Other EU states have also expressed their aversion to the current legislation, with the Netherlands and France reportedly also starting to exert pressure on Portugal to revise rules governing tax benefits for expat pensioners residing here.
The Netherlands has been particularly vociferous in its criticism of the regime, reportedly arguing that the rule has effectively transformed Portugal into a tax haven within the EU’s borders.
The legislation entitles pensioners to be exempt from taxes both in their home nation and in Portugal.
News of the bilateral agreement between the two countries was made public by the Finnish Minister of Finance, Petteri Orpo.
The news was revealed on the Finnish Minister’s Twitter feed, which explained that he and his Portuguese counterpart, Mário Centeno had earlier this month signed a revision allowing Finnish pensioners residing in Portugal to be taxed.
According to Finnish daily Talouselämä, Finland could previously only tax pensions paid to former public sector employees residing in Portugal. But with the revision, the scope of the authority to tax is said to expand significantly.
The newspaper also explained that the public in Finland was recently incensed about the Portuguese fiscal loophole, when a top shareholder in a top Finnish company revealed in an interview that she was moving to Portugal with her family to avoid paying tax.
This particular incident is said to have been behind Helsinki’s insistence to reach a tax deal with Lisbon.
However, a statement from the Finnish Finance Ministry indicates that there will be a three-year transitional period before the revised bilateral agreement comes into full effect.
The special regime for pensioners allows an exemption of a foreign occupational pension so long as its beneficiary qualifies for a special tax regime for non-habitual residents.
One of the requirements is that the pensioner be a non-habitual resident for Portuguese income tax purposes, while the second is that the pension is an occupational pension, paid from a foreign source.
Should these requirements be met, the pension will not be taxed in Portugal and depending on the provisions of the applicable tax treaty, it is also usually non-taxable in the source country for the duration of residence in Portugal.
The idea behind this exemption was reportedly conceived following pressure from interest groups in Sweden, and following Portugal’s agreement to waive income tax on pensions, the legislation effectively spread to cover all EU member states and any other nations with which Portugal shares tax agreements.
Scandinavian and French nationals have been particularly swift in taking Portugal up on its offer of tax exemption, resulting from the application of Article 81 of the IRS Code.
Figures from the Finance Ministry recently showed that while people taking up the beneficial tax treatment in Portugal failed to exceed a hundred a year in the first four years following its introduction, this number exceeded ten a day in 2015 and continues to rise.