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.

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.

– 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.

When a company redomiciles to Portugal, there is no asset transfer, no crystallisation of Capital Gains, no “IMT”(Property Transfer Tax), no Stamp Duty on Real Property. With no chargeable events taking place, only the headquarters and effective management move to Portugal. The assets remain safely within the company. Thus the alternative term for Redomiciliation: Continuance. Continuance opens attractive opportunities for legitimate tax mitigation.

Updated Basis for Capital Gains Tax

Following company registration in Portugal, a Balance of Accounts needs to be presented to mark the starting point as a Portuguese resident corporate entity. Legislation based on a 2016 EU Directive, updates the Portuguese Corporate Tax code (“CIRC”).

Upon Redomiciliation, the company’s balance sheet must be based on net book value, rather than historical value as was previously the case. When correctly implemented, there will be many cases with little or no difference between the net book value and market value upon the transfer of the company’s asset, reducing or eliminating Capital Gain liability.

According to this recent legislation transposing the relevant EU directive, new evaluation norms apply according to the following rule:

Entities transferring their head office or effective management to Portuguese territory must consider for tax purposes the net book value of their assets held, provided that the determined amount does not exceed the market price at the time of transfer.

This process opens two opportunities: First, the shares of the Company can be sold according to the Net Book Value with little or no Capital Gains Tax due. Alternatively, the Company owned property can be transferred out of Company ownership with acquisition established at Net Book Value. Either solution should minimize the Capital Gains Tax liability when the Company’s property or its shares are sold.

If potential buyers wish to continue with the property being held by a redomiciled Portuguese Company, this solution continues to be viable and tax-efficient. Likewise, if the buyers want to own the property in their own names, this redomiciliation solution is now equally workable with similar beneficial tax treatment. The buyers and sellers should keep in mind that the second option will trigger two IMT’s as opposed to a single instance of Property Transfer Tax as in the first method.

Changes in the obligations of companies and workers

During the months of March, April and May, employers will only deduct Social Security contributions based on one third of the earnings paid to employees. Whatever is missing can then be paid in instalments (three or six months) in the second semester. This is a measure aimed at improving liquidity, which may have greater impact because some workers who are at home accompanying children (due to the closing of schools) will receive a smaller paycheck (based on two thirds of their salaries) with the companies delivering only one third of social contributions in these cases. The government has not yet explained whether the announced reduction will also override these cases or exclude them.

In addition, companies with work suspended based on the lay-off regime will be exempt from contributions for the workers covered in a period that will be at least two months (the suspension from work and the following), and may go up to seven months if it continues to be renewed.

Several details remain unclear, namely, whether the reduction of contributions by two thirds is dependent on the fulfillment of criteria or is generalized. The same is applicable to the new tax measures.

On Wednesday, the Minister of Finance had indicated that the temporary reduction in social contributions, to one third, applied to companies with up to 50 jobs. “Companies with up to 250 jobs can access this mechanism to reduce and split the payment of social contributions in the second quarter if they have seen a drop in turnover of 20%,” he explained.

Taxes

A new order is expected to be published by the Secretary of State for Tax Affairs to clarify the conditions for access to the measures.

According to the communiqué of the Council of Ministers, in the months of April, May and June, the delivery of VAT and withholding income tax can be paid in three or six instalments.

The tax enforcement proceedings in progress or that may be instituted by the Tax Authority and Social Security are also suspended until June 30.

But it is also not entirely clear who can benefit from these postponements. On Wednesday, the Minister of Finance had announced that the flexibility in terms of VAT, IRC and IRS – with the possibility of paying in instalments (three or six months, with late payment interest in the last three instalments for the second case) without need a Guarantee – applied to companies “with a turnover of up to €10 million in 2018, or starting from 01 January 2019”. Or, in larger businesses, in view of “a decrease in turnover of at least 20% in the average of the three months prior to the month in which this obligation exists compared to the same period of the previous year”.

Previously, the government had postponed until July 31 the submission of the declaration of Modelo 22 of the IRC, the special payment on account to June 30 and the first payment on account and the first additional payment on account to 31 August.

At the same time, the Tax Authority determined that “sufficient conditions for the application of the figure of the just impediment in the fulfillment of the tax declaratory obligations in relation to certified taxpayers or accountants must be considered the situations of infection or prophylactic isolation declared or determined by health authority “.

However, in other announced measures, the delivery of the single report of the companies, whose delivery deadline started last Monday, may also be postponed. “Following the state of alert we are in due to the Covid-19 epidemic, the report’s final delivery date is being considered and will be readjusted in due course,” warned the Ministry of Labor.

Changes to green receipts and sole proprietors

Social Contributions

The flexibility announced for companies also applies to self-employed workers, according to the indications given by the Ministry of Finance. In the months of March, April and May, freelancers will be able to deduct on only one third of income. The remainder can then be paid in instalments (three or six months) during the second half of the year. Once again, it is unclear under what access conditions are foreseen, which, at the outset, assumed a 20% reduction in turnover, and is also applied to companies with up to 50 workers.

In addition to this situation, Social Security support for workers when there is a proven stop in the activity of their own or their sector (up to €438.81 monthly, in a renewable measure for up to six months) will also see social contributions postponed to 100% while they are enjoying support.

Taxes

There is also provision for the option of instalment plans for the delivery of VAT and of withholding taxes of three or six months (at the beginning, with interest on arrears in the last three months if the option is the second), during the months of April, greater and June.

The criteria announced on Wednesday provided, without detailing different conditions for these workers, access to those with a turnover of less than €10 million or a 20% drop in turnover from that amount.

Changes for employees

For now, there are no significant changes in the payment of taxes or social contributions with an impact on the obligations, and on disposable income, of employees.

From the outset, the deadlines for submitting the IRS declaration are maintained as of April 1, and if there is payment in instalments of the withholding tax on salaries, these will be changed only with an impact on the companies’ treasuries (without change in the net salary, on departure).

There is also no provision for reducing or postponing the payment of social contributions due by workers (11%). Although the matter was not clarified, the government announced on Friday that the changes are aimed at “improving the liquidity of companies” and not that of families.

However, in some cases, there may be an impact on net wages for workers who see reduced gross wages (due to lay-offs or having stayed at home accompanying minors with schools closed, seeing their wages drop to two-thirds). With half of the national workers earning below €855 (February figures), many may end up with IRS exempt earnings during this period. According to the 2020 withholding tax tables, in the case of a couple with two children, income up to €686 is exempt. Singles without children are exempt up to €659 of gross monthly remuneration.

Expatriates to pay at least €7,500 in income tax per year on foreign sourced pensions

With the proposed NHR changes in the 2020 State Budget, promoting Portugal as the “Florida of Europe” might soon become more difficult. Foreign pensioners who join the non-habitual residency scheme  (NHR) in the future will lose the double tax exemption and will be required to pay a 10% tax rate in Portugal with a minimum assessment of €7,500 per annum. However, the intention is not to drive away wealthy foreign fiscal residents from a regime that has earned for Portugal many millions of real estate and other taxes.

The new requirements will only apply to future applicants who request NHR status after the 2020 State Budget becomes passed into law. However, it is also possible for those who have already joined the NHR scheme to opt for this limited taxation. Paying this minimum tax in Portugal provides a window of opportunity that may prove valuable to Finns, Swedes and others who are at risk being taxed in their countries of origin at much higher tax rates.

Background

NHR emerged in 2009 as a way to attract highly skilled individuals to Portugal in exchange for a flat-rate assessment of 20% rather than the high tax rate of 48%. However, the scheme also provides a generous framework for foreign pensioners who benefit from a 10-year “IRS” exemption on pensions received from abroad. As tax residents in Portugal, these fiscal migrants no longer pay tax in the country of origin. It is this double exemption that continues to prove seductive to many foreigners. It is also this double exemption that leads to Portugal being accused of promoting unfair tax competition. To restore a level playing field, opponents to the NHR tax exemption have proposed the 10% minimum income tax rate.

Existing Pension Exclusion

Under the Portuguese tax code (“CIRS”), contributions to pension plans are normally considered to be capital. In other words, these contributions have already satisfied tax obligations in the fiscal year in which they were made.  Only the subsequent growth of the Pension Fund is taxable upon withdrawal. When the appropriate statutory criteria have been satisfied, 85% of pension income may be excluded with the remaining 15% liable for assessment.

Example: As habitual residents (living in Portugal more than 183 days per annum), a couple, each earning €75,000 in pensions, will have a total gross tax before deductions of just €2,000 (1.33%) on their total income of €150,000 after exclusions.

With tax treatment like this on the books for decades, who needs the confusion and disarray of the Non-Habitual Resident status in the first place?