Portugal has been a tax haven for foreign pensioners for a decade.

Between 2009 and 2020, retirees who decided to move their residence to the country have not paid a single euro in income taxes.

As of 2020, paradise got a little worse: it began to withhold 10% of their pensions.

Since last January 1, the tax holiday has completely ended for Swedish retirees, who will once again be taxed on their income in their country of origin even if they reside in Portugal, following the decision of their Government to break the bilateral agreement to avoid double taxation, which both countries had signed in 2002.

Sweden is the second European state to slam Portugal diplomatically for its fiscal laxity, after Finland, which did so in 2018 to force half a thousand Finnish pensioners established in Portugal to pay taxes in their country of origin.

The affected Swedish colony is now larger.

"There is no exact information on the number of Swedish pensioners living in Portugal," says Sten Engdahl, a Swedish diplomat who has investigated in his thesis the reasons that influence the migration of pensioners from his country to Spain and Portugal.

“According to official data from the immigration authorities, in 2009 there were 746 Swedes officially registered in Portugal, while in 2020 the figure had increased to 5,181.

The real number is most likely higher,” he adds via email.

Portugal created the tax regime for non-habitual residents (administratively RNH) in 2009 with benefits for pensioners and certain active professionals in the scientific, artistic or technical field.

The government of the socialist José Sócrates thus intended to attract new residents of thriving accounts to encourage consumption and investment.

In the case of workers, a fixed income rate of 20% was established for ten years.

The measures also benefited Portuguese retirees or returned professionals who had lived abroad for more than five years.

“What the Portuguese taxpayers have accepted without protesting has provoked protests among the Swedish taxpayers”, compares Susana Tavares, an economist specializing in public policy at the Nova University of Lisbon, during a face-to-face interview.

Portugal was, in fact, the first community country that exempted foreign retirees from paying taxes, according to the report published by the European Union Fiscal Observatory last November.

In the eyes of a country like Sweden, with a long attachment to the high taxes that finance its welfare state, the Portuguese strategy was difficult to accept.

In an unusual decision in diplomatic relations between partners of the European Union, the Nordic country decided to break the bilateral convention so that Swedish pensions are taxed in the country of origin even if their beneficiaries reside in Portugal.

From January this year, the Swedes will be able to continue enjoying the sun of the Algarve and the golf courses of Cascais, but not tax tips.

"It is even immoral that they have not paid anything for 11 years," says Susana Tavares, who regrets that the rupture of the agreement affects the Portuguese international reputation.

In an article she wrote in the newspaper

he stressed that no one knew the profit that Portugal obtained with these tax gifts.

Given that retirees do not create value for their work, Tavares wondered "how much can these people consume to bring so much value to the economy" that would justify their tax advantages.

"I don't know, but I suspect the government doesn't either," he added.

What is known is what Portugal stops entering each year due to the advantages for non-habitual residents: 619.8 million euros in 2019. According to the report of the Fiscal Observatory of the European Union, it is the community country that loses the most for its special regime.

Only the United Kingdom, which is already out of the club, has a higher bill: 1,371 million euros in 2018. The contrast with Sweden is interesting, where only 87 million euros are lost due to tax incentives (2020 data).

That same year, the cost to Spain of the inpatriate regime was 502.7 million euros.

The reasons for the Swedish split were clearly expressed by Magdalena Andersson, the head of Finance who became Prime Minister last December, in an interview in

almost a year ago, when he announced the end of the convention if Portugal did not modify the regime: “A tax has to be legitimate and fair.

The possibility that the richest citizens are given to pay zero or 10% while ordinary citizens pay much more is a fiscal injustice that undermines the credibility of the fiscal system”.

Andersson did not hide his astonishment at the Portuguese tolerance towards this inequality: “If a Swedish patient and a Portuguese patient were together in a Portuguese hospital, the Portuguese would have paid taxes for both because the Swedes have all the rights, such as health care or public transport, without having paid taxes.

It is fascinating that this is accepted by Portuguese citizens.”

In 2019, the Swedish Government negotiated with the Portuguese a modification of the bilateral agreement that would allow the taxation of pensioners in Sweden, but the Cabinet of António Costa has not ratified this amendment since then.

“We have waited two years and our patience is over,” Andersson said.

In June 2021, the Swedish Parliament approved the liquidation of the bilateral convention, which ceased to be in force on January 1.

In a letter sent to the Portuguese authorities by representatives of the Swedish community, it was warned that breaking the agreement would have “disastrous” consequences and would make it impossible for most Swedes to stay in Portugal.

"The tax burden on pensions and income will increase to levels impossible to bear," they pointed out in their letter.

The study published last November by the Fiscal Observatory of the European Union, an organization attached to the Paris School of Economics and financed with community funds, calculates that the loss of public income in the European Union due to special regimes is 4,500 million euros per year.

More than 200,000 taxpayers currently benefit from these strategies aimed at attracting certain professionals or pensioners with high purchasing power in a tax competition between countries.

Preferential regimes for both workers and pensioners have gone from five in Europe in 1994 to 28 in 2020. The report notes that the special regimes in Italy, Greece, Cyprus and Portugal are "among the most damaging."

The Observatory points out that while competition between countries for corporate taxation has decreased in the last decade, a race has been unleashed to subsidize the individual income of certain groups.

"Considering the proliferation of increasingly aggressive personal tax regimes aimed at foreign residents, it would seem appropriate to request the reform of the Code of Conduct that makes it possible to evaluate the aggressiveness of these regimes," they defend.

Portugal and Spain, not so equal

Sun, food and quality of life are qualities common to Spain and Portugal that are equally appreciated by Swedish retirees who move to the peninsula.

However, there are differences between the two countries that influence the choice of residence for retirement.

The tax burden and driving in English weigh in favor of Portugal, while the cost of living, including cheaper flights, is more attractive in Spain.

"Tax incentives are one of the most important reasons for attracting people to Portugal, but not to Spain, and the ease of communicating in English is important both when it comes to attracting and retaining them in Portugal, but not in Spain," says Sten. Engdahl in his thesis.

The profile of Swedish pensioners established on the peninsula also shows divergences.

Among residents in Portugal, there are many who have a university degree (78%), are in good health (89%) and have a comfortable income (82%).

Among those who live in Spain, there are 58% graduates, 76% who declare that they are in good health and 62% who consider that their income is good.

Engdahl, who began his work for the thesis in 2016 and who had the answers of 575 Swedish retirees, highlights the interest of the research so that "governments understand that attracting foreign retirees can be an important way to promote economic growth and the development in their countries.

The Swedish researcher believes that Spain and Portugal have been successful in this endeavor, although he believes that measures should be strengthened to increase the socio-cultural adaptation of foreigners in host societies.

Barely 24% of Swedes established in Spain speak Spanish fluently, although this figure is even lower in the Portuguese case: 13%.

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