…and so it begins, the unravelling of a major part of the fabric of Portugal’s tax deals for foreigners wishing to settle here as the Finnish tax department has won the argument over its country's retirees living in Portugal without paying income tax on their private sector pensions.
Portuguese Finance Ministry officials have agreed to sign a new bilateral treaty with Finland which will see an end to the current ten year tax holiday that has encouraged many Finns to head to the sun.
Finland’s Finance Ministry has confirmed that it now has received notification from its Portuguese counterpart confirming its willingness to lift the existing tax free deal for Finnish pensioners who in future will be obliged to pay income tax to Finland on their private pensions - deal or no deal.
The detail of Portugal’s current tax arrangement for Finns prevents the Finnish treasury from being allowed to collect tax on private sector pensions paid to its nationals resident in Portugal due to the tempting ten-year tax holiday granted by Portugal to certain categories of foreign retirees.
Late last year, Finland was able to negotiate a similar agreement with Spain and Finns there were given a notice period after which they will be taxed at current rates on their private pensions. This change, coupled with Spain's requirement for an annual statement of worldwide assets, had made fiscal life less appealing on the Costas.
Several well-known and wealthy Finns are known to have left Finnland in retirement to enjoy the untaxed fruits of their pension planning arrangements, including Kim Gran - the former CEO of Nokian Tyres, Matti Halmesmäki - the former CEO of the Finnish food and general retail group Kesko, and Sakari Tamminen - the former CEO of metals company Rautaruukki.
The agreement from Portugal’s Finance Ministry is a personal victory for Finland’s Finance Minister Alexander Stubb who earlier had threatened to end the tax avoidance scheme by negotiation, or he simply would tear up the current treaty.
Also, under certain conditions, Finns and other emigrees that deftly choose to expire in Portugal can pass on their estate without the inconvenience of inheritance taxes. While alive, Finns overseas pay a 1.5% ‘healthcare tax’ to Finland based on their pre-tax income.
Many in the Algarve are well aware of the recent influx of foreigners but unaware of the tax status of these foreign retirees that many say disadvantages national earners whose incomes are taxed and fund the still massive State machine and additional Troika loan repayments.
The counter-argument is that Finns and other tax exempt retirees will bring purchasing power to Portugal and will buy vehicles and property as well as using local shops and restaurants.
The Helsinki Times reported in February this year that the 25-year-old Finnish Society in the Algarve has seen an increase in membership of more than 200 in the past year and was struggling to keep up with enquiries.
The far larger Golden Visa scheme offers a benign tax regime for non-EU incomers but is in such disarray that post-visa spending patterns have been hard to asses. This scheme at least has seen thousands of €500,000 plus properties fly off the shelves, to the delight of many estate agents.
Other EU countries will be studying the detail and wording of the proposed new treaty between Finland and Portugal to see if they too can bring an end to the tax-free lifestyles enjoyed by their retired citizens who choose to head to the sun to the detriment of their own treasuries.
