income (or loss) of the enterprise situated in that
State to reflect the income that would have been earned in the
absence of such a relationship. The paragraph specifies what the
term "associated enterprise" means in this context. An enterprise
of one Contracting State is associated with an enterprise of the
other Contracting State if it participates directly or indirectly
in the management, control, or capital of the other. Two
enterprises also are associated if any third person or persons
participate directly or indirectly in the management, control, or
capital of both. The term "control" includes any kind of control,
whether or not legally enforceable and however exercised or
exercisable.
Paragraph 2 provides that where a Contracting State has made
an adjustment to the profits of an enterprise of that State that is
consistent with the provisions of paragraph 1 (i .e., that was
appropriate to reflect arm's length conditions), and the associated
enterprise in the other State has been subject to tax on those same
profits, that other Contracting State is obligated to make a
corresponding, or correlative, adjustment to the tax liability of
that associated enterprise. The Contracting State making such an
adjustment will take the other provisions of the Convention, where
relevant, into account. For example, if the effect of a
correlative adjustment is to treat a Swedish corporation as having
made a distribution of profits to its U.S. parent corporation, the
provisions of Article 10 (Dividends) will apply, and Sweden may
impose a withholding tax on the dividend. The rate of the tax will
be determined by the provisions of Article 10. The competent
authorities are authorized to consult, if necessary, to resolve any
differences in the application of these provisions. For example,
there may be a disagreement over whether an adjustment made by a
Contracting State under paragraph 1 was appropriate.
Paragraph 3 clarifies that nothing in this Article affects the
rights of the Contracting States to apply internal law provisions
relating to adjustments between related parties. Such adjustments
-- the distribution, apportionment, or allocation of income,
deductions, credits or allowances -- are permitted even if they are
different from, or go beyond, those authorized by paragraph 1 of
the Article, so long as they accord with the general principles of
paragraph 1, i.e., that the adjustment reflects what would have
transpired had the related parties been acting at arm's length.
-20-

If a correlative adjustment is made under paragraph 2, it is
to be implemented pursuant to paragraph 2 of Article 25 (Mutual
agreement procedure), notwithstanding any time limits or other
procedural limitations in the law of the Contracting State making
the adjustment. The saving clause of paragraph 4 of Article 1
(Personal scope) does not apply to paragraph 2 of Article 9 (see
the exceptions to the saving clause in subparagraph (a) of
paragraph 5 of Article 1). Thus, even if the statute of
limitations has run, or there is a closing agreement between the
Internal Revenue Service and the taxpayer, a refund of tax can be
made in order to implement a correlative adjustment arising under
paragraph 2 of Article 9. Statutory or procedural limitations,
however, cannot be overridden to impose additional tax, because,
under paragraph 2 of Article 1 the Convention cannot restrict any
statutory benefit.
The United States intends that its regulations under Code
section 482 will adhere fully to the arm's length standard. In
particular, the "commensurate with income" approach for determining
royalty rates with respect to intangible property transferred
between related parties is to be applied consistently with the
arm's length standard. The commensurate with income approach
recognizes that in certain cases it may be appropriate under the
arm's length standard to make periodic adjustments to royalty rates
between related parties. In particular, as noted in a 1992 OECD
Report on the United States Proposed Regulations under Section 482,
it is not always possible for the Internal Revenue Service to know
what profits were reasonably foreseeable at the time that an
intangible was transferred. In such cases and others periodic
adjustments may be warranted. It is anticipated that the
commensurate with income approach and the section 482 regulations
in general will be applied in a manner consistent with the
principles underlying paragraph 1 of Article 9.
Article 10 - DIVIDENDS
Article 10 provides rules for both source and residence
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 attrib-
utable 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 share-
holder 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 establish-
ment 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 Conven-
tion 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).
Article 11 - INTEREST
Article 11 provides rules for source and residence country
taxation of interest.
Paragraph 1 grants to the residence State the exclusive right
to tax interest derived and beneficially owned by its residents.
Thus, the exemption at source for interest in the prior Convention
is generally carried forward to this Convention.
Unlike the prior Convention which did not explicitly define
"interest”, under the new treaty, paragraph 2 of Article 11
expansively defines the term "interest" as used in this Article to
mean income from debt-claims of every kind, whether or not the
claim is secured by a mortgage, and whether or not carrying a right
to participate in the profits of the debtor. The definition of
interest includes income from Government securities and from bonds
or debentures, including premiums or prizes attaching to such
securities, bonds or debentures. The definition also encompasses
an excess inclusion with respect to a residual interest in a real
estate mortgage investment conduit. A special rule is provided in
paragraph 7 for this category of interest. Penalty charges for
late payment are excluded from the definition of interest.
Interest does not include dividends as defined in Article 10 even
if such dividends are income arising from debt-claims.
Paragraph 3 provides an exception to the general rule of
paragraph 1 that bars a source country tax on interest. The
exception applies in cases where the beneficial owner of the
interest carries on business through a permanent establishment in
the source State or performs independent personal services from a
fixed base situated in the source State and the debt claim in
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respect of which the interest is paid forms part of the business
property of such permanent establishment or fixed base. In such
cases the provisions of Article 7 (Business profits) or Article 14
(Independent personal services) will apply and the source State
will generally retain the right to impose tax on such interest
income.
Paragraph 4 provides a source rule for interest. It provides
that interest shall be deemed to arise in a State when the payer is
the State itself, or a political subdivision, local authority or
resident of that State. There is an exception, however, to the
general rule that interest arises in the State of residence of the
payer. The exception arises when the payer, even if he is a third-
state resident, has a permanent establishment or a fixed base in
one of the States and the interest is borne by that permanent
establishment or fixed base. In that case, the interest is deemed
to arise in the State in which the permanent establishment or fixed
base is situated.
Paragraph 5 deals with cases where there is a special
relationship between the payer and the beneficial owner of
interest. The provisions of Article 11 apply only to interest
payments that would have been made absent such special relation­
ships (i.e., an arm's length interest payment). Any excess amount
of interest paid remains taxable according to the laws of the
United States and Sweden respectively, with due regard to the other
provisions of the Convention. Thus, for example, if the excess
amount would be treated as a distribution of profits, such amount
could be taxed as a dividend rather than as interest, but the tax
would be subject to the rate limitations of paragraph 2 of Article
10 (Dividends).
Paragraph 6 limits the right of one State to impose tax on
interest payments made by a resident of the other. The paragraph
provides for the imposition of tax under those circumstances only
with respect to (1) interest paid to a resident of the first-
mentioned State, (2) interest attributable to a permanent estab-
lishment or a fixed base located in that first-mentioned state, or
(3) interest that arises in the first-mentioned State and is not
paid to a resident of the other State. Thus, under subparagraph
(a), the United States may tax interest paid by a Swedish resident
to a resident of the United States as part of the world-wide income
of the U.S. resident. Under subparagraph (b), the United States
may tax interest paid by a resident of Sweden if that interest is
attributable to a permanent establishment located in the United
States, and is therefore subject to U.S. tax as part of the income
of the permanent establishment. Finally, under subparagraph (c),
the United States may tax interest paid by a resident of Sweden if
(1) that interest is borne by a U.S. permanent establishment of
that Swedish resident, (2) it is not portfolio interest or
otherwise exempt from U.S. tax, and (3) the beneficial owner of the
interest is a resident of a country that does not have a treaty
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with the United States that exempts interest from tax at source.
For example, if a U.S. permanent establishment of a Swedish company
borrows from a Swiss bank, interest paid on that loan would be U.S.
source, and would be subject to tax at a rate of 5 percent under
the U.S.-Switzerland treaty. No tax, however, would be imposed by
the United States on the permanent establishment of the Swedish
company under the excess interest provisions of section 884(f) of
the Code, since excess interest is treated in this case as interest
paid by a resident of the United States to a resident of Sweden,
and such interest is exempt from U.S. tax under paragraph 1 of this
Article.
Although paragraph 2 includes an excess inclusion with respect
to a residual interest in a U.S. real estate mortgage investment
conduit (REMIC) within the definition of interest, paragraph 7
provides that the exemption at source for interest provided for in
paragraph 1 does not apply to such income. Instead, such income
may be taxed in the State where the excess inclusion arises. Under
United States law, this class of income is subject to the statutory
30 percent U.S. rate of tax at source. The legislation that
created REMICs in 1986 provided that such excess inclusions were to
be taxed at the full 30 percent statutory rate, regardless of any
then-existing treaty provisions to the contrary. Providing for the
30 percent rate in the Convention, therefore, conforms the
treatment of excess inclusions with respect to residents of Sweden
to Congressional intent.
Notwithstanding the limitations on source country taxation of
interest contained in this Article, the saving clause of paragraph
4 of Article 1 (Personal scope) permits the United States to tax
interest 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).
Article 12 - ROYALTIES
Article 12 provides rules for source and residence country
taxation of royalties.
Paragraph 1 grants to the residence State the exclusive right
to tax royalties arising in the other State, and derived and
beneficially owned by a resident of the first-mentioned State.
Paragraph 2 generally follows other U.S. treaties and defines
the term "royalties" for purposes of the Convention to mean
payments of any kind received as a consideration for the use of, or
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the right to use, any copyright of a literary, artistic, or
scientific work; for the use of, or the right to use, any patent,
trade mark, design or model, plan, secret formula or process; or
for information concerning industrial, commercial, or scientific
experience. The term also includes gains derived from the
alienation of any such right or property that are contingent on the
productivity, use, or further alienation thereof. In addition,
payments received in connection with the use or right to use
cinematographic films, or works on film, tape, or other means of
reproduction used for radio or television broadcasting are
specifically included in the definition of royalties. The
reference to "other means of reproduction" makes clear that future
technological advances in the field of radio and television
broadcasting will not affect the inclusion of payments relating to
the use of such means of reproduction within the definition of
royalties.
Paragraph 3 of Article 12 provides an exception to the source
country exemption for royalties in cases where the beneficial owner
of the royalties carries on business through a permanent
establishment in the source state or performs independent personal
services from a fixed base situated in the source state and the
royalties are attributable to the permanent establishment or fixed
base. In such cases the provisions of Article 7 (Business profits)
or Article 14 (Independent personal services) will apply, and the
source state will generally retain the right to tax such royalties
on a net basis.
Paragraph 4 deals with cases involving special relationships
between the payor and beneficial owner of a royalty. Paragraph 4
provides that the provisions of Article 12 apply to royalty
payments between related persons only to the extent that such
payments would have been made absent such special relationships
(i.e ., an arm's length royalty payment). Any amount in excess of
an arm's length payment remains taxable according to the laws of
the source State, with due regard to the other provisions of the
Convention. If, for example, the excess amount is treated as a
distribution of profits under the national law of the source State,
such excess amount will be taxed as a dividend rather than as a
royalty payment, but the tax imposed on the dividend payment will
be subject to the rate limitations of paragraph 2 of Article 10
(Dividends).
Notwithstanding the limitations on source country taxation of
royalties contained in this Article, the saving clause of paragraph
4 of Article 1 (Personal scope) permits the United States to tax
royalties 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.
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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).
ARTICLE 13 - GAINS
Article 13 provides rules for source and residence country
taxation of gains from the alienation of property.
Paragraph 1 preserves the situs country right to tax gains
derived from the alienation of real property situated in the situs
state (the "source State"). Thus, paragraph 1 permits gains
derived by a resident of one State from the alienation of real
property located in the other State to be taxed by such other
State. However, paragraph 1 does not grant the situs State an
exclusive right to tax these gains. The residence State may also
tax these gains from real property, subject to the rules of Article
23 (Relief from double taxation).
Paragraph 2 defines the term "real property situated in the
other Contracting State." Where the United States is the source
State, the term includes real property referred to in Article 6
(Income from real property) and certain indirect interests in such
property. Such indirect interests include a United States real
property interest in the United States, as that term is defined in
the Code on the date of signature of the Convention, and as
amended. In addition, the treaty clarifies that an interest in a
partnership, trust, or estate, to the extent that the assets of
such entity consist of United States real property interests
situated in the United States, are included in this definition.
Thus, the United States preserves its right to collect the tax
imposed by section 897 of the Code on gains derived by foreign
persons from the disposition of United States real property
interests, including gains arising from indirect dispositions
described in section 897(g). For this purpose, the source rules of
section 861(a)(5) of the Code shall determine whether a United
States real property interest is situated in the United States.
Where Sweden is the source state, the term "real property
situated in the other Contracting State" includes property that is
real property under the laws of Sweden that is situated in Sweden.
This encompasses real property referred to in Article 6 and shares
or similar rights in a company the assets of which consist,
directly or indirectly, mainly of such real property.
The definition of "real property situated in the other State"
applies solely for purposes of Article 13. Therefore, this
definition has no effect on the right to tax income covered in
other articles of the Convention, such as Article 6 (Income from
real property).
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Paragraph 3 preserves the source country right to tax gains
from the disposition of movable property in certain circumstances.
Paragraph 3 provides that gains from the disposition of movable
property which are attributable to a permanent establishment which
an enterprise of a State has in the other State or which are
attributable to a fixed base available to a resident of a State for
the purpose of performing independent personal services, and gains
from the disposition of such a permanent establishment (alone or
with the whole enterprise) or of such a fixed base, may be taxed in
the other State. This provision permits gains from the alienation
by a resident of a State of an interest in a partnership, trust or
estate that has a permanent establishment situated in the other
State to be taxed as gains attributable to such permanent
establishment under paragraph 3. Thus, for example, the United
States may tax gains derived from the disposition of an interest in
a partnership that has a permanent establishment in the United
States, whether or not the assets of such partnership consist of
movable property.
The rule in paragraph 9 of Article 7 (Business profits)
dealing with deferred income and expenses of a permanent
establishment or fixed base applies to paragraph 3 of this Article.
Thus, gains from the disposition of movable property which are
attributable to a permanent establishment or fixed base, but are
deferred until after the permanent establishment or fixed base no
longer exists, may nevertheless be taxed by the State in which the
permanent establishment or fixed base was located.
Paragraph 4 provides a further exception from the rule set
forth in paragraph 3. Paragraph 4 provides that profits derived
from the disposition of ships and aircraft operated by an
enterprise in international traffic and from movable property (such
as containers) attributable to the operation of such ships and
aircraft are taxable only in the State in which the enterprise is
resident. This paragraph applies to gains derived by the air
transport consortium Scandinavian Airlines System ("SAS"), but only
to the gains that correspond to the participation held in that
consortium by AB Aerotransport ("ABA"), the Swedish partner of SAS.
(The special status of SAS is discussed in connection with Article
8 (Shipping and air transport).)
Even though the issue is addressed in the first sentence of
the paragraph, the second sentence of paragraph 4 explicitly
clarifies that gains from the disposition of containers used in
international traffic by an enterprise of a Contracting State shall
be taxable only in that State. For this purpose, containers are
deemed to include trailers, barges, and related equipment used for
the transport of containers.
Paragraph 5 provides that gains described in Article 12
(Royalties) shall be taxable in accordance with the provisions of
Article 12. This paragraph applies to gains derived from the
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alienation of rights to intangible property if the amount of the
gain is contingent on the productivity, use or disposition thereof,
which are described in paragraph 2 of Article 12. Treatment of
gains attributable to intangible property that are not described in
paragraph 2 of Article 12 is governed by paragraphs 3 or 6 of
Article 13.
Subject to the special rule of paragraph 7, paragraph 6 grants
to the residence State the exclusive right to tax gains from the
disposition of property other than those specifically referred to
in the preceding paragraphs of Article 13.
Paragraph 7 provides a special rule for an individual who had
been a . resident of Sweden and who has become a resident of the
United States. With respect to such an individual, Sweden will
have the right to tax gains referred to in paragraph 6 from any
property derived by such individual at any time during the ten
years following the date on which the individual ceased to be a
resident of Sweden. Although this Article is not reciprocal,
pursuant to paragraph 4 of Article 4 (Residence) the United States
retains the right to tax its former citizens where their loss of
citizenship had as one of its principal purposes the avoidance of
tax.
Notwithstanding the foregoing limitations on source country
taxation of certain gains, the saving clause of paragraph 4 of
Article 1 (Personal scope) permits the United States to tax gains
realized by its residents and citizens, subject to the special
foreign tax credit rules of Article 23 (Relief from double
taxation) , as if the Convention had not come into effect.
As with any benefit of this 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).
Article 14 - INDEPENDENT PERSONAL SERVICES
The Convention deals in separate articles with different
classes of income from personal services. Article 14 deals with
the general class of income from independent personal services and
Article 15 deals with the general class of dependent personal
service income. Exceptions or additions to these general rules are
found in Articles 16 and 18 through 21 for directors' fees (Article
16) ; performance income of artistes and athletes (Article 18) ;
pensions in respect of personal service income, social security
benefits, and annuities (Article 19); government service salaries
and pensions (Article 20); and students and trainees (Article 21) .
2.4 provides the general rule that an individual who is
a resident of a Contracting State and who derives income from the
performance of personal services in an independent capacity will be
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exempt from tax in respect of that income by the other Contracting
State unless certain conditions are satisfied. The income may be
taxed in the other Contracting State if the services are performed
in that other State, and the income is attributable to a fixed base
that is regularly available to the individual in that other State
for the purpose of performing his services. If, however, the
individual is a Swedish resident who performs independent personal
services in the United States, and he is also a U.S. citizen, the
United States may, by virtue of the saving clause of paragraph 4 of
Article 1 (Personal scope), tax his income without regard to the
restrictions of this Article, subject to the special foreign tax
credit rules of paragraph 3 of Article 23 (Relief from double
taxation).
The term "fixed base" is not defined in the Convention, but
its meaning is understood to be analogous to that of the term
"permanent establishment," as defined in Article 5 (Permanent
establishment). Similarly, some rules of Article 7 (Business
profits) for attributing income and expenses to a permanent
establishment are relevant for attributing income to a fixed base.
However, the taxing right conferred by this Article with respect to
income from independent personal services is somewhat more limited
than that provided in Article 7 for the taxation of business
profits. In both Articles 7 and 14 the income of a resident of one
Contracting State must be attributable to a permanent establishment
or fixed base in the other State in order for that other State to
have a taxing right. In Article 14, however, the income also must
be attributable to services that are performed in that other State,
while Article 7 is not concerned with the place of performance of
the income-generating activities so long as the income is
attributable to the permanent establishment.
The rule in paragraph 9 of Article 7 (Business profits)
dealing with deferred income and expenses of a permanent
establishment or fixed base applies to this Article. Thus, income,
gain or expense that is attributable to a fixed base, but is
deferred until after the fixed base is no longer available to the
performer of the services may nevertheless be taxed or deducted, as
the case may be, by the State in which the fixed base was located.
Article 15 - DEPENDENT PERSONAL SERVICES
Article 15 deals with the taxation of remuneration derived by
a resident of a Contracting State as an employee.
Under paragraph 1, remuneration in respect of employment
derived by an individual who is a resident of a Contracting State
generally may be taxed only by his State of residence. To the
extent his remuneration is derived from an employment exercised in
the other State ("the host State"), the remuneration may also be
taxed by the host State, subject to the conditions specified in
paragraph 2. In such a case the individual's State of residence
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will relieve double taxation in accordance with the provisions of
Article 23 (Relief from double taxation). Consistent with the
general rule of construction that the more specific rule takes
precedence over the more general, income dealt with in Articles 16
(Directors' fees), 19 (Pensions and annuities), and 20 (Government
service) is governed by the provisions of those articles rather
than this Article.
Paragraph 2 provides that the host State may not tax the
remuneration of a resident of the other State derived from services
performed in the host State, if three conditions are satisfied: (1)
the individual is present in the host State for a period or periods
not exceeding 183 days in any consecutive twelve month period; (2)
the remuneration is paid by, or on behalf of, an employer who is
not a resident of the host State; and (3) the remuneration is not
borne as a deductible expense by a permanent establishment or fixed
base that the employer has in the host State. If a foreign
employer pays the salary of an employee, but a host State
corporation or permanent establishment reimburses the foreign
employer in a deductible payment which can be identified as a
reimbursement, neither condition (2) nor (3) , as the case may be,
will be considered to have been fulfilled. Conditions (2) and (3)
are intended to assure that a State will not be required both to
allow a deduction to the payor for the amount paid and to exempt
the employee on the amount received. In order for the remuneration
to be exempt from tax in the host State, all three conditions must
be satisfied.
Paragraph 3 contains a special rule applicable to remuneration
for services performed by an individual who is a resident of a
State as an employee aboard a ship or aircraft operated in
international traffic, including an aircraft operated in
international traffic by the air transport consortium Scandinavian
Airlines System ("SAS”). (The special situation of SAS is
discussed in connection with Article 8 (Shipping and air
transport).) Such remuneration shall be taxable only in the State
of residence of the employee if the services are performed as a
member of the regular complement of the ship or aircraft. The
"regular complement" includes the crew. In the case of a cruise
ship, it may also include others, such as entertainers, lecturers,
etc., employed by the shipping company to serve on the ship. The
use of the term "regular complement" is intended to clarify that a
person who exercises his employment as, for example, an insurance
salesman, while aboard a ship or aircraft is not covered by this
paragraph. However, services performed by an individual as a
member of a regular complement of a ship operated in international
traffic by a Swedish enterprise may be taxed in Sweden.
The comparable provision in the OECD Model provides a
different rule with respect to operations by a United States
enterprise. Under paragraph 3 in the OECD Model such income may be
taxed (on a non-exclusive basis) in the Contracting State in which
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the place of effective management of the employing enterprise is
situated. The United States does not use this rule in many other
treaties, because under U.S. law, a taxing right over an employee
of an enterprise managed in the United States (or an employee of a
U.S. resident) cannot be exercised with respect to non-U.S. source
income unless the employee is also a U.S. citizen or resident.
If a U.S. citizen who is resident in Sweden performs dependent
services in the United States and meets the conditions of paragraph
2, or is a crew member on a Swedish ship or airline, and would,
therefore, be exempt from U.S. tax were he not a U.S. citizen, he
is nevertheless taxable in the United States on his remuneration by
virtue of the saving clause of paragraph 4 of Article 1 (Personal
scope), subject to the special foreign tax credit rule of paragraph
3 of Article 23 (Relief from double taxation).
Article 16 - DIRECTORS' FEES
This Article provides that one of the States may tax the fees
paid by a company which is a resident of that State for services
performed by a resident of the other State in his capacity as a
director of the company. Only the State of residence of the
director, however, may tax any portion of the remuneration that is
derived in respect of services performed in that State.
This rule is an exception to the more general rules of Article
14 (Independent personal services) and Article 15 (Dependent
personal services). Thus, for example, in determining whether a
non-employee director's fee is subject to tax in the country of
residence of the corporation, whether the fee is attributable to a
fixed base is not relevant.
This Article is subject to the saving clause of paragraph 4 of
Article 1 (Personal scope). Thus, if a U.S. citizen who is a
Swedish resident is a director of a U.S. corporation, the United
States may tax his full remuneration regardless of the place of
performance of his services, subject, however, to the special
foreign tax credit provisions of paragraph 3 of Article 23 (Relief
from double taxation).
The prior Convention contains no special rule dealing with
corporate directors. They are subject to the normal rules
regarding the taxation of persons performing personal services.
Article 17 - LIMITATION ON BENEFITS
Article 17 addresses the problem of "treaty shopping" by
limiting the source basis tax benefits of the Convention to those
residents of the other Contracting State that have a substantial
nexus with, or otherwise have a significant business purpose for
residing in, the other Contracting State. In a typical case of
treaty shopping, a resident of a third State might establish an
-34-

entity resident in a Contracting state for the purpose of deriving
income from the other Contracting State and claiming treaty
benefits with respect to that income. Article 17 limits the abuse
of the Convention by limiting the benefits of the Convention to
those persons whose residence in a Contracting State is not
considered to have been motivated by the existence of the
Convention. Absent Article 17, the entity generally would be
entitled to benefits under the treaty as a resident of a
Contracting State, although the entity might be denied those
benefits as a result of limitations (e.q., business purpose,
substance-over-form, step transaction or conduit principles or
other anti-avoidance rules) applicable to a particular transaction
or arrangement. Article 17 and the general anti-abuse provisions
complement each other, as Article 17 generally determines whether
an entity has a sufficient nexus to the Contracting State to be
treated as a resident for treaty purposes, while general anti-abuse
provisions determine whether a particular transaction should be
recast in accordance with the substance of the transaction.
The structure of Article 17 is as follows: Paragraph 1 lists
a series of attributes of a resident of a Contracting State, the
presence of any one of which will entitle that person to benefits
of the Convention in the other Contracting State. Several of
these, which will be discussed first, are purely objective tests.
One, in subparagraph (c) , is more subjective, and requires some
elaboration and interpretation. Paragraph 2 provides that benefits
may be granted even to a person not entitled to benefits under the
tests of paragraph 1, if the competent authority of the source
State so determines. Paragraph 3 defines the term "recognized
stock exchange" as used in paragraph 1. Paragraph 4 authorizes the
competent authorities to develop agreed applications of the Article
and to exchange information necessary for carrying out the
provisions of the Article.
Two categories of persons eligible for benefits from the other
Contracting State under subparagraphs (a) and (b) of paragraph 1
are (1) individual residents of a Contracting State and (2) the
Contracting States, political subdivisions or local authorities
thereof. It is most unlikely that persons falling into these two
categories can be used to derive treaty benefitted income, as the
beneficial owner of the income, on behalf of a third-country
person. If an individual is receiving income as a nominee on
behalf of a third-country resident, benefits will be denied with
respect to those items of income under the articles of the
Convention which grant the benefit, because of the requirements in
those articles that the beneficial owner of the income be a
resident of a Contracting State.
Subparagraph (d) provides a two-part test, the ownership and
base erosion tests, both of which must be met for entitlement to
benefits under this subparagraph. Under these tests, benefits will
be granted to a resident of a Contracting State other than an
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individual, if both (1) more than 50 percent of the beneficial
interest in the person (or, in the case of a corporation, more than
50 percent of each class of its shares) is owned, directly or
indirectly, by persons who are themselves entitled to benefits
under the other tests of paragraph 1 (other than subparagraph (c)) ,
or by U.S. citizens, and (2) not more than 50 percent of the
person's gross income is used, directly or indirectly, to make
deductible payments to persons, other than persons who are
themselves eligible for benefits under the other tests of paragraph
1 (other than subparagraph (c) ) , or to U.S. citizens. It is
understood that the term "gross income" is to be interpreted as in
U.S. law. Thus, in general, the term should be understood to mean
gross receipts less cost of goods sold.
The rationale for this two-part test is that since treaty
benefits can be indirectly enjoyed not only by equity holders of an
entity, but also by that entity's various classes of obligees (such
as lenders, licensors, service providers, insurers and reinsurers)
it is not enough merely to require substantial ownership of the
entity by treaty country residents or their equivalent. In order
to prevent treaty benefits from inuring to third-country residents,
it is also necessary to require that the entity's deductible
payments be made in substantial part to such treaty country
residents or their equivalents. For example, a third-country
resident could lend funds to a Swedish-owned Swedish corporation to
be reloaned to a resident of the United States that is related to
the third-country resident. In the absence of a treaty between the
United States and the third country, the interest if earned
directly by the third-country resident would be subject to a 30
percent withholding tax in the United States. The U.S. source
interest income of the Swedish corporation, however, would be
exempt from U.S. withholding tax under Article 11 (Interest) of the
Convention. While the Swedish corporation would be subject to
Swedish corporation income tax, its taxable income could be reduced
to near zero by the deductible interest paid to the third-country
resident. If, under a Convention between Sweden and the third
country, that interest is exempt from Swedish tax, the U.S. treaty
benefit with respect to the U.S. source interest income will have
flowed to the third-country resident.
Under subparagraph (e), a corporation that is a resident of a
Contracting State is entitled to treaty benefits from the other
Contracting State if there is substantial and regular trading in
the corporation's principal class of shares on a recognized stock
exchange. The term "recognized stock exchange" is defined in
paragraph 3 of the Article to mean, in the United States, the
NASDAQ System and any stock exchange which is registered as a
national securities exchange with the Securities and Exchange
Commission, and, in Sweden, the Stockholm Stock Exchange
(Stockholms Fondbörs). Paragraph 3 also provides that the
competent authorities may, by mutual agreement, recognize
additional exchanges for purposes of subparagraph 1(e).
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Subparagraph (f) provides that a not-for-profit organization
(including a pension fund and a private foundation) which is a
resident of a Contracting State is entitled to benefits from the
other Contracting State if it satisfies two conditions: (1) It must
be generally exempt from tax in its State of residence by virtue of
its not-for-profit status, and (2) more than half of the
beneficiaries, members or participants, if any, in the organization
must be persons entitled, under this Article, to the benefits of
the Convention. A pension fund is entitled to the benefits of the
Convention if the organization sponsoring the fund, trust or entity
is entitled to the Convention's benefits under Article 17. Thus,
one need not determine that more than half of the beneficiaries of
a Swedish pension plan are residents of Sweden in deciding whether
the plan is entitled to U.S. treaty benefits in respect of its
income so long as the Swedish corporation sponsoring the fund is
entitled to benefits under Article 17, because, for example, it is
publicly traded on the Stockholm Stock Exchange. If, however, the
sponsoring organization is not entitled to benefits, the tests of
subparagraph 1(f) must be met.
Subparagraph 1(c) of Article 17 provides a test for eligi­
bility for benefits for residents of a Contracting State that are
not qualifying persons under any of the other tests of this
paragraph. This is the so-called "active trade or business" test.
Unlike the other tests of paragraph 1, it looks not solely at
objective characteristics of the person deriving the income, but at
the nature of the activity engaged in by that person and the
connection between the income and that activity. Under the active
trade or business test, a resident of one State deriving an item of
income from the other State is entitled to benefits with respect to
that income if that person (or a person related to that person) is
engaged in an active trade or business in the first-mentioned State
and the income in question is derived in connection with, or is
incidental to, that trade or business.
Income that is derived in connection with, or is incidental
to, the business of making or managing investments will not qualify
for benefits under this provision, unless those investment
activities are banking or insurance activities carried on by a bank
or insurance company.
Income is considered derived "in connection" with an active
trade or business in a Contracting State if, for example, the
income-generating activity in that State is "upstream," "down-
stream," or parallel to that going on in the other State. Thus, if
the U.S. activity consisted of selling the output of a Swedish
manufacturer or providing inputs to the manufacturing process, or
of selling in the United States the same sorts of products that
were being sold by the Swedish trade or business in Sweden, the
income generated by that activity would be treated as earned in
connection with the Swedish trade or business. Income would be
considered "incidental" to the Swedish trade or business if, for
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example, it were interest income earned from the short-term
investment of working capital of the Swedish resident in U.S.
securities.
An item of income will be considered to be earned in connec-
tion with or to be incidental to an active trade or business in
Sweden if the income is derived by the resident of Sweden claiming
the benefits directly or indirectly through one or more other
persons that are residents of the United States. Thus, for
example, a Swedish resident could claim benefits with respect to an
item of income earned by a U.S. operating subsidiary but derived by
the Swedish resident indirectly through a U.S. holding company
interposed between it and the operating subsidiary.
It is expected that, in order for an item of income to be
considered derived in connection with an active trade or business
under subparagraph 1(c), the business activity in the residence
State will be substantial in relation to the income generating
activity in the source State. For example, the trade or business
in Sweden must be substantial in relation to the activity in the
United States that gave rise to the income in respect of which
treaty benefits are being claimed. Given the relative sizes of the
U.S. and Swedish economies, it is not necessary that the Swedish
trade or business be as large as the U.S. income-generating
activity. The Swedish trade or business cannot, however, in terms
of income, assets, or similar measures, be only a very small per-
centage of the size of the U.S. activity.
The substantiality requirement is intended to prevent certain
types of treaty-shopping abuses. For example, a third-country
resident may want to acquire a U.S. company that manufactures
television sets for worldwide markets; however, since its country
of residence has no tax treaty with the United States, any
dividends generated by the investment would be subject to a U.S.
withholding tax of 30 percent. Absent a substantiality test, the
investor could set up a Swedish corporation that would operate a
small outlet in Sweden to sell a few of the television sets
manufactured by the U.S. company. That Swedish corporation would
then acquire the U.S. manufacturer with capital provided by the
third-country resident. It might be argued that the U.S. source
income is generated from business activities in the United States
related to the television sales activity of the Swedish parent and
that the dividend income should be subject to U.S. tax at the 5
percent rate provided by Article 10 (Dividends). However, the
substantiality test would not be met in this example, so the
dividends would remain subject to withholding in the United States
at a rate of 30 percent.
In general, it is expected that if a person qualifies for
benefits under the other subparagraphs of paragraph 1, no inquiry
will be made into qualification for benefits under subparagraph
1(c). Upon satisfaction of any of the other tests of paragraph 1,
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any income derived by the beneficial owner from the other
Contracting State is entitled to treaty benefits. Under
subparagraph 1(c), however, the test is applied separately for each
item of income.
It is intended that the provisions of subparagraph 1(c) will
be self executing. Unlike the provisions of paragraph 2, discussed
below, claiming benefits under this subparagraph does not require
advance competent authority ruling or approval. The tax
authorities may, of course, on review determine that the taxpayer
has improperly interpreted the subparagraph and is not entitled to
the benefits claimed.
Paragraph 2 provides that a resident of a Contracting State
that derives income from the other Contracting State and is not
entitled to the benefits of the Convention under any of the
provisions of paragraph 1, may, nevertheless, be granted benefits
at the discretion of the competent authority of the Contracting
State in which the income arises.
Paragraph 2 itself provides no guidance to competent
authorities or taxpayers as to how the discretionary authority is
to be exercised. It is understood, however, that in making
determinations under paragraph 2, the competent authorities will
take into account all relevant facts and circumstances. The
factual criteria that the competent authorities are expected to
take into account include the existence of a clear business purpose
for the structure and location of the income earning entity in
question; the conduct of an active trade or business (as opposed to
a mere investment activity) by such entity; and a valid business
nexus between that entity and the activity giving rise to the
income.
For purposes of implementing paragraph 2, a taxpayer will be
permitted to present his case to his competent authority for an
advance determination based on the facts, and will not be required
to wait until the tax authorities of one of the Contracting States
have determined that benefits are denied under one of the other
provisions of the Article. It also is expected that if the
competent authority determines that benefits are to be allowed,
they will be allowed retroactively to the time of entry into force
of the relevant treaty provision or the establishment of the
structure in question, whichever is later.
It is contemplated that under paragraph 2 the Competent
Authority of the United States will grant treaty benefits to the
Nobel Foundation, a Swedish charitable organization.
Paragraph 4 provides that the competent authorities of the
United States and Sweden will consult together to develop a
commonly agreed application of this Article. In accordance with
Article 26 (Exchange of information), the competent authorities
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will exchange information necessary to carry out this Article and
to safeguard the application of domestic laws.
Article 18 - ARTISTES AND ATHLETES
This Article deals with the taxation by one State of artistes
(i.e ., performing artists and entertainers) and athletes resident
in the other State from the performance of their services as such.
The Article applies both to the income of an entertainer or athlete
who performs services on his own behalf and one who performs his
services on behalf of another person, either as an employee of that
person, or pursuant to any other arrangement. The rules of this
Article take precedence over those of Articles 14 (Independent
personal services) and 15 (Dependent personal services). This
Article applies, however, only with respect to the income of
performing artists and athletes. Others involved in a performance
or athletic event, such as producers, directors, technicians,
managers, coaches, etc., remain subject to the provisions of
Articles 14 and 15.
Paragraph 1 describes the circumstances in which one State may
tax the performance income of an entertainer or athlete who is a
resident of the other State. Income derived by a resident of one
State from his personal activities as an entertainer or athlete
exercised in the other State may be taxed in that other State if
the amount of the gross receipts derived by the individual for any
twelve month period exceeds $6,000 (or its equivalent in Swedish
kronor). The $6,000 includes expenses reimbursed to the individual
or borne on his behalf. If the gross receipts exceed $6,000, the
full amount, not just the excess, may be taxed in the State of
performance.
The OECD Model provides for taxation by the country of
performance of the remuneration of entertainers or athletes with no
dollar or time threshold. The United States introduces the dollar
threshold test in its treaties to distinguish between two groups of
entertainers and athletes -- those who are paid very large sums of
money for very short periods of service, and who would, therefore,
normally be exempt from host country tax under the standard
personal services income rules, and those who earn only modest
amounts and are, therefore, not clearly distinguishable from those
who earn other types of personal service income.
Paragraph 1 applies notwithstanding the provisions of Articles
14 (Independent personal services) or 15 (Dependent personal
services). Thus, if an individual would otherwise be exempt from
tax under those Articles, but is subject to tax under this Article
he may be taxed in accordance with Article 18. An entertainer or
athlete who receives less than the $6,000 threshold amount, and who
is, therefore, not subject to tax under the provisions of this
Article, may, nevertheless, be subject to tax in the host country
under Articles 14 or 15 if the tests for taxability under those
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Articles are met. For example, if an entertainer who is an
independent contractor earns only $5,500 of income for a 12 month
period, but the income is attributable to a fixed base regularly
available to him in the State of performance (such as a cocktail
lounge in which he regularly performs) , that State may tax his
income under Article 14.
Income derived from one State by an entertainer or athlete who
is a resident of the other in connection with his activities as
such, but from other than actual performance, such as royalties
from record sales and payments for product endorsements, is not
covered by this Article, but by other articles of the Convention,
as appropriate, such as Article 12 (Royalties) or Article 14
(Independent personal services). For example, if an entertainer
receives royalty income from the sale of recordings of a concert
given in a State, the royalty income would be exempt from source
country tax under Article 12, even if the remuneration from the
concert itself may have been covered by this Article.
Paragraph 2 is intended to eliminate the potential for abuse
when income from a performance by an entertainer or athlete does
not accrue to the performer himself, but to another person.
Foreign entertainers commonly perform in the United States as
employees of, or under contract with, a company or other person.
The relationship may truly be one of employee and employer, with no
abuse of the tax system either intended or realized. On the other
hand, the "employer" may, for example, be a company established and
owned by the performer, which is merely acting as the nominal
income recipient in respect of the remuneration for the
entertainer's performance. The entertainer may be acting as an
"employee", receiving a modest salary, and arranging to receive the
remainder of the income from his performance in another form or at
a later time. In such case, absent the provisions of paragraph 2,
the company providing the entertainer's services could attempt to
escape host country tax because it earns business profits but has
no permanent establishment in that country. The entertainer may
largely or entirely escape host country tax by receiving only a
small salary in the year the services are performed, perhaps small
enough to place him below the dollar threshold in paragraph 1. He
would arrange to receive further payments in a later year, when he
is not subject to host country tax, perhaps as salary payments,
dividends or liquidating distributions.
Paragraph 2 seeks to prevent this type of abuse while at the
same time protecting the taxpayer's right to the benefits of the
Convention when there is a legitimate employee—employer
relationship between the performer and the person providing his
services. Under paragraph 2, when the income accrues to a person
other than the performer, and the performer (or persons related to
him) participate, directly or indirectly, in the profits of that
other person, the income may be taxed in the Contracting State
where the performer's services are exercised, without regard to the
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provisions of the Convention concerning business profits (Article
7) or independent personal services (Article 14). Thus, even if
the "employer" has no permanent establishment or fixed base in the
host country, its income may be subject to tax there under the
provisions of paragraph 2. Taxation under paragraph 2 is imposed
on the person providing the services of the entertainer or athlete.
This paragraph does not affect the rules of paragraph 1, which
apply to the entertainer or athlete himself. To the extent of
salary payments to the performer, which are treated under paragraph
1, the income taxable by virtue of paragraph 2 to the person
providing his services is reduced.
For purposes of paragraph 2, income is deemed to accrue to
another person (i.e., the person providing the services of the
entertainer or athlete) if the entertainer or athlete has control
over, or the right to receive, gross income in respect of the
services of the entertainer or athlete. Direct or indirect
participation in the profits of a person may include, but is not
limited to, the accrual or receipt of deferred remuneration,
bonuses, fees, dividends, partnership income or other income or
distributions.
The paragraph 2 override of the protection of Articles 7
(Business profits) and 14 (Independent personal services) does not
apply if it is established that neither the entertainer or athlete,
nor any persons related to the entertainer or athlete, participate
directly or indirectly in the profits of the person providing the
services of the entertainer or athlete. Thus, for example, assume
that a circus owned by a U.S. corporation performs in Stockholm,
and the Swedish promoters of the performance pay the circus, which,
in turn, pays salaries to the clowns. The circus has no permanent
establishment in Sweden. Since the clowns do not participate in
the profits of the circus, but merely receive their salaries out of
the circus' gross receipts, the circus is protected by Article 7
and its income is not subject to Swedish tax. Whether the salaries
of the clowns are subject to Swedish tax depends on whether they
exceed the $6,000 threshold in paragraph 1, and, if not, whether
they are taxable under Article 15 (Dependent personal services).
This exception to the paragraph 2 override of the Articles 7
and 14 protection of persons providing the services of entertainers
and athletes for non-abusive cases is not found in the OECD Model.
The OECD Model language applies to non-abusive situations, i.e. ,
where the performer does not participate in the profits of the
person providing the services. Paragraph 2 of this Convention,
however, applies only if the performer participates in the profits
of the venture. Therefore, paragraph 2 does not apply unless the
arrangement is a potentially abusive situation. The language of
this paragraph is consistent with the U.S. reservation to paragraph
2 of the OECD Model.
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This Article is subject to the provisions of the saving clause
of paragraph 4 of Article 1 (Personal scope). Thus, if an
entertainer or athlete who is resident in Sweden is a citizen of
the United States, the United States may tax all of his income from
performances in the United States without regard to the provisions
of this Article, subject, however, to the special foreign tax
credit provisions of paragraph 3 of Article 23 (Relief from double
taxation).
The prior Convention contains no special rules for the
taxation of the income of entertainers and athletes. Such income
is subject to the general rules for the taxation of personal
service income.
Article 19 - PENSIONS AND ANNUITIES
Article 19 deals with the taxation of private f i.e.,
non-government) pensions, annuities, social security, and similar
benefits.
Paragraph l provides that private pensions and other similar
remuneration derived and beneficially owned by a resident of a
Contracting State in consideration of past employment are generally
taxable only in the State of residence of the recipient. The
paragraph also provides for exclusive residence country taxation of
annuities. The rules of this paragraph do not apply to items of
income which are dealt with in Article 20 (Government service),
including pensions in respect of government service, or to social
security benefits which are dealt with in paragraph 2 of Article
19.
The term "annuity" as used in this Article is defined in
paragraph 3 to mean a stated sum paid periodically at stated times
during life or during a specified or ascertainable number of years
under an obligation to make the payment in return for adequate and
full consideration other than services rendered or to be rendered.
Paragraph 2 provides that pensions (including the Swedish
"allmän tilläggspension") and other payments made by one of the
States under the provisions of its social security system or
similar legislation paid to a resident of the other State or to a
citizen of the United States will be taxable only in the paying
State. Pensions in respect of government service under the
provisions of a social security system as described in this
paragraph are covered by this rule, and not by the rule of
paragraph 2 of Article 20 (Government service). “Similar
legislation" is defined in paragraph 2 of the notes exchanged at
the time of the signing of the Convention to refer to United States
tier 1 Railroad Retirement benefits. The reference to U.S.
citizens is necessary to ensure that a social security payment by
Sweden to a U.S. citizen not resident in the United States will not
be taxable by the United States.
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Paragraph 4 permits a resident of Sweden or the United States
who is not a national of that country to deduct contributions paid
by or on behalf of that individual to a pension or other retirement
arrangement that is established and maintained and recognized for
tax purposes in the other country to the same extent that
deductions would be permitted in the first-mentioned country. The
contributions are only deductible, however, if the competent
authority of the State permitting the deduction agrees that the
pension scheme or other retirement arrangement of the other State
generally corresponds to a pension scheme or other retirement
arrangement recognized for that purpose in the first State. In
either Contracting State, a pension or other retirement arrangement
will qualify as "recognized for tax purposes" in that State if
contributions to the arrangement would qualify for tax relief in
that State.
Paragraph 2 is one of the exceptions listed in paragraph 5(a)
of Article 1 (Personal scope) to the saving clause of paragraph 4
of that Article. Thus, the United States will not tax social
security benefits paid by Sweden to a U.S. citizen who is a
resident of Sweden. The provisions of this Article (except those
of paragraph 2 dealing with social security benefits) are subject
to the saving clause of paragraph 4 of Article 1 (Personal scope).
Thus, for example, a periodic pension or annuity payment received
by a resident of Sweden who is a U.S. citizen may be taxed by the
United States, regardless of the provision for exclusive residence
taxation for those classes of income.
Article 20 - GOVERNMENT SERVICE
Article 20 deals with the taxation of income (including
pensions) from governmental employment.
Subparagraphs (a) and (b) of paragraph 1 deal with the
taxation of government compensation (other than a pension).
Subparagraph (a) provides that wages, salaries, and similar
compensation paid by one of the States or by its political
subdivisions or local authorities to any individual are generally
exempt from tax by the other State. Under subparagraph (b), such
payments are, however, taxable in the other State and only in that
State, if the services are rendered in that other State and the
individual is a resident of that State who is either a citizen of
that State or a person who did not become resident of that State
solely for purposes of rendering the services. Thus, an individual
who, after establishing U.S. residence, is hired by the Swedish
Embassy in Washington, would be subject to U.S. (and not Swedish)
tax on his Swedish salary.
Paragraph 2 deals with the taxation of a pension paid by, or
out of funds created by, one of the States or a political
subdivision or a local authority thereof to an individual in
respect of services rendered to that State or subdivision or
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authority. Subparagraph (a) provides that such a pension is
taxable only in that State. Subparagraph (b) provides an exception
under which such a pension is taxable only in the other State if
the individual is a resident of, and a citizen of, that other
State. Pensions paid to retired civilian and military employees of
a Government of either State are intended to be covered under
paragraph 2.
Paragraphs 1 and 2 are similar to paragraphs 1 and 2 of
Article 19 (Government service) of the OECD Model Treaty. These
paragraphs differ from many U.S. treaties under which such
remuneration, including a pension, is taxable only in the
Contracting State that pays it.
Paragraph 3 provides that the provisions of Articles 14
(Independent personal services), 15 (Dependent personal services),
16 (Directors' fees), 18 (Artistes and athletes), and 19 (Pensions
and annuities) shall apply to remuneration and pensions in respect
of services rendered in connection with a business carried on by
one of the States or a political subdivision or a local authority
thereof. This treatment is consistent with the OECD Models which
excludes payments in respect of services rendered in connection
with a business carried on by the governmental entity paying the
compensation or pension.
Under paragraph 5(b) of Article 1 (Personal scope), the saving
clause (paragraph 4 of Article 1) does not apply to the benefits
conferred by one of the States under Article 20 if the recipient of
the benefits is neither a citizen of that State, nor, in the case
of the United States, is a lawful permanent resident (i.e., a
"green card" holder). Thus, for example, a Swedish resident who
receives a pension paid by Sweden in respect of services rendered
to the Government of Sweden shall be taxable on this pension only
in Sweden unless the individual is a U.S. citizen or acquires a
U.S. green card.
Article 21 - STUDENTS AND TRAINEES
Article 21 deals with visiting students, apprentices, and
business trainees.
An individual who is a resident of one of the Contracting
States and who visits the other Contracting State for the purpose
of full-time education or training, will not be taxed by that other
State on amounts received from abroad to cover his expenses. The
reference to "full-time" is not intended to exclude full-time
students who, in accordance with their visas, may hold part-time
jobs. The exemption, however, does not extend to any amounts
received as compensation for services rendered, which are covered
under Article 14 (Independent personal services) or Article 15
(Dependent personal services). The exemption also does not apply
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to any grant provided from within the host State, which is taxable
in accordance with the domestic laws of that State.
Under paragraph 5(b) of Article 1 (Personal scope), Article 21
is an exception to the saving clause of paragraph 4 of Article 1
for individuals who are not citizens of the United States or green
card holders but are residents of the United States under the
physical presence tests of Code section 7701(b).
Article 22 - OTHER INCOME
This Article provides the rules for the taxation of items of
income not dealt with in the other articles of the Convention. An
item of income is "dealt with" in an article when an item in the
same category is a subject of the article, whether or not any
treaty benefit is granted to that item of income. This Article
deals both with classes of income that are not dealt with
elsewhere, such as lottery winnings, and with income of the same
class as income dealt with in another article of the Convention,
but from sources in third States, and, therefore, not a subject of
the other Article if that article deals only with items of that
class of income from sources within one of the States.
Paragraph 1 contains the general rule that such items of
income derived by a resident of one of the States will be taxable
only in the State of residence. This exclusive right of taxation
applies irrespective of whether the residence State exercises its
right to tax the income covered by the Article.
Paragraph 2 contains an exception to the general rule of
paragraph 1 for income, other than income from real property, that
is attributable to a permanent establishment or fixed base
maintained in a Contracting State by a resident of the other
Contracting State. The taxation of such income is governed by the
provisions of Articles 7 (Business profits) and 14 (Independent
personal services). Thus, in general, third-country income which
is attributable to a permanent establishment maintained in the
United States by a resident of Sweden would be taxable by the
United States. There is an exception to this rule for income from
real property, as defined in paragraph 2 of Article 6 (Income from
real property). If, for example, a Swedish resident derives income
from real property located outside the United States which is
attributable to the resident's permanent establishment or fixed
base in the United States, only Sweden and not the United States
may tax that income. This special rule for foreign-situs real
property is consistent with the general rule, also reflected in
Article 6, that only the situs and residence States may tax real
property income. Even if such property is part of the property of
a permanent establishment or fixed base in a Contracting State,
that State may not impose tax if neither the situs of the property
nor the residence of the owner is in that State.
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The rule in paragraph 9 of Article 7 (Business profits)
dealing with deferred income and expenses of a permanent
establishment or fixed base applies to this Article. Thus, income,
gain or expense that is from third-country sources and that is
attributable to a permanent establishment or fixed base, but is
deferred until after the permanent establishment or fixed base no
longer exists, may nevertheless be taxed or deducted, as the case
may be, in the State in which the permanent establishment or fixed
base was located.
This Article is subject to the saving clause of paragraph 4 of
Article 1 (Personal scope). Thus, the United States may tax the
income of a Swedish resident not dealt with elsewhere in the
Convention, if that Swedish resident is a citizen of the United
States, subject, however, to the special foreign tax credit
provisions of paragraph 3 of Article 23 (Relief from double
taxation).
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).
Article 23 - RELIEF FROM DOUBLE TAXATION
Article 23 describes the manner in which each Contracting
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
-47-

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.
Article 24 - NON-DISCRIMINATION
Article 24 assures that citizens of a Contracting State or
entities deriving their status in a State (paragraph 1) , and
residents of a Contracting State (paragraphs 2 through 5), will not
be subject to discriminatory taxation in the other State. For this
purpose, non-discrimination means providing national treatment.
Paragraph 1 provides that a citizen of one of the States or a
legal person, partnership or association deriving its status as
such from the laws of one of the States may not be subject to
taxation or connected requirements in the other Contracting State
that are other or more burdensome than the taxes and connected
requirements imposed upon a citizen or entity of that other
Contracting State in the same circumstances. These persons are
afforded protection under this paragraph even if they are not
residents of either State. Thus, a U.S. citizen who is resident in
a third country is entitled, under this paragraph, to the same
treatment by Sweden as a Swedish citizen who is in similar
circumstances (i.e ., who is resident in a third country).
Paragraph 1 clarifies that this paragraph does not obligate
the United States to apply the same taxing regime to a Swedish
citizen who is not resident in the United States and a U.S. citizen
who is not resident in the United States. Paragraph 1 applies only
when the citizens of the two States are in the same circumstances.
United States citizens who are not residents of the United States
but who are, nevertheless, subject to United States tax on their
worldwide income, are not in the same circumstances with respect to
United States taxation as citizens of Sweden who are not United
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States residents. Therefore, Article 24 would not entitle a
Swedish citizen not resident in the United States to the net basis
taxation of U.S. source dividends or other investment income that
applies to a U.S. citizen not resident in the United States.
Paragraph 2 provides that a permanent establishment in one of
the States of an enterprise of the other Contracting State may not
be less favorably taxed in the first-mentioned State than an
enterprise of that first-mentioned State that is carrying on the
same activities in the first-mentioned State. This provision,
however, does not obligate a Contracting State to grant to a
resident of the other any personal allowances, reliefs, and other
reductions for taxation purposes, that it grants to its own
residents on account of their civil status or family
responsibilities. Thus, if an individual resident in Sweden owns
a Swedish enterprise that has a permanent establishment in the
United States, in assessing income tax on the profits attributable
to the permanent establishment, the United States is not obligated
to allow to the Swedish resident the personal allowances for
himself and his family that would be permitted if the permanent
establishment were a sole proprietorship owned and operated by a
U.S. resident.
Section 1446 of the Code imposes on any partnership with
income that is effectively connected with a U.S. trade or business
the obligation to withhold tax on amounts allocable to a foreign
partner. In the context of the Convention, this obligation applies
with respect to a Swedish resident partner's share of the
partnership income attributable to a U.S. permanent establishment.
There is no similar obligation with respect to the distributive
shares of U.S. resident partners. It is understood, however, that
this distinction is not a form of discrimination within the meaning
of paragraph 2. No distinction is made between U.S. and Swedish
partnerships, since the law requires that partnerships of both
domiciles withhold tax in respect of the partnership shares of
non-U.S. partners. In distinguishing between U.S. and Swedish
partners, the requirement to withhold on the Swedish but not the
U.S. partner's share is not discriminatory taxation, but, like
other withholding on nonresident aliens, is merely a reasonable
method for the collection of tax from persons who are not
continually present in the United States, and as to whom it
otherwise may be difficult for the United States to enforce its tax
jurisdiction. If tax has been overwithheld, the partner can, as in
other cases of overwithholding, file for a refund. (The
relationship between paragraph 2 and the imposition of the branch
tax is dealt with below in the discussion of paragraph 5.)
Paragraph 3 prohibits discrimination in the allowance of
deductions. When an enterprise of one of the States pays interest,
royalties or other disbursements to a resident of the other State,
the first-mentioned State must allow a deduction for those payments
in computing the taxable profits of the enterprise under the same
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conditions as if the payment had been made to a resident of the
first-mentioned State. An exception to this rule is provided for
cases where the provisions of paragraph 1 of Article 9 (Associated
enterprises), paragraph 5 of Article 11 (Interest) or paragraph 4
of Article 12 (Royalties) apply, because these provisions permit
the denial of deductions in certain circumstances in respect of
transactions between related persons. The term "other
disbursements" is understood to include a reasonable allocation of
executive and general administrative expenses, research and
development expenses and other expenses incurred for the benefit of
a group of related persons which includes the person incurring the
expense.
The rules under section 163(j) of the Code relating to
earnings-stripping are not discriminatory within the meaning of
paragraph 3. First, section 163(j) applies equally to interest
paid to domestic or foreign related parties, as interest paid to
all domestic tax-exempt entities related to the payor corporation
(under a greater than 50% ownership test) is subject to the
provision. Second, as noted above, paragraph 3 does not apply to
payments falling under Article 9(1) or 11(5), relating to
transactions not conducted in accordance with the arm's length
standard. Paragraph 3 reflects the negotiators' understanding that
Article 9 applies to issues relating to thin capitalization, and
that adjustments to the amount of a deduction for interest must be
consistent with the arm's length principles of paragraph 1 of
Article 9 as those principles are examined and explained in OECD
publications regarding thin capitalization. The approach taken by
section 163(j) is consistent with this description.
Paragraph 4 requires that a Contracting State not impose other
or more burdensome taxation or connected requirements on an
enterprise of that State which is wholly or partly owned or
controlled, directly or indirectly, by residents of the other
State, than the taxation or connected requirements which it imposes
on other similar enterprises of that first-mentioned State.
The Tax Reform Act of 1986 ("TRA") introduced section
367(e)(2) of the Code which changed the rules for taxing
corporations on certain distributions they make in liquidation.
Prior to the TRA, corporations were not taxed on distributions of
appreciated property in complete liquidation, although non-
liquidating distributions of the same property, with several
exceptions, resulted in corporate-level tax. in part to eliminate
this disparity, the law now generally taxes corporations on the
liquidating distribution of appreciated property. The Code
provides an exception in the case of distributions by 80 percent or
more controlled subsidiaries to their parent corporations, on the
theory that the built-in gain in the asset will be recognized when
the parent sells or distributes the asset. This exception does not
apply to distributions to parent corporations that are tax-exempt
organizations or, except to the extent provided in regulations,
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foreign corporations. The policy of the legislation is to collect
one corporate-level tax on the liquidating distribution of
appreciated property; if and only if that tax can be collected on
a subsequent sale or distribution does the legislation defer the
tax. It is understood that the inapplicability of the exception to
the tax on distributions to foreign parent corporations does not
conflict with paragraph 4 of the Article. While a liquidating
distribution to a U.S. parent will not be taxed, and, except to the
extent provided in regulations, a liquidating distribution to a
foreign parent will, paragraph 4 of the Article merely prohibits
discrimination among corporate taxpayers on the basis of U.S. or
foreign stock ownership. Eligibility for the exception to the tax
on liquidating distributions for distributions to non-exempt, U.S.
corporate parents is not based upon the nationality of the owners
of the distributing corporation, but is based upon whether such
owners would be subject to corporate tax if they subsequently sold
or distributed the same property. Thus, the exception does not
apply to distributions to persons which would not be so subject --
not only foreign corporations, but also tax-exempt organizations.
For the reasons given above in connection with the discussion
of paragraph 2 of the Article, it is also understood that the
provision in section 1446 of the Code for withholding of tax on
non-U.S. partners does not violate paragraph 4 of the Article.
It is further understood that the ineligibility of a U.S.
corporation with nonresident alien shareholders to make an election
to be an "S" corporation does not violate paragraph 4 of the
Article. If a corporation elects to be an S corporation (requiring
35 or fewer shareholders), it is generally not subject to income
tax and the shareholders take into account their pro-rata shares of
the corporation's items of income, loss, deduction or credit. (The
purpose of the provision is to allow an individual or small group
of individuals to conduct business in corporate form while paying
taxes at individual rates as if the business were conducted
directly.) A nonresident alien does not pay U.S. tax on a net
basis, and, thus, does not generally take into account items of
loss, deduction or credit. Thus, the S corporation provisions do
not exclude corporations with nonresident alien shareholders
because such shareholders are foreign, but only because they are
not net basis taxpayers. The provisions also exclude corporations
with other types of shareholders where the purpose of the
provisions cannot be fulfilled or their mechanics implemented. For
example, corporations with corporate shareholders are excluded
because the purpose of the provisions to permit individuals to
conduct a business in corporate form at individual tax rates would
not be furthered by their inclusion.
Paragraph 5 of the Article specifies that no provision of the
Article will prevent either Contracting State from imposing the
branch tax described in paragraph 8 of Article 10 (Dividends).
Thus, even if the branch tax were judged to violate the provisions
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of paragraphs 2 or 4 of the Article, neither Contracting State
would be constrained from imposing the tax.
As noted above, notwithstanding the specification of taxes
covered by the Convention in Article 2 (Taxes covered), for
purposes of providing nondiscrimination protection this Article
applies to taxes of every kind and description imposed by one of
the States or a political subdivision or local authority thereof.
Customs duties are not considered to be taxes for this purpose.
The saving clause of paragraph 4 of Article 1 (Personal scope)
does not apply to this Article, by virtue of the exceptions in
subparagraph 5(a). Thus, a U.S. citizen who is resident in Sweden
may claim benefits in the United States under this Article.
Article 25 - MUTUAL AGREEMENT PROCEDURE
Article 25 provides for cooperation between the competent
authorities of the States to resolve disputes that may arise under
the Convention and to resolve cases of double taxation not provided
for in the Convention. The competent authorities of the two States
are identified in subparagraph 1(e) of Article 3 (General
definitions).
Paragraph 1 provides that when a resident of one of the States
considers that the actions of one or both States will result for
him in taxation that is not in accordance with the Convention, he
may present his case to the competent authority of the State of
which he is a resident or citizen. It is not necessary for a
person first to have exhausted the remedies provided under the
national laws of the States before presenting a case to the
competent authorities.
Paragraph 2 provides that if the competent authority of the
State to which the case is presented judges the case to have merit,
and cannot reach a unilateral solution, it shall seek agreement
with the competent authority of the other State such that taxation
not in accordance with the Convention will be avoided. If
agreement is reached under this provision, it is to be implemented
even if implementation is otherwise barred by the statute of
limitations or by some other procedural limitation, such as a
closing agreement. Since subparagraph 2(a) of Article 1 (Personal
scope) provides that the Convention cannot operate to increase a
taxpayer's liability, time or other procedural limitations can be
overridden under this paragraph only for the purpose of making
refunds and not to impose additional tax.
Paragraph 3 authorizes the competent authorities to seek to
resolve difficulties or doubts that may arise as to the application
or interpretation of the Convention. The paragraph includes a
non-exhaustive list of examples of the kinds of matters about which
the competent authorities may reach agreement. They may agree to

the same attribution of income, deductions, credits or allowances
between an enterprise in one State and its permanent establishment
in the other State (subparagraph (a)) or between persons
(subparagraph (b)). These allocations are to be made in accordance
with the arm's-length principles of Article 7 (Business profits)
and Article 9 (Associated enterprises).
The competent authorities also may agree to resolve
bilaterally a variety of other possible conflicting applications of
the Convention. They may agree to a common characterization of an
item of income (subparagraph (c)), to a common application of
source rules with respect to a particular item of income
(subparagraph (d)) , and to a common meaning of a term (subparagraph
(e)).
Paragraph 3 also authorizes the competent authorities to
consult for the purpose of eliminating double taxation in cases not
provided for in the Convention. An example of such a case might be
double taxation arising from a transfer pricing adjustment between
two permanent establishments of a third-country resident, one in
the United States and one in Sweden. Since no resident of one of
the States is involved in the case, the Convention does not, by its
terms, apply, but the competent authorities may use the authority
of the Convention to seek to prevent any double taxation.
Paragraph 4 provides that the competent authorities may communicate
with each other directly to reach agreements in the sense of this
Article.
By virtue of the exceptions in paragraph 5(a) of Article l
(Personal scope), this Article is not subject to the saving clause
of paragraph 4 of that Article. Thus, rules, definitions,
procedures, etc., that are agreed upon by the competent authorities
under this Article, may be applied by the States with respect to
their citizens and residents even if they differ from the
comparable internal law provisions. Similarly, as indicated above,
internal law may be overridden by a State to provide refunds of tax
to its citizens or residents under this Article.
Article 26 - EXCHANGE OP INFORMATION
Article 26 provides for the exchange of information between
the competent authorities of the Contracting States. The
information to be exchanged is that necessary for carrying out the
provisions of the Convention or the domestic laws of the United
States or Sweden concerning the taxes covered by the Convention.
This article covers all taxes imposed by the two Contracting
States. Exchange of information with respect to domestic law is
authorized insofar as the taxation under those domestic laws is not
contrary to the Convention. Thus, for example, information may be
exchanged with respect to a covered tax, even if the transaction to
which the information relates is a purely domestic transaction in
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the requesting State and, therefore, the exchange is not made for
the purpose of carrying out the Convention.
Paragraph 1 states that information exchange is not restricted
by Article 1 (Personal scope). This means that information may be
requested and provided under this Article with respect to persons
who are not residents of either Contracting State. For example, if
a third-country resident has a permanent establishment in Sweden
which engages in transactions with a U.S. enterprise, the United
States could request information with respect to that permanent
establishment, even though it is not a resident of either
Contracting State. Similarly, if a third-country resident
maintains a bank account in Sweden, and the Internal Revenue
Service has reason to believe that funds in that account should
have been reported for U.S. tax purposes but have not been so
reported, information can be requested from Sweden with respect to
that person's account.
Paragraph 1 also provides assurances that any information
exchanged will be treated as secret, subject to the same disclosure
constraints as information obtained under the laws of the
requesting State. Information received may be disclosed only to
persons, including courts and administrative bodies, concerned with
the assessment, collection, enforcement or prosecution in respect
of the taxes to which the information relates, or to persons
concerned with the administration of these taxes. The information
must be used by these persons in connection with these designated
functions. Persons concerned with the administration of taxes, in
the United States, include legislative bodies, such as the
tax-writing committees of Congress and the General Accounting
Office. Information received by these bodies is for use in the
performance of their role in overseeing the administration of U.S.
tax laws. Information received may be disclosed in public court
proceedings or in judicial decisions.
It is contemplated that the Contracting States will utilize
Article 26 to exchange information on a routine basis, on request
in relation to a specific case, or spontaneously.
Paragraph 2 explains that the obligations undertaken in
paragraph 1 to exchange information do not require a Contracting
State to carry out administrative measures which are at variance
with the laws or administrative practice of either State. Nor does
that paragraph require a Contracting State to supply information
not obtainable under the laws or administrative practice of either
State, or to disclose trade secrets or other information, the
disclosure of which would be contrary to public policy (ordre
public). However, either Contracting State may, subject to the
limitations of this paragraph and its internal law, provide
information which it is not obligated to provide under this
Article.
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Paragraph 3 provides that when information is requested by a
Contracting State in accordance with this Article, the other
Contracting State is obligated to obtain the requested information
as if the tax in question were the tax of the requested State, even
if that State has no direct tax interest in the case to which the
request relates. The paragraph further provides that the
requesting State may specify the form in which information is to be
provided (e.q., depositions of witnesses and authenticated copies
of original documents) so that the information can be usable in the
judicial proceedings of the requesting State. The requested State
should, if possible, provide the information in the form requested
to the same extent that it can obtain information in that form
under its own laws and administrative practices with respect to its
own taxes.
Paragraph 4 clarifies that the competent authorities may
settle the mode of application of this Article. Types of
information exchange that may be used include spontaneous and
industry-wide exchanges of information, information exchanges on
request, and simultaneous tax examinations.
Paragraph 5 provides that the competent authorities may
exchange information concerning every tax imposed by a Contracting
State, not just the taxes listed in Article 2 (Taxes covered).
Article 27 - ADMINISTRATIVE ASSISTANCE
Article 27 deals with administrative assistance between
Contracting States in the collection of taxes.
Paragraphs 1, 2, and 3 are similar to Article XVII of the
prior Convention. Under these paragraphs, the States agree to lend
assistance in collection of the taxes that are the subject of the
Convention, along with interest, costs, and additions to the taxes.
The taxes to be collected must be finally determined in the
requesting State, as established by documents accompanying the
request. A revenue claim is finally determined when the applicant
State has the right under its internal law to collect the revenue
claim, and all administrative and judicial rights of the taxpayer
to restrain collection in the applicant State have lapsed or been
exhausted. The requested State will use the procedures that it
uses in the collection of its own taxes.
Paragraph 4 provides that assistance will not be granted with
respect to citizens, corporations or other entities of the
requested State, except to the extent necessary to insure that the
benefits of the Convention are enjoyed only by persons entitled to
those benefits under the terms of the Convention. Under this
paragraph, assistance will be provided in those cases where an
exemption or reduced rate of tax at source granted under the
Convention by that other State has been enjoyed by persons not
entitled to those benefits.
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Paragraph 5 makes clear that the Contracting State asked to
collect the tax is not obligated, in the process, to carry out
administrative measures that are different from those used in the
collection of its own taxes, or that would be contrary to its
sovereignty, security or public policy.
Article 28 - DIPLOMATIC AGENTS AND CONSULAR OFFICERS
Article 28 confirms that any fiscal privileges to which
diplomatic agents or consular officials are entitled under general
provisions of international law or under special agreements will
apply notwithstanding any provisions to the contrary in the
Convention. This provision also applies to residents of both
Contracting States, provided that they are not citizens of the
other State and, if the United States is the other State, are not
green card holders (see paragraph 5(b) of Article 1 (Personal
scope)).
Article 29 - ENTRY INTO FORCE
The Convention is subject to ratification. Instruments of
ratification will be exchanged at Washington, D.C.
The Convention enters into force on the date on which the
instruments of ratification are exchanged. Its provisions with
respect to United States withholding taxes will have effect for
amounts paid or credited on or after January 1 following the date
on which the Convention enters into force. With respect to other
United States taxes, the provisions will have effect for taxable
years beginning on or after that same date. The Convention's
provisions with respect to Swedish taxes on income will have effect
for income derived on or after January 1 of the year following the
year that the Convention enters into force. With respect to
Swedish capital taxes, the provisions will have effect for taxes
assessed in or after the second calendar year following the year
the Convention enters into force. Thus, for example, if
instruments of ratification are exchanged in July 1995, the
provisions of the Convention will take effect as of January 1, 1996
for United States withholding taxes, for taxable years beginning on
or after January 1, 1996 for other United States taxes, January 1,
1996 for Swedish taxes on income, and for taxable years taxes
assessed in or after January 1, 1997 for Swedish capital taxes.
The coming into effect of the Convention will terminate the
Convention of March 23, 1939, and the Supplementary Convention of
October 22, 1963. The provisions of the Prior Convention will
cease to have effect when the comparable provisions of the
Convention become effective. The 1939 Convention will be applied
to Swedish capital taxes until the first year after the year in
which the Convention enters into force.
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Article 30 - TERMINATION
The Convention shall remain in force indefinitely unless
terminated by one of the Contracting States. Either State may
terminate the Convention after five years from the date on which it
enters into force by giving at least six months prior notice
through diplomatic channels. In that event, the Convention will
cease to have effect with respect to United States taxes withheld
at the source for amounts paid or credited on or after January 1
following the expiration of the six-month period, with respect to
other United States taxes for taxable periods beginning on or after
January 1 following the expiration of the six-month period, with
respect to Swedish taxes on income for income derived on or after
January 1 following the expiration of the six-month period, and
with respect to Swedish capital taxes for taxes assessed in or
after the second calendar year following the expiration of the six-
month period.
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