Tax Treaty between Portugal and Sweden comes to an end

The Tax Treaty between Portugal and Sweden has been terminated. The termination is effective January 1st, 2022, as per the Treaties’ provisions. The Portuguese Foreign Affairs Ministry issued Aviso nº 2/2022 regarding this matter.

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.

The termination of the Tax Treaty harms cross-border transactions and payments. 

Until a new Treaty potential comes into force, each country is entitled to claim tax on all inbound income paid to the other country’s resident companies or individuals. 

For example, according to Portuguese rules, income derived from services rendered by a Swedish company to a Portuguese company will be liable to withholding tax at a 25% rate. On a separate note, Sweden is now entitled to tax pension income paid by Swedish entities to tax resident individuals in Portugal.

As Tax Treaty rates no longer apply, dividends, royalties, and in some cases, capital gains will suffer increased taxation at source.

Avoiding double taxation now depends entirely on domestic provisions of Portugal and Sweden, the Parent-Subsidiary Directive, and the Interest and Royalties Directive. However, Portugal does grant resident companies and individuals a tax credit mechanism to mitigate double taxation under certain conditions.

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