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The Portuguese non-habitual resident tax regime – tax quarrels for pensioners

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Sofia Quental
Valadas Coriel & Associados, Lisbon
sofia.quental@valadascoriel.com

 

The Portuguese non-habitual resident (NHR) tax regime was created in 2009 and implemented in 2010. It has now been in force for ten years – an important milestone. It is now believed to be used by more than 50,000[1] individuals, although the tax department does not disclose the specific figures.

The NHR is a very attractive tax regime that may be requested by any individual (foreign or Portuguese) who becomes a Portuguese tax resident (having not been tax resident in Portugal in the preceding five years).

The regime offers the beneficiary several tax exemptions and reductions for certain types of income for a fixed period of ten years, regardless of changes in the internal Portuguese tax system. The regime was implemented to attract highly skilled professionals, high net worth individuals and foreign pensioners to Portugal.

The NHR tax regime has triggered political outrage in Finland and Sweden in relation to pensioners, as it led to the double-non-taxation of Finnish and Swedish nationals – including pensions paid by social security, employer retirement plans, pension funds and other arrangements like private insurance.

Indeed, the NHR regime was designed to be an aggressively competitive measure to attract affluent pensioners from high tax countries worldwide to come and reside in Portugal. Since most of the conventions for the avoidance of double taxation state that pensions can only be taxed in the country of residence of the beneficiary, except for pensions paid to former public servants, Portugal offered zero-tax status to newcomer retired persons for ten years. In effect, foreign pensioners could reside and collect their retirement pensions in Portugal entirely tax-free until 2020. Portugal has, thus, become a tax haven for pensioners.

The Finnish government, in the absence of Portuguese taxation, wanted to tax pensioners who enjoy the NHR regime in Portugal. It was therefore pressuring the Portuguese government to sign a new double taxation treaty (DTT) which would allow Finland to tax its pensioners. In 2016, Portugal and Finland signed a new DTT allowing Finland to tax its retired citizens living in Portugal. However, the document has not yet been ratified by the Portuguese Parliament.

The Finnish Government eventually lost patience with Portugal. Faced with Portugal’s procrastination, the Finnish Parliament voted for the unilateral denunciation of the Portugal–Finland DTT on 14 June 2018 with effect from 1 January 2019.[2] [3]

Sweden also forced Portugal to renegotiate the DTT to eliminate tax havens for pensioners, but again the ratification process is stalled in the Portuguese Parliament.

After years of international pressure, in January 2020 the Portuguese government made the first major change to the NHR tax regime: the exemption applicable to foreign-sourced retirement pensions was eliminated and has been replaced by a ten per cent flat tax.

The new rules also broaden the definition of income, previously treated as salary, which can benefit from the ten per cent rate. The ten per cent taxation rate will also cover pensions (qualifying as such) from life insurance, pension funds and retirement savings plans, even if the capital received is not previously taxed (ie, not taxed at the time the contributions were made).

However, the Swedish government considered even these recent changes inadequate, giving Swedish emigrants an unfair advantage. It argued that plenty of Portuguese pensioners pay a higher tax rate and receive much less; it recently announced that it intends to denounce the tax treaty it signed with Portugal.

According to the DTT, Swedish tax residents could receive pension payments tax-free from private pension schemes in both Sweden and Portugal under the Portuguese NHR tax regime. Amendments to the DTT preventing pensions earned in Sweden from being received tax-free were negotiated between the two countries in 2019. Sweden has already ratified the agreement, but Portugal had not yet done so after two years.

The Swedish government says that there is still a possibility for Sweden to go back on its decision if Portugal guarantees that the ‘agreement is a reality’, but only if the Portuguese government acts now. We await further developments.

It is important to mention that the NHR regime is a security regime in terms of tax benefits during the ten-year period. Even if tax legislation changes the NHR regime by imposing new taxes or increasing the tax rates, the Portuguese government cannot alter the regime that an individual applied for at the time they started their NHR tax status. Pensioners already benefiting from the status will keep the zero tax rate on their foreign pensions until the end of the ten year period, or the ten per cent reduced flat rate even if Portugal cedes to pressure to terminate the NHR status.

Therefore, this regime will continue to attract highly skilled professionals, high net worth individuals and pensioners to Portugal – placing the country on the international radar as a country that offers tax advantages on top of a recognised high quality of life.

While less beneficial than zero tax, a ten per cent tax on foreign pension income is still lower than that charged in many other countries, and is a significant reduction on the usual Portuguese income tax rates of 14.5 per cent to 48 per cent.

The NHR tax regime still offers many other advantages for a period of ten years.

• A 20 per cent special flat tax rate applies to labour and self-employment income sourced in Portugal if derived from high-value-added activities. The tax can be even lower if the applicant is self-employed, since in certain conditions only 75 per cent of the gross income is taxable, reducing the effective tax rate to 15 per cent);

• Labour income sourced outside Portugal is not subject to taxation in Portugal if taxed in the source country;

• Self-employment income from a high-value activity sourced outside Portugal is not subject to taxation in Portugal, provided that income may be taxed (even if not effectively subject to taxation) in the source country under a DTT signed between Portugal and that country; and

• Interests, dividends and royalties sourced outside Portugal from white-listed counties are tax exempt in Portugal. If taxed in the source countries, the tax so charged shall not exceed the reduced rates established in the DTT, usually ranging from five per cent to 15 per cent.

In addition to this special regime, Portugal has many other advantages to offer such as residence permits for people who wish to invest or simply to relocate permanently.

It should also be noted that Portugal does not have a wealth tax; gift and succession tax does not apply between spouses, children, parents and grandparents (for others a ten per cent flat tax is applicable); and Portugal does not tax private sales of works of art or collectibles, or cryptocurrency gains.



[1] Santos Pereira, S. ‘Regime fiscal para estrangeiros com quebra de 22% nas adesões’ (Dinheiro Vivo, 20 March 2021). See www.dinheirovivo.pt/economia/nacional/regime-fiscal-para-estrangeiros-com-quebra-de-22-nas-adesoes-13478965.html, accessed 1 April 2021.

[2] ‘No tax treaty between Finland and Portugal from 1 January 2019 onwards – effects on corporate taxation’ (PwC Portugal), see www.pwc.pt/en/services/tax/news/tax-treaty-between-finland-and-portugal.html,accessed 15 April 2021.

[3] Official Portuguese Gazette, see https://dre.pt/home/-/dre/117447716/details/maximized, accessed 15 April 2021.

 

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