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Tax alert: termination of the Portugal/Finland Double Tax Treaty

SÉRVULO PUBLICATIONS 20 Dec 2018

Following several months of controversy and diplomatic discussions, Finland has officially communicated to Portugal the termination of the Double Taxation Treaty in force between the two countries since 1971. The Treaty will cease to be in force as of January 1st, 2019.

The termination of the Treaty arises as a result of the controversy around the Non-Habitual Residents’ regime, which is a favourable income tax regime for people who relocate to Portugal. The coordination of this regime with the Portugal/Finland Double Taxation Treaty allows for a full tax exemption on pensions received from Finland by people who move to Portugal.

To change this situation, Finland has previously expressed its intention to renegotiate the Treaty with Portugal and a new treaty was even negotiated and agreed on in November 2016. In order for a new Double Taxation Treaty to come into force, both signatory countries must fulfil the constitutional requirements demanded by their internal legislations. In Portugal’s case, this implies that the new Taxation Treaty has to be approved by Parliament and ratified by the President.

Finland fulfilled all the internal formalities in order for the new treaty to go into force already in 2017, whereas Portugal did not. In response to Finland’s pressure to this end, Portugal manifested that it would soon complete the necessary internal formalities. However, up to date, those formalities have not been met.

Consequently, Finland decided not to wait any further and terminate the treaty. Please note Finland has communicated the termination of the whole treaty and not simply that of article 18.º concerning the pensions.

Teresa Pala Schwalbach

tps@servulo.com

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Teresa Pala Schwalbach