Eligibility for Treaty Benefits under the Sweden-U.S. Income Tax Treaty

Eligibility for Treaty Benefits Under

The Sweden-U.S. Income Tax Treaty

by Jason Connery, Douglas Poms, and

Jennifer Blasdel-Marinescu

Reprinted from Tax Notes Int’l, July 23, 2012, p. 359

Volume 67, Number 4 July 23, 2012

Eligibility for Treaty Benefits Under the Sweden-U.S.

Income Tax Treaty

by Jason Connery, Douglas Poms, and Jennifer Blasdel-Marinescu

o be entitled to benefits under income tax treaties,

companies must satisfy eligibility requirements.

This article includes flowcharts to help practitioners

navigate the eligibility requirements of the Sweden-U.S.

income tax treaty applicable to Swedish companies.

Income tax treaties may exempt business income

from source country income taxes and eliminate or

reduce domestic withholding taxes on payments be-

tween residents of countries that are parties to an in-

come tax treaty. To be entitled to benefits under U.S.

income tax treaties, a company must not only be a resi-

dent of the tax treaty partner’s country, but also satisfy

at least one of the tests in the treaty’s limitation on

benefits provision, if applicable.

The flowcharts in this article focus on the eligibility

of Swedish companies claiming benefits on income

that would otherwise be subject to U.S. taxation. This

article does not address the eligibility for treaty benefits

of entities that are partnerships or are otherwise trans-

parent for U.S. or Swedish tax purposes. This article

does not discuss the triangular rules in paragraph 5 of

the LOB provision of the treaty. This article is based

on the treaty, the protocol to the treaty signed on Sep-

tember 30, 2005, the exchange of notes to the protocol,

and the U.S. Treasury technical explanation.

This article is the 11th in a series

that provides

flowcharts to assist practitioners in determining a com-

pany’s eligibility for tax treaty benefits under the LOB

Convention Between the Government of Sweden and the

Government of the United States of America for the Avoidance

of Double Taxation and the Prevention of Fiscal Evasion With

Respect to Taxes on Income, signed on September 1, 1994, as

amended by a protocol signed on September 30, 2005.

See Jason Connery, Douglas Poms, and Jennifer Blasdel-

Marinescu, ‘‘Eligibility for Treaty Benefits Under the Australia-

U.S. Income Tax Treaty,’’ Tax Notes Int’l, Dec. 12, 2011, p. 843,

Doc 2011-24020,or2011 WTD 238-14; Connery, Poms, and Jenni-

fer Blasdel, ‘‘Eligibility for Treaty Benefits Under the

Switzerland-U.S. Income Tax Treaty,’’ Tax Notes Int’l,May9,

2011, p. 505, Doc 2011-6410,or2011 WTD 89-21; Connery, Poms,

and Blasdel, ‘‘Eligibility for Treaty Benefits Under the Japan-U.S.

Income Tax Treaty,’’ Tax Notes Int’l, Sept. 6, 2010, p. 789, Doc

2010-18355,or2010 WTD 172-12; Connery, Poms, and Blasdel,

‘‘Eligibility for Treaty Benefits Under the 2009 Protocol to the

France-U.S. Income Tax Treaty,’’ Tax Notes Int’l, Apr. 12, 2010,

p. 149, Doc 2010-5809,or2010 WTD 69-14; John Venuti, Connery,

Poms, and Blasdel, ‘‘Eligibility for Treaty Benefits Under the

Netherlands-U.S. Income Tax Treaty,’’ Tax Notes Int’l,Nov.23,

2009, p. 601, Doc 2009-24084,or2009 WTD 223-11; Venuti, Con-

nery, Poms, and Alexey Manasuev, ‘‘Eligibility for Treaty Ben-

efits Under the Canada-U.S. Income Tax Treaty,’’ Tax Notes Int’l,

June 15, 2009, p. 967, Doc 2009-11815,or2009 WTD 113-15;Ron

Dabrowski, Venuti, Poms, and Manasuev, ‘‘Eligibility for Treaty

Benefits Under U.K.-U.S. Income Tax Treaty,’’ Tax Notes Int’l,

Mar. 23, 2009, p. 1095, Doc 2009-4590,or2009 WTD 56-9; Venuti,

Connery, Poms, and Manasuev, ‘‘Eligibility for Treaty Benefits

Under the Luxembourg-U.S. Income Tax Treaty,’’ Tax Notes Int’l,

Jason Connery and Douglas Poms are principals and Jennifer Blasdel-Marinescu is a manager in the

International Corporate Services group of KPMG LLP’s Washington National Tax practice.

The information contained herein is of a general nature and based on authorities that are subject to

change. Applicability of the information to specific situations should be determined through consultation

with your tax adviser. This article represents the views of the authors only and does not necessarily rep-

resent the views or professional advice of KPMG LLP.

(Footnote continued on next page.)

TAX NOTES INTERNATIONAL JULY 23, 2012 • 359

provisions of specific U.S. income tax treaties and,

when applicable, in determining eligibility for a 0 per-

cent withholding tax rate on cross-border intercompany

dividend payments to the company.

This article contains eight flowcharts. The first seven

analyze the LOB provision of the treaty as applied to

Swedish companies. The eighth flowchart analyzes the

requirements that a Swedish company must satisfy to

qualify for a 0 percent withholding tax rate on cross-

border intercompany dividend payments to that com-

pany under article 10(3) of the treaty. Although the

flowcharts provide a comprehensive review of appli-

cable provisions under the treaty, taxpayers and their

tax advisers should carefully evaluate each case and

determine whether the requirements of the treaty are

met based on all facts and circumstances. ◆

July 21, 2008, p. 285, Doc 2008-14359,or2008 WTD 142-8; Venuti,

Dabrowski, Poms, and Manasuev, ‘‘Eligibility for Treaty Benefits

Under the France-U.S. Income Tax Treaty,’’ Tax Notes Int’l, Feb.

11, 2008, p. 523, Doc 2008-773,or2008 WTD 33-10; and Venuti

and Manasuev, ‘‘Eligibility for Zero Withholding on Dividends

in the New Germany-U.S. Protocol,’’ Tax Notes Int’l, Jan. 14,

2008, p. 181, Doc 2007-27516,or2008 WTD 12-10.

SPECIAL REPORTS

360 • JULY 23, 2012 TAX NOTES INTERNATIONAL

Chart 1. Eligibility for Treaty Benefits Under Article 17 (LOB)

of the Sweden-U.S. Tax Treaty

Does the Swedish company

satisfy the publicly traded

company test?

(See Chart 2.)

Yes

Does the Swedish

company satisfy the

subsidiary of a publicly

traded company

test

Does the Swedish

company satisfy the

ownership/base

erosion test?

(See Chart 4.)

Yes

Does the Swedish company

satisfy the active trade or

business test ?

Does the Swedish company

satisfy the derivative

benefits test?

Yes

Has a discretionary

determination been

granted by the U.S.

competent authority?

(See Chart 7.)

Yes

Not eligible for treaty

benefits.

Is the company a

resident of Sweden?

Eligible for

treaty benefits.

Not eligible

for treaty

benefits.

Eligible for

treaty

benefits.

Exempt Pension Trusts and Not-for-Profit Organizations

(See Chart

3.)

(See Chart 5.)

“Resident” generally means any person (e.g., a company)

who, under the laws of the respective contracting state (here,

Sweden), is liable to tax therein by reason of that person’s

domicile, residence, place of management, place of

incorporation, or any other criterion of a similar nature, and also

includes that state and any political subdivision or local authority

thereof. Article 4(1)(a) of the treaty.

See Chart 6.)

A Swedish resident that is exempt from Swedish tax and is taxable as a

corporation for U.S. tax purposes is entitled to the benefits of the treaty

if it is established and maintained in Sweden either:

a. exclusively for religious, charitable, scientific, artistic, cultural,

or educational purposes; or

b. to provide pensions or other similar retirement benefits under a

plan if: (i) more than 50 percent of the person’s beneficiaries,

members, or participants are individuals resident in either the

U.S. or Sweden; or (ii) the organization sponsoring such person

satisfies at least one of the tests in the LOB article in the treaty.

Article 17(2)(d) of the treaty.

SPECIAL REPORTS

TAX NOTES INTERNATIONAL JULY 23, 2012 • 361

Does the Swedish

company satisfy the

publicly traded

company test?

“Shares” includes depository

receipts thereof. Article 17(7)(c)

of the treaty.

“Principal class of shares” means the

ordinary or common shares of the company,

provided that such class of shares

represents the majority of the voting power

and value of the company. If no single class

of ordinary or common shares represents

the majority of the aggregate voting power

and value of the company, the principal

class of shares are those classes that in

the aggregate represent a majority of the

aggregate voting power and value of the

company. Article 17(7)(a) of the treaty.

“Recognized stock exchange” means:

(i)the NASDAQ system owned by the National

Association of Securities Dealers, Inc. and any

stock exchange registered with the U.S.

Securities and Exchange Commission as a

national securities exchange under the U.S.

Securities Exchange Act of 1934;

(ii)the Stockholm Stock Exchange

(Stockholmsbörsen), the Nordic Growth Market,

and any other stock exchange subject to

regulation by the Swedish Financial Supervisory

Authority;

(iii) the Irish Stock Exchange and the stock

exchanges of Amsterdam, Brussels,

Copenhagen, Frankfurt, Hamburg, Helsinki,

London, Madrid, Milan, Oslo, Paris, Reykjavik,

Riga, Tallinn, Toronto, Vienna, Vilnius, and

Zurich; and

(iv) any other stock exchange agreed upon by the

competent authorities of the United States and

Sweden. Article 17(7)(d) of the treaty.

A company’s primary place of management and

control will be in the contracting state of which it is a

resident only if executive officers and senior

management employees exercise day-to-day

responsibility for more of the strategic, financial, and

operational policy decision-making for the company

(including its direct and indirect subsidiaries) in that state

than in any other state, and the staffs conduct more of

the day-to-day activities necessary for preparing and

making those decisions in that state than in any other

state. Article 17(7)(f) of the treaty.

The primary place of management and control test

should be distinguished from the “place of effective

management” test that is used in the OECD model

treaty and by many other countries to establish

residence. In some cases, the place of effective

management test has been interpreted to mean the

place where the board of directors meets. By contrast,

the primary place of management and control test

looks to where day-to-day responsibility for the

management of the company (and its subsidiaries) is

exercised. U.S. Treasury technical explanation to the

2005 protocol to the treaty.

Eligible for treaty

benefits.

Yes

Not eligible for

treaty benefits.

(Go to Chart 3.)

Is the Swedish company’s

primary place of management

and control in Sweden? Article

17(2)(c)(i)(B) of the treaty.

Is the Swedish company’s

principal class of shares (and

any disproportionate class of

shares) regularly traded on one

or more recognized stock

exchanges? Article 17(2)(c)(i) of

the treaty.

Is the Swedish company’s

principal class of shares

primarily traded on a

recognized stock exchange

located within the European

Union or in any other European

Economic Area state or in

Switzerland? Article

17(2)(c)(i)(A) of the treaty.

Yes

Chart 2. Publicly Traded Company Test Under Article 17(2)(c)(i) (LOB)

of the Sweden-U.S. Tax Treaty

“Disproportionate class of shares”

disproportionate class of shares

means any

class of shares of a company resident in a

contracting state that entitles the shareholder to

disproportionately higher participation, through

dividends, redemption payments, or otherwise, in

the earnings generated in the other contracting

state by particular assets or activities of the

company when compared to its participation in

overall assets or activities of such company.

Thus, for example,

a company resident in Sweden meets the

test if it has

outstanding a class of “tracking stock” that pays

dividends based upon a formula that approximates

the company's return on its assets employed in the

United States.

Article 17(7)(b) of the treaty.

U.S. Treasury technical

explanation to the 2005 protocol to the treaty.

A is considered to be

on one or more

in a taxable year if the aggregate number

of shares of that class traded on such stock exchange

or exchanges during the preceding taxable year is at

least 6 percent of the average number of shares

outstanding in that class during that preceding taxable

year. For this purpose,

if a class of shares was not listed on a

during this 12-month period, the

class of will be treated as

only if the class meets the aggregate trading

requirements for the taxable period in which the

income arises.

Trading on one or

more may be

aggregated for purposes of meeting the

standard.

For

example, a Swedish resident company could satisfy

the definition of through trading, in

whole or in part, on a

located in the United States or certain third countries.

Authorized but unissued shares are not considered

for purposes of the test.

class of shares regularly

traded recognized stock

exchanges

recognized

stock exchange

shares regularly traded

recognized stock exchanges

regularly

traded

regularly traded

recognized stock exchange

regularly traded

Article 17(7)(e) of the treaty.

U.S. Treasury technical explanation

to the 2005 protocol to the treaty.

U.S. Treasury technical

explanation to the 2005 protocol to the treaty.

U.S.

Treasury technical explanation to the 2005

protocol to the treaty.

SPECIAL REPORTS

362 • JULY 23, 2012 TAX NOTES INTERNATIONAL

Do five or fewer U.S. or Swedish resident

(see Chart 1 for definition) companies,

each satisfying the publicly traded

company test (see Chart 2), own directly

or indirectly shares (see Chart 2 for

definition) representing at least 50 percent

of the aggregate voting power and value

(and at least 50 percent of any

disproportionate class of shares (see

Chart 2 for definition)) of the Swedish

company?

In the case of indirect ownership, each

intermediate owner in the chain of

ownership must be a resident of either the

United States or Sweden. Article

17(2)(c)(ii) of the treaty.

Does the Swedish company

satisfy the subsidiary of a

publicly traded company

test?

Yes

Not eligible for treaty

benefits. (Go to Chart 4.)

Chart 3. Subsidiary of a Publicly Traded Company Test Under

Article 17(2)(c)(ii) (LOB) of the Sweden-U.S. Tax Treaty

Eligible for treaty benefits.

SPECIAL REPORTS

TAX NOTES INTERNATIONAL JULY 23, 2012 • 363

Yes

Does the Swedish company

satisfy the ownership/base

erosion test?

Not eligible for

treaty benefits. (Go

to Chart 5.)

For purposes of the base erosion test:

A. Depreciation and amortization

deductions, which do not represent

payments or accruals to other

persons, are disregarded.

B. In the case of Sweden, deductible

payments do not include the amount

of so-called group contributions, if

any, paid to a Swedish resident or

permanent establishment. Exchange

of notes with respect to the 2005

protocol to the treaty. Thus, the

amount of a Swedish resident

company’s deductible payments and

gross income for the taxable year is

reduced by the amount of group

contributions paid to a Swedish

resident or Swedish PE. Exchange

of notes with respect to the 2005

protocol to the treaty. Sweden

taxes companies on an entity rather

than consolidated group basis and

therefore, tax consolidation is not

allowed. Qualifying companies may

exchange group contributions, which

are deductible by the payer and

taxable to the payee. Through these

contributions, tax consolidation can

be effectively achieved. U.S.

Treasury technical explanation to

the 2005 protocol to the treaty.

Eligible for treaty benefits.

Yes

Base Erosion Test

Is less than 50 percent of the Swedish company’s

gross income for the taxable year, as determined in

Sweden, paid or accrued, directly or indirectly, to

persons not described in A, B, C, and/or D above,

under the ownership test, whether resident (see

Chart 1 for definition) in Sweden or the United States

(collectively, “Eligible Qualified Persons,” each an

“Eligible Qualified Person”) in the form of payments

that are deductible for Swedish tax purposes (but not

including arm’s-length payments in the ordinary course

of business for services or tangible property and

payments in respect of financial obligations to a bank

that is not related to the payer)? Article 17(2)(e)(ii) of

the treaty.

Ownership Test

Do one or more of the following types of persons own,

directly or indirectly, at least 50 percent of each class

of shares (see Chart 2 for definition) or other

beneficial interests in the Swedish company on at least

half the days of the taxable year? Article 17(2)(e)(i) of

the treaty.

A. Individuals resident in Sweden (see article

17(2)(a) of the treaty).

B. Sweden or any political subdivision or local

authority of Sweden (see article 17(2)(b) of the

treaty).

C. Companies resident in Sweden that satisfy the

publicly traded company test (see Chart 2) (see

article 17(2)(c)(i) of the treaty).

D. Certain tax-exempt not-for-profit organizations or

pension trusts resident in Sweden (see Chart 1).

See article 17(2)(d) of the treaty.

Yes

Note: In the case of a Swedish company,

the ownership test requires that its

eligible shareholders also be resident in

Sweden. Thus, a Swedish company wholly

owned by, for example, an individual

resident (see Chart 1 for definition) in the

United States would not satisfy the

ownership test.

Chart 4. Ownership/Base Erosion Test Under Article 17(2)(e) (LOB)

of the Sweden-U.S. Tax Treaty

SPECIAL REPORTS

364 • JULY 23, 2012 TAX NOTES INTERNATIONAL

Ownership Test

Are shares (see Chart 2 for definition)

representing at least 95 percent of the aggregate

voting power and value (and at least 50 percent

of any disproportionate class of shares (see

Chart 2 for definition)) of the Swedish company

owned, directly or indirectly, by seven or fewer

persons that are equivalent beneficiaries?

Article 17(3)(a) of the treaty.

Base Erosion Test

Is less than 50 percent of the Swedish company’s

gross income, as determined in Sweden, for the

taxable year paid or accrued, directly or indirectly,

to persons who are not equivalent beneficiaries,

in the form of payments that are deductible for

Swedish tax purposes (but not including arm’s-

length payments in the ordinary course of

business for services or tangible property and

payments in respect of financial obligations to a

bank that is not related to the payer)? Article

17(3)(b) of the treaty.

Yes

Eligible for treaty benefits.

Yes

“Equivalent beneficiary” means:

A resident of a member state of the EU or of

any other EEA state or of a party to the North

American Free Trade Agreement, or of

Switzerland, but only if that resident:

(i)(A) would be entitled to all the benefits of a

comprehensive income tax treaty between any

member state of the EU or any other EEA

state or any party to NAFTA, or Switzerland,

and the United States under provisions

analogous to the rules for Eligible Qualified

Persons ( )

Eligible Qualified Persons (

)

and

see Chart 4 for definition

see

Chart 4, Base Erosion Test, for definition

, provided

that if such treaty does not contain a compre-

hensive LOB provision, the resident would be

entitled to the benefits of the treaty by reason

of the rules for

such person were a resident of Sweden or the

United States under article 4 (residence);

(i)(B) with respect to insurance premiums and to

income referred to in article 10 (dividends), 11

(interest), or 12 (royalties), would be entitled

under such treaty to a rate of tax with respect

to the item of income for which benefits are

being claimed under this treaty that is at least

as low as the rate applicable under this treaty;

(ii) is an Eligible Qualified Person (see Chart

4, Base Erosion Test, for definition). Article

17(7)(g) of the treaty.

Does the Swedish company satisfy

the derivative benefits test?

Not eligible for

treaty benefits.

(Go to Chart 6.)

Note: The derivative benefits test

potentially applies to all treaty benefits,

although the test is applied to individual

itemsofincome.U.S. Treasury technical

explanation to the 2005 protocol to the

treaty.

Chart 5. Derivative Benefits Test Under Article 17(3) (LOB)

of the Sweden-U.S. Tax Treaty

Note: subsidiary of a publicly company test

( ) ownership/base erosion test ( ) equivalent

beneficiary

Under article 17(7)(g), a company that satisfies the

and/or the is an

see Chart 3 see Chart 4 not

SPECIAL REPORTS

TAX NOTES INTERNATIONAL JULY 23, 2012 • 365

Is the income under consideration

derived by the Swedish company

in connection with, or

incidental to, such trade or

business in Sweden? Article

17(4)(a) of the treaty.

Eligible for treaty

benefits.

Yes

Does the Swedish company (or

any associated enterprise) carry

on a trade or business activity in

the United States that gives rise

to the item of income under

consideration?

Yes

Is the trade or business activity of

the Swedish company in Sweden

substantial in relation to such

trade or business activity in the

United States? Article 17(4)(b) of

the treaty.

Yes

Is the Swedish company (or a

person connected to it) engaged

in the active conduct of a trade or

business in Sweden (other than

the business of making or

managing investments for its own

account, unless these activities

are banking, insurance, or

securities activities carried on by

a bank, insurance company, or

registered securities dealer)?

Article 17(4)(a) of the treaty.

Yes

An item of income is considered to be derived in

connection with a trade or business if the

income-producing activity in the state of source

(here, the United States) is a line of business

that “forms a part of” or is “complementary” to

the trade or business conducted in Sweden by

the income recipient. U.S. Treasury technical

explanation to the 2005 protocol to the treaty.

A business activity generally will be considered

to “form a part of” a business activity conducted

in the state of source (e.g., the United States) if

the two activities involve the design,

manufacture, or sale of the same products or

type of products, or the provision of similar

services. The line of business in the state of

residence may be upstream, downstream, or

parallel to the activity conducted in the state of

source. Thus, the line of business may provide

inputs for a manufacturing process that occurs in

the state of source, may sell the output of that

manufacturing process, or simply may sell the

same sorts of products that are being sold by

the trade or business carried on in the state of

source. U.S. Treasury technical explanation

to the 2005 protocol to the treaty.

For two activities to be considered to be

“complementary,” the activities need not relate

to the same types of products or services, but

they should be part of the same overall industry

and be related in the sense that the success or

failure of one activity will tend to result in the

success or failure for the other. When more than

one trade or business is conducted in the state

of source (here, the United States) and only one

of the trades or businesses forms a part of or

is complementary to a trade or business

conducted in the state of residence (here,

Sweden), it is necessary to identify the trade or

business to which an item of income is

attributable. Royalties generally will be

considered to be derived in connection with the

trade or business to which the underlying

intangible property is attributable. Dividends will

be deemed to be derived first out of earnings

and profits of the treaty-benefited trade or

business, and then out of other earnings and

profits. Interest income may be allocated under

any reasonable method consistently applied. A

method that conforms to U.S. principles for

expense allocation will be considered a

reasonable method. U.S. Treasury technical

explanation to the 2005 protocol to the treaty.

The term “trade or business” is not defined in

the treaty. The U.S. Treasury technical

explanation to the 2005 protocol to the treaty

explains that the United States will refer to the

regulations issued under section 367(a) for the

definition of the term

Therefore, a trade or business will generally be

considered to be a specific unified group of

activities that constitute or could constitute an

independent economic enterprise carried on for

profit. U.S. Treasury technical explanation to

the 2005 protocol to the treaty. Further, a

corporation generally will be considered to carry

on a trade or business only if the officers and

employees of the corporation conduct

substantial managerial and operational

activities. U.S. Treasury technical explanation

to the 2005 protocol to the treaty.

An item of income derived from the state of source

(here, the United States) is “incidental to”thetrade

or business carried on in the state of residence

(here, Sweden) if production of the item facilitates

the conduct of the trade or business in the state of

residence. An example of incidental income is the

temporary investment of working capital of a person

in the state of residence in securities issued by

persons in the state of source. U.S. Treasury

technical explanation to the 2005 protocol to the

treaty.

In determining whether a Swedish company is

engaged in the

active conduct of a trade or

business in Sweden, activities conducted by

persons connected to the Swedish company are

deemed to be conducted by the Swedish company.

A person will be connected to another if one

possesses at least 50 percent of the aggregate

voting power and at least 50 percent of the

aggregate value of the shares (see Chart 2 for

definition) in the company or of the beneficial

equity interest in the company) or another person

possesses, directly or indirectly, at least 50 percent

of the beneficial interest (or, in the case of a

company, at least 50 percent of the aggregate

voting power and at least 50 percent of the

aggregate value of the shares (see Chart 2 for

definition) in the company or of the beneficial

equity interest in the company) in each person. In

any case, a person will be considered to be

connected to another if, based on all the relevant

facts and circumstances, one has control of the

other or both are under the control of the same

person or persons. Article 17(4)(c) of the treaty.

Whether the trade or business activity of the

Swedish company is substantial in relation to

trade or business activity in the United States is

based upon all the facts and circumstances and

takes into account the comparative sizes of the

trade or businesses in each contracting state

(measured by reference to asset values, income,

and payroll expenses), the nature of the

activities performed in each contracting state,

and the relative contributions made to that trade

or business in each contracting state. In making

each determination or comparison, due regard

will be given to the relative sizes of the U.S. and

Swedish economies. U.S. Treasury technical

explanation to the 2005 protocol to the treaty.

Not eligible for treaty

benefits. (Go to Chart 7.)

The Swedish company is associated with an

enterprise of the United States if it participates

directly or indirectly in the management, control,

or capital of the U.S. enterprise or if the same

persons participate directly or indirectly in the

management, control, or capital of the Swedish

company and the U.S. enterprise. Article 9(1)

of the treaty.

Does the Swedish company

satisfy the active trade or

business test?

Chart 6. Active Trade or Business Test Under Article 17(4) (LOB)

of the Sweden-U.S. Tax Treaty

(Only applies if an item of income is derived in connection with or incidental to

an active trade or business in Sweden)

“trade or business.”

SPECIAL REPORTS

366 • JULY 23, 2012 TAX NOTES INTERNATIONAL

The U.S. competent authority’s discretion is quite broad. The U.S.

competent authority may determine to grant all benefits of the treaty, or

it may determine to grant only certain benefits. For instance, it may

determine to grant benefits only with respect to a particular item of

income in a manner similar to the active trade or business test (see

Chart 6). Further, the U.S. competent authority may set time limits on

the duration of any relief granted. U.S. Treasury technical

explanation to the 2005 protocol to the treaty.

A Swedish company is permitted to present its case to the U.S.

competent authority for an advance determination based on the facts.

In these circumstances, if the U.S. competent authority determines that

benefits are to be allowed, such benefits 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. U.S.

Treasury technical explanation to the 2005 protocol to the treaty.

YesNo

Requesting competent authority

assistance

– A taxpayer may request

the assistance of the U.S. competent

authority under Rev. Proc. 2006-54.

The U.S. competent authority may

determine in its own discretion that the

taxpayer qualifies for certain benefits

under the LOB article of the treaty.

There is a US $27,500 user fee for

requesting a discretionary

determination under the LOB

provision. If a request is submitted for

more than one entity, a separate user

fee is charged for each entity. Rev.

Proc. 2006-54, section 14.2, as

amended by IR-2012-38.

Not eligible for

treaty benefits.

Eligible for treaty benefits.

Has a discretionary determination

been granted by U.S. competent

authority?

A Swedish company that is not entitled to benefits under the LOB

article of the treaty will, nevertheless, be granted benefits of the treaty

if the U.S. competent authority determines that the establishment,

acquisition, or maintenance of such person and the conduct of its

operations did not have as one of its principal purposes the obtaining

of benefits under the treaty. The U.S. competent authority will consult

with the Swedish competent authority before denying the request for a

discretionary determination. Article 17(6) of the treaty.

The U.S. competent authority must consider the obligations of Sweden

by virtue of its membership in the EU. In particular, the U.S. competent

authority will consider the legal requirements for the facilitation of the

free flow of capital and persons within the EU, together with the

differing internal income tax systems, tax incentive regimes, and

existing tax treaty policies among member states of the EU. The U.S.

competent authority is instructed to consider as its guideline whether

the establishment, acquisition, or maintenance of a company or the

conduct of its operations has or had as one of its principal purposes

the obtaining of benefits under the treaty. The U.S. competent authority

may, therefore, determine, under a given set of facts, that a change in

circumstances that would cause a company to cease to qualify for

treaty benefits under paragraphs 2 and 3 of article 17 need not

necessarily result in a denial of benefits. Such changed circumstances

may include a change in the state of residence of a major shareholder

of a company, the sale of part of the stock of a Swedish company to a

person resident in another member state of the EU, or an expansion of

a company’s activities in other member states of the EU, all under

ordinary business conditions. The U.S. competent authority will

consider these changed circumstances (in addition to other relevant

factors normally considered under paragraph 6 of article 17) in

determining whether such a company will remain qualified for treaty

benefits with respect to income received from U.S. sources. If these

changed circumstances are not attributable to tax avoidance motives,

this also will be considered by the U.S. competent authority to be a

factor weighing in favor of granting a discretionary determination.

Exchange of notes to the 2005 protocol to the treaty.

Chart 7. Discretionary Determination by U.S. Competent Authority

Under Article 17(6) (LOB) of the Sweden-U.S. Tax Treaty

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TAX NOTES INTERNATIONAL JULY 23, 2012 • 367

Not eligible to claim 0

percent withholding tax rate

on dividends.

thus, unless the context otherwise requires or the

competent authorities agree to a common meaning

under the provisions of article 25 (mutual agreement

procedure), has the meaning that has under the

laws of that state concerning the taxes to which the

treaty applies (here, the United States). Article 3(2)

of the treaty. The beneficial owner of a dividend is

the person to which the dividend income is

attributable for tax purposes under the laws of the

source state (here, the United States). Thus, if a

dividend paid by a U.S. corporation is received by a

nominee or agent that is a resident of Sweden on

behalf of a person that is not a resident of Sweden,

the dividend is not entitled to the benefits of article

10. U.S. Treasury technical explanation to the

2005 protocol to the treaty.

“Dividends” means income from shares (see

Chart 2 for definition) or other rights, not being

debt-claims, participating in profits, as well as

income from other corporate rights that is subjected

to the same taxation treatment as income from

shares (see Chart 2 for definition) by the laws of

the state of which the company making a distribution

is a resident (see Chart 1 for definition),and

income from arrangements, including debt

obligations, carrying the right to participate in profits

to the extent so characterized under the laws of the

contracting state in which the income arises as well

as, in the case of the United States, contingent

interest of a type that would not qualify as portfolio

interest. Article 10(5) of the treaty. Dividends are

defined “broadly and flexibly” by the United States

and include:

(i) a constructive dividend that results from a

non-arm’s-length transaction between a

corporation and a related party;

(ii) a payment to a Swedish company

denominated as interest that is made by a

thinly capitalized corporation to the extent that

the debt is recharacterized as equity under the

laws of the United States;

(iii) amounts treated as a dividend upon the

sale or redemption of shares or upon a transfer

of shares in a reorganization (see, e.g., Rev.

Rul. 92-85, 1992-2 C.B. 69); and

(iv) a distribution from a U.S. publicly traded

limited partnership, which is taxed as a

corporation under U.S. tax rules. U.S.

Treasury technical explanation to the 2005

protocol to the treaty.

However, a distribution by a U.S. limited liability

company is not characterized by the United States

as a dividend, provided the U.S. limited liability

company is not taxed as a corporation for U.S. tax

purposes. U.S. Treasury technical explanation to

the 2005 protocol to the treaty.

Eligible to claim 0 percent

withholding tax rate on

dividends.

For the purposes of determining whether

respect to the dividends under the

derivative benefits test (see Chart 6),

within the meaning of clause iii of

subparagraph a of paragraph 3 of article

10 (dividends), the determination of

whether a person owning shares, directly

or indirectly, in the company claiming the

benefits of this treaty is an equivalent

beneficiary will be made by treating such

person as holding the same voting power

in the company paying the dividends as

the company claiming the benefits holds

in such company. Article 10(3) of the

treaty.

Yes

Has the Swedish company owned,

directly or indirectly through one or

more residents of either Sweden or

the United States, shares (see

Chart 2 for definition)

representing 80 percent or more of

the voting power in the U.S.

company paying the dividends for a

12-month period ending on the date

on which entitlement to the

dividends is determined? Article

10(3)(a) of the treaty.

Is one of the following satisfied on the date of

receipt of such dividends:

1) the Swedish company satisfies either the

publicly traded company test (see Chart 2) or the

subsidiary of a publicly traded company test

(see Chart 3);

2) the Swedish company satisfies the

ownership/base erosion test (see Chart 4),

provided that the Swedish company satisfies the

active trade or business test (see Chart 6) with

respect to the dividends;

3) the Swedish company is entitled to benefits with

respect to the dividends under the derivative

benefits test (see Chart 5);or

4) the Swedish company has obtained a

discretionary determination (see Chart 7) from

the U.S. competent authority providing for a 0

percent withholding tax rate on dividends?

Article 10(3)(a) of the treaty.

Is the Swedish company

the beneficial owner of

dividends from U.S.

sources?

Yes

Chart 8. Eligibility for 0 Percent Withholding Tax Rate on Dividends

Under Article 10(3) of the Sweden-U.S. Tax Treaty

a company is entitled to benefits with

“Beneficial owner” is not defined in the treaty and,

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368 • JULY 23, 2012 TAX NOTES INTERNATIONAL