End of the Portugal-Sweden double taxation treaty: what changes for a Swedish NHR?

Sweden unilaterally terminated, as of 1 January 2022, the double taxation treaty (“the Treaty”) that had been signed with Portugal in 2002, as a result of the disapproval by the Swedish government of the no (or reduced) taxation of Swedish retirees residing in Portugal, under the non-habitual resident regime ("NHR").

But will the impact of this termination be only limited to the taxation of retirees? What may ultimately change for a Swedish NHR with the termination of the Treaty? For this purpose, it is important to consider the various types of income that may benefit from a special tax regime in Portugal, under the NHR regime:

#1 Pensions. Pensions from Sweden will continue to be either exempt from Portuguese Personal Income Tax (“PIT”) or to be taxed at a special 10% flat rate (i.e., for NHR registered after April 2020, or those who have opted for being taxed in accordance to the new regime in their 2020 tax return).

However, without Treaty protection, Sweden may also tax such pensions, as opposed to what occurred in the past, since the Treaty only allowed pensions to be taxed in the state of residence of the retiree, and not in the country of source of the income, which prevented taxation in Sweden.

So, with the termination of the Treaty, pensions paid out of Sweden to a NHR will be taxed in Sweden, at a 25 % rate, regardless of being exempt or taxed (at the mentioned 10% rate) in Portugal.

#2 Employment Income. As to employment income, nothing changes, at least from a Portuguese standpoint. In fact, such income will continue to be exempt from PIT, insofar it is effectively taxed at source and it is not deemed as arising from Portuguese source; or, if this is not the case, it may enjoy from the application of a special reduced tax rate of 20%, provided it derives from a high value-added activity.

However, without Treaty protection, the situations in which Sweden may tax income derived from work carried out therein and/or paid by a Swedish entity are no longer confined to specific situations, as formerly detailed in the Treaty.

According to its domestic provisions, Sweden taxes employment income paid by a Swedish employer and obtained by a non-resident in Sweden at a 25 % rate. The employee may, however opt for the application of the normal tax rules, which would entail a higher tax rate but, on the other hand, it would allow deduction for certain costs. Under certain conditions the so-called 183/182 days rule may be applicable. Hence, if an employment income is paid by an employer that is not resident in Sweden but for work performed in Sweden and if the employment income is not a cost in a permanent place of business in Sweden, then, Sweden will not tax that income at all, provided the employee’s length of stay in Sweden did not exceed 183 days.

It should be noticed that employment income from Sweden paid out to a Swedish expat will always be a sensitive issue. Indeed, Swedish Tax Authorities may argue that it constitutes an evidence for the individual to still be considered tax resident in Sweden, particularly if such income is being paid by his/her previous employer. Thus, these situations must always be addressed carefully, before any dispositions are made

# 3 Income from real estate (rents and capital gains). Rents and capital gains arising from real estate located in Sweden are still exempt from taxation in Portugal.

In Sweden, such rental income will continue to be taxed as income of capital, at a 30% rate. For rental income deriving from a private property, income up to 40 000 SEK is exempted, and, on top of that, another 20 % deduction of such income will be exempted from tax.

Capital gains, be it from properties, real estate or securities (if owned directly and not via an ISK-account or capital-insurance), are taxed in Sweden at a 30 %.

#4 Dividends, interest and royalties. Standard types of financial investment income (dividends and interest) and royalties are still exempt, in Portugal.

However, as for Swedish source dividends, interest and/or royalties, taxation at source (i.e., in Sweden) will no longer be limited to the Treaty rates (i.e., 15%, 10% or 5% respectively).

In Sweden, dividends paid out to an individual resident abroad will be taxed at a 30 % source tax (unless the shares are not owned within an ISK-account or by a capital-insurance), but no tax is levied on interest payments to residents abroad. On the other hand, Royalties earned by an individual will be taxed as business income provided it is paid from a permanent place of busieness, in average around 31 % up to an income of ca 540 000 SEK and above that level ca 51 %. The income calculation for tax purposes of royalties is, however, quite complex and should also take into account social security fees (which, however, are tax deductible).

#5 Other income. With respect to other items of income obtained by a NHR not dealt with in any specific category of the Treaty, there is a subtle but important modification.

Indeed, Portugal-Sweden Treaty was one of the few double tax treaties signed by Portugal to deviate from the OECD Model Convention, allowing the state of source (in the case at stake, Sweden) to tax such income, and this mere “possibility” (no effective taxation being required) was enough to allow Portugal to exempt such income while received by a NHR. This provision allowed Portugal to exempt, for instance, Swedish source income arising from life insurance products or investment funds.

From now on, such (other) income will be taxed, in Portugal, in accordance to the Portuguese standard rules, i.e., those that apply to Portuguese ordinary tax residents, not benefiting from the NHR regime.