Tax-free pensions between Sweden and Portugal under threat

Portugal and Sweden signed, on 16 May 2019, a Protocol to their existing 2002 double tax treaty. Amongst other changes, an amendment to Article 18 (Pensions) provides that pensions earned in Sweden will be taxable in Sweden if not taxed in Portugal. As a result, Swedish pensioners who are living in Portugal under the non-habitual residents (NHR) regime may lose the double exemption of income tax from which they currently benefit.

Introduced in 2009 to attract ‘high value-added’ scientific, artistic or technical professions to Portugal, the NHR taxes qualifying professionals at a flat rate of 20% on their Portuguese-sourced business income. In addition, most foreign-source income – including pensions – is exempt from Portuguese taxation for a period of ten consecutive years. This can apply even if the income is not actually taxed in the home country.

This provision offers significant benefits to retirees. Of the 27,367 individual accepted under the NHR programme to date, only 2,140 (8%) are qualifying ‘high value-added’ professionals.

The treaty renegotiation was initiated at the request of Sweden and follows a similar move by Finland. Finland signed a Protocol with Portugal in November 2016 to amend its 1970 double tax treaty, which it said restricted its “right to tax private pensions received in Portugal from Finland”. In this case, the Portuguese government failed to complete ratification procedures and, as a result, Finland terminated its DTA with Portugal as of 1 January 2019.

The Finnish government said the treaty was not consistent with Finland’s current tax treaty policy. “The termination decision ensures that Finland will be able to tax the private pensions of Finns resident in Portugal,” said a government statement.