At the origin of this initiative is the fact that until now, Portugal has failed to ratify the protocol to the agreement signed by the two countries in May 2019.
Under the tutelage of Magdalena Andersson, the Swedish government decided to present a bill to parliament proposing the termination of the double tax treaty, informing the Portuguese executive that it could be reversed if Portugal ratifies the protocol amending the treaty before parliament votes on the diploma.
The protocol was signed in 2017 by the finance ministers of Portugal and Sweden introducing amendments to the convention to avoid double taxation between the two countries, namely with regard to the taxation of pensions of Swedes allowing migrants to benefit from full IRS exemption on retirement who have moved to Portugal and are covered by the Non-Habitual Resident (RNH) tax regime.
In practical terms and if ratified by both countries, this protocol will give back to Sweden the right to assess pensions as of January 1, 2023 - or in January 2022 in relation to pensioners residing in Portugal and with pensions paid by Sweden under the RNH regime who do not opt for the flat 10% IRS rate created in the 2020 Portuguese State Budget (OE2020).
In the absence of ratification by Portugal, the Swedish Government intends to renounce the treaty to avoid double taxation. Sweden could begin to tax the pensions of its citizens residing in Portugal as of 01 January 2022.
Without commenting on the 10% rate for pensions that are embraced by the NHR regime (which is optional since beneficiaries can choose to keep the exemption until the 10 years that the programme grants), the pension tax within the scope of the NHR does not contain any progressive element, contrary to what happens with the general regime in force in Portugal for the taxation of this type of income.
The difference between the Non-Habitual Resident programme and the general taxation in Portugal means that the NHR is a special regime, specifically targeting to attract Swedish retirees coming to Portugal to take advantage of this tax benefit. Swedish government sources stress that, under these circumstances, Sweden is not willing to give up its taxation rights guaranteed under Swedish legislation. The standard tax rate that Sweden applies on pensions is 25%. For the Swedish Ministry of Finance, tax treaties should aim to avoid double taxation, not provide an opportunity for tax planning”.
Dennis Swing Greene is Chairman and International Fiscal Consultant for euroFINESCO s.a. www.eurofinesco.com