Sweden terminates Tax Treaty with Portugal

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The Swedish Parliament voted for the Tax Treaty with Portugal to be terminated. It will no longer be in force from January 2022 onwards.

The reasons behind this decision relate to the special income regime offered by Portugal to non-habitual tax residents.

The NHR regime applies to individuals who qualify as tax residents in Portugal and have not qualified as such during the past five years. It provides numerous tax advantages compared to ordinary tax residents.

In 2002, a Treaty to Avoid Double Taxation on Income and Capital entered into force between Portugal and Sweden. Years later, in 2009, the provisions of this Treaty (when combined with the NHR regime) allowed for Swedish pensions to be paid tax-free to tax residents of Portugal.

As with most Tax Treaties, the Treaty concluded between Portugal and Sweden determined that pensions earned by a resident of a contracting state can only be taxed in that state. Therefore, if a Swedish pensioner transfers his/her tax residency to Portugal, the latter country would have all taxation powers.

However, on the Portuguese side, the NHR regime established that pension income would be tax-exempt in Portugal if not deemed to be sourced in Portugal. The result was a double tax exemption in Sweden or Portugal.

In 2017, Sweden initiated discussions with Portugal to amend the Treaty. An amended protocol was signed in 2019, but Portugal did not ratify it. Still, due to increased criticism by Finland and Sweden, Portugal amended the NHR regime in 2020. A 10% tax rate for pensions replaced the exemption.

According to Sweden, the 10% rate is inadequate and not enough to avoid Swedish retirees moving to Portugal for tax reasons alone or curb taxation disparities. The NHR benefits have been a part of exit plans for many pensioners.

The termination of the Tax Treaty will have a negative impact not only on pensions but also on taxation for both corporates and individuals. Avoiding double taxation will soon depend entirely on domestic provisions of Portugal and Sweden, the Parent Subsidiary Directive, and the Interest and Royalties Directive. In any case, a greater administrative burden is expected.



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