Sweden to rescind its tax treaty with Portugal evoking “fiscal injustice”

Sweden wants to tear up an agreement with Portugal and start taxing its pensioners who have chosen to live in Portugal in recent years as fiscal residents. According to the newspaper Public, Sweden plans to revoke the tax treaty signed with Portugal in 2002 and start taxing pensioners who have been exempt from assessment in both countries.

In 2019, the two governments signed an agreement with amendments to the rules that would allow Sweden to tax the pensions of its nationals living in Portuguese territory. Stockholm has already ratified the agreement, but Lisbon still has not.

“The combination of the Portuguese tax regime for Non‑Habitual Residents (RNH) with the tax convention originally signed with Sweden makes Portugal a fiscal paradise for Swedish pensioners.”, declared Swedish Minister of Finance, Magdalena Andersson. “We are submitting this proposal to Parliament. I can withdraw it if the Portuguese Government implements the treaty quickly.”

Asked how much Sweden has lost in tax revenues since 2009, the minister responded that the loss of tax revenues is not the primary reason for tearing up the double tax convention. “The possibility given to wealthier citizens to pay 0 or 10%, while ordinary citizens pay much more, is a fiscal injustice that undermines the credibility of the fiscal system. Some Swedish citizens have an income of millions of euros yet do not pay any tax. The 10% rate is too low and is much less than what a regular pensioner in Portugal pays,” affirmed the Swedish Finance Minister.

Foreign Retirees pay 10% tax on foreign pension income

Since last year, the exemption in Portugal for foreign earned pensions ended. Pensioners who have non‑habitual resident status pay a tax of 10% on retirement benefits paid by their country of origin. The rule does not apply to those who already benefit from NHR or who have already signed up for the status. New taxpayers in Portugal lose their double tax exemption and will be taxed at a rate of 10% on their pensions. The option must be chosen when submitting the declaration during 2021.

Benefits of investing via the Golden Visa investment program in Portugal

– Visa exemption for traveling within the Schengen Area;

– Family reunification even for children studying abroad;

– Applying for permanent residence after 5 years of residency;

– Applying for Portuguese citizenship after 5 years.

– Possibility of applying to Non-Habitual Residency regime.

Opening and Closing a Business Activity

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Whether for profit or pleasure, the truth is that there are many people who choose to be sole traders as a way to make a living. More than one out of five Portuguese workers are self-employed, a percentage that places Portugal within the highest level of entrepreneurs in the EU. For a person to operate as a sole trader, there are some preliminary requirements that must be met with Tax Authority and Social Security Administration before starting up a business operation.

Opening a business activity

If you want to do business as a sole trader, the first step is to communicate your intentions to the Tax Authorities (“A.T.”), even before you launch your business. This is done by registering the Opening of Business Activity Declaration (“Declaração de Início de Actividade”). This step can be done in person at a Finanças office or in a Citizens’ Centre (“Loja de Cidadão”). In these cases, a civil servant guides you through the process to complete the necessary forms and enroll you directly into the system.

Taxpayers should also choose between being assessed in the Simplified Regime or under Standard Accounting procedures. Portuguese tax residents can also open their business activity on the Internet through the Finanças website. To submit a declaration, you must first have a Portuguese Tax Identification Number (“NIF”)as well as your Finanças password (“senha”). Proceed as follows:

Home Services Submit Activity Declarations Opening of Business Activity

An important note: Once you have completed these steps, you can start your business or professional activity after receiving confirmation by post in the form of a “dependability code” that will be sent to your registered address.

Another important point: If you intend to perform a one-off “Isolated Act” rather than exercise an on-going business activity, you are excused from the requirement of submitting an Opening of Business Activity Declaration.

Social Security

Registration for Social Security happens automatically and does not require you to complete any additional forms. If this is your initial registration, you are eligible for a first year exemption from Social Security contributions. Likewise, until your taxable sole trader income surpasses €2,515.32, you will also be exempt. In situations where you accumulate an independent business activity with salaried work or are in receipt a Social Security Old Age pension, you are also excused from Social Security contributions. Standard contributions for Sole traders are at the rate of 29.6%. 

Closing your business activity

It is not at all uncommon for sole traders to cease their business activity yet fail to notify the Tax Authority of the fact. It should not come as a surprise that as far as Finanças is concerned, the activity remains open until reported closed. To wind up your self employment, you should go to an “AT” office, a Citizens’ Centre or to the Finanças website. To close your activity online, proceed to the “AT” website and go though the following steps:

Home Services Submit Activity Declarations Closing a Business Activity

On your next IRS tax return, you must refer to the cessation of activity in Annex B. As happens with the opening of a sole trader activity, the cessation will be reported automatically to Social Security by Finanças and no further declaration is necessary on your part. Failure to close your business with result in ongoing assessment based on previous activity.

Dual Citizenship in Portugal

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Those who are contemplating taking on Portuguese citizenship often wish to retain their nationality of origin. Fortunately, Portugal recognises and permits dual nationality. There can be a variety of reasons for taking on Portuguese citizenship:

  • Lifelong access to state healthcare;
  • For British nationals, certainty regarding their status in the EU after “Brexit”;
  • The ability to move freely around Europe and enjoy the benefits of being an EU citizen;
  • Being able to vote in national elections.

Any foreign citizen aged 18 or over may apply for naturalisation once having formally resided for six or more years in the country. As EU nationals, this requires having held temporary residency in Portugal for a period of 5 years, then taking permanent residency through the local SEF office (Serviço de Estrangeiros e Fronteiras).

Naturalisation

Central to the naturalisation process is a notarised and translated copy of the Birth Certificate issued in the country of origin.

A criminal record certificate, translated and apostilled, is also required from Portugal, from the country of origin and from any other country of residence. In Portugal, the certificate is issued at the local Tribunal. For UK nationals, application can be made online:

https://www.acro.police.uk/police_certificates.aspx

Then choose the ‘Police Certificates’ tab.

The Process

Citizenship application is handled by the IRN (Instituto dos Registos e do Notariado) through the local Conservatória. Depending on the nature of one’s situation, there are appropriate forms available in Portuguese only on the IRN website:

http://www.irn.mj.pt/sections/irn/a_registral/servicos-externos-docs/impressos/nacion alidade/impressos-nacionalidade

Language Test

Applicants must pass a Portuguese language proficiencytest, known as CIPLE – A2, except for those who have been married to a Portuguese national for more than 3 years.

Application for the test should be made online at least one month in advance. To help prepare, there is a book of model tests available from the following link:

http://www.lidel.pt/pt/catalogo/portugues-europeu-lingua-estrangeira/avaliac ao-certificacao/

CIPLE measures the basic ability to interact in a limited number of predictable daily communication situations. The exam consists of three parts:

  • Reading comprehension and written interactions
  • Oral comprehension
  • Oral production and interactions
Citizenship by marriage

If married to a Portuguese national, citizenship may be obtained after 3 years of residency. In this case, the language test is usually waived.

If you are in a cohabiting relationship with a Portuguese citizen but not married (commonly referred to as “união de facto”), it is still possible to obtain Portuguese citizenship once the union has been officially recognised. While there is no formal process for registration for cohabiting couples, the status must still be proven. The couple should request a declaration from the local parish council, stating that they have lived together for at least two years. Two local witnesses are necessary. Translated copies of the birth certificate will also be necessary. In this case, no minimum required period of residency exists prior to applying for citizenship. However, authorities may require a Portuguese language proficiencytest as well as documented links which demonstrate integration into Portuguese society.

Application

All foreign language documents should be translated into Portuguese and certified. Once all of the paperwork has been assembled and checked, application should be hand delivered or sent by post via registered mail to:

Conservatória dos Registos Centrais

Rua Rodrigo da Fonseca, 200 1099-003 Lisboa

or visit the local “Conservatórias do Registo Civil”. The process usually takes around 3-6 months.

Aggregate vs Autonomous Reporting Options

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When assessing Company profits, taxation occurs in a two-stage process: first, the Company pays Corporate Income Tax on its profits, then Shareholders pay Individual Income Tax on these distributed profits (now called dividends). This assessment procedure is called “economicdouble taxation. Almost all countries in the EU have adopted one of several methods to eliminate “economic” double taxation-some via the Company, some via the Individual. Regardless of the method, the end result should be the same: dividends reported by the Individual should be after the elimination of any “economic” double taxation.

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State Budget 2021 – tax havens

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The imposition of IMI and IMT for companies directly or indirectly based in so-called tax havens, approved in the State Budget, does not distinguish between the jurisdictions with which Portugal has double taxation (ADT) and information exchange (ATI) agreements from those in which complete opacity prevails in capital movements. Sovereign funds and other investors from Oman, the United Arab Emirates or Qatar as well as investors based in Hong Kong – all included in the list of tax havens but with ADT with Portugal – will be some of the hardest hit. The same happens with the Cayman Islands, Jersey, Guernsey, Isle of Mann or Panama, where the funds are established, which aggregate a large part of institutional investors worldwide.

Brexit – Stays of 90 days

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The commercial agreement established between the United Kingdom and the European Union will allow the mobility of European and British citizens for short stays (maximum 90 days consecutively). As of yet, there is still no agreement for longer stays. The agreement does not cover the right of UK nationals to enter (with or without a visa) to work, reside or remain in the EU, nor vice versa.