Finns may have breathing space before pensions are taxed

Finnish residents in Portugal may have until 2022 before the tax treaty between the two countries is ended.

Around 10,000 people were known to be benefitting from the Non-habitual Residents (NHR) tax scheme as at the end of 2016 with estimates for the number at the end of 2017 rising to 27,000.

Finland is ended the bilateral tax treaty and officially has communicated its action to the Portuguese government in a note sent in June. The intention is to end the tax treaty between the two countries if Portugal does not ratify a new agreement by the end of November. If there is ratification, new rules will apply from 2022, giving Finns some time within which to make up their mind whether they want to stay or leave.

Under the pressure of the Finnish authorities, the scheme is to be ended, at least for the Finns. The Swedish government also has started negotiations on the revision of its Double Taxation Agreement with Portugal which will end the NHR regime that allows pensioners from another country to reside in Portugal without paying income tax on certain types of personal pension.

Many are watching the situation with increasing concern, warning the Portuguese government of the dangers of creating an image of fiscal instability which could push immigrants to other countries where low tax schemes are viewed as more stable.

The Finnish and Swedish governments’ actions are none of Portugal’s doing as it continues to pursue foreign spenders by offering generous tax breaks.

Double taxation agreements state that, as a rule, taxes are levied in the country where the person lives. In the case of pensioners who spend a minimum of 183 days a year in Portugal (who have not resided here for the last five years), it would therefore be Portugal and not Finland that receive taxes.

However, under the NHR rules, many pensions are exempt from IRS so pensioners do not pay tax in Portugal or in their original country.

The same scheme provides for a reduced rate of 20% of income tax from employment income of those on a special list of professions.

Finland wants to end this benefit: if people do not pay tax in Portugal, they will start paying tax in Finland.

Between 2009, when the NHR system was created, and 2016, some 10,684 people joined the scheme. The estimated figure for the end of 2017 is 27,000 people, made up of pensioners and workers, foreign and Portuguese, who all comply with the rule of not having resided in Portugal in the last five years.

Sweden also has decided to start negotiations with Portugal to scrap the tax agreement even though Swedes in Portugal are at pains to point out that many pay 25% tax before their pensions leave Sweden.

The Ministry of Finance of Sweden says that "negotiations are ongoing" and that the objective is to make sure pensions are, "taxed in Sweden or in Portugal."

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