Pensioners and Portugal's Non Habitual Residence Scheme - is the "Golden Visa" about to lose some of its brilliance?

13 February 2020

It looks like time is about to be called, albeit initially gently, on the significant tax breaks enjoyed by many pensioners retiring to Portugal.

The Non Habitual Residence Scheme, (NHR) described by many as “Europe’s best kept secret”, has allowed individuals to become resident in Portugal, and for the first 10 years, enjoy exemption from tax on many sources of foreign income, such as pensions, dividends, rental and interest.

Most tax treaties with Portugal specifically allow for the country of residence to have primary taxing rights on pension income. This means for example, that someone who qualifies as NHR in Portugal, with a UK private pension, could formally request HMRC to allow the pension trustees to issue pension payments with no UK tax deduction, and then also receive full tax exemption in Portugal.

The story of the Portuguese NHR scheme is one of enormous success, attracting thousands of high net worth professionals and asset rich retirees to the country, which has helped develop and significantly increase the country’s economy, additionally creating an exceptionally strong housing market.

This success hasn’t been without its criticism from its European neighbours, many of whom, including the UK, allow for significant tax relief for pension savings, with the expectation that some of this will be recovered later when benefits are taken. It comes as no surprise that formal requests were made by Sweden and Finland for pension income to be taxed in the source country rather than the country of residence.

It was perhaps, only a matter of time before other countries followed suite, and so rather than missing out altogether on any tax raising opportunity, whilst still continuing to attract future retirees to the country, the Portuguese Government have recently announced plans to tax NHR qualifying individuals on their pension income, but:

  • at a much reduced 10% fixed rate, and
  • only where they are new to the NHR scheme, i.e. register after 31 March 2020. Those who are already registered will continue to enjoy tax free status on their pension income for their particular 10 year NHR period.

This is a clever tactic by the Portuguese Government, as whilst 10% is still more than 0%, it remains far less than many other countries tax rates, and still less than the non NHR Portuguese tax rates of up to 48%.

This new 10% rate is therefore still an attractive proposition to many potential retirees, and given the other income tax exemptions connected to the NHR scheme remain intact, at least for the time being, it follows that Portugal remains the best global tax programme of its type.

Of course, for British Expats, Portugal offers so much more, in the form of guaranteed sunshine and easy access from many UK airports, so maybe it is the case that this “Golden Visa” remains just as attractive as ever…

If you are considering a move overseas, and would like to investigate how we can help you plan and mitigate International tax exposure, please get in touch with Lynn Gracie (lynn.gracie@aab.uk) or your usual AAB contact.

 

By Lynn Gracie, Private Client Tax Senior Manager at Anderson Anderson & Brown LLP

To find out more about Lynn and the Private Client Tax team, click here.

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