NHR – Portugal to tax foreign pensions

By March 25, 2020 July 31st, 2020 News

There are just a few weeks left to lock in expat benefits Portugal’s generous ‘non-habitual residence’ scheme.

After years of international pressure, Portugal is diluting the tax benefits of the highly sought after Non-Habitual Residency (NHR) scheme.

The 2020 budget is to be confirmed by the end of March and everyone is focused on the ruling to charge a 10% tax on foreign pension income under NHR from 31 March 2020.

But the NHR scheme will still be the most appealing compared to other EU countries.

For UK nationals thinking about moving to Portugal the clock is ticking on the Brexit Withdrawal agreement set to run till the end of 2020 and there is very little time to secure tax-free UK pension income and residency in Portugal.

For more information on residency changes Download our Residency Brexit Guide which outlines ten steps towards securing the right to stay in Portugal.

Who will be affected by the NHR change?

The new tax on pensions is set to only affect those applying for non-habitual residence after 31 March 2020.

So if you have already registered for NHR, or you apply before the March deadline, your benefits should be locked in and continue for the remainder of your ten-year NHR period.

NHR regime – what will actually change for non-habitual residents?

The original NHR regime offered tax exemptions for any foreign-source income that was taxable in another country under the terms of a double tax treaty. The UK-Portugal tax treaty gives Portugal taxing rights on UK private pensions, company pensions and the UK State Pension so all qualified for a full tax exemption. As such, non-habitual residents could receive most UK pension income tax-free.

Of the 28,000 expatriates who have taken NHR status since it began in 2009, over 9,000 have been pensioners.

In the last few years, the Portuguese government has received harsh criticism from Finland and Sweden for its NHR regime.

Portugal’s finance minister pledged to standardise taxation of foreign pensions to maintain “a good fiscal relationship” with their EU neighbours.

From 31 March 2020, the NHR exemptions are set to no longer apply to pensions.

Photo credit: Vita Marija Murenaite @runningvita (Unsplash.com)

NHR CHANGE TO PENSIONS -Update 31 July 2020.
There will now be a flat 10% tax on all foreign pension income.

Note: there will be no change to UK government pensions which have always been taxable in the UK and will continue to be taxed in the UK only.

Update July 2020: New taxation rules.

There is a new 10% taxation applied to pension incomes and other global income. In the past this was zero. But for most pensioners this is still a much better rate than the rate applied in their own country.

Working professionals will pay the flat 20% rate on global income which includes pensions and other revenues.

The rest of the NHR regime will remain the same.

What are the other benefits of NHR?

There is no change to the very attractive ‘no Portuguese tax on foreign income for your first ten years in Portugal’ – which includes UK rental income, certain capital gains, interest and some dividends.

NHR also offers a flat income tax rate of 20% for those employed in Portugal in one of the pre-defined ‘high-value’ professions.

To qualify for NHR, you must not have been resident in Portugal within the last five Portuguese tax years and you meet the conditions of Portuguese residence.

Download our ‘Residency and Brexit’ Guide: 10 Steps to Portugal

Portugal is still very appealing

Even with the changes Portugal is still very appealing compared to other EU countries.

While less beneficial than zero tax, a 10% tax on foreign pension income is still lower than that charged in many other countries including the UK.

Even if you do not qualify for NHR, Portugal can offer tax appeal.

UK pension income outside the NHR regime attracts the usual income tax rates but there are opportunities for extremely favourable tax treatment on investments.

So if you are living in Portugal, consider exploring your options for transferring and reinvesting UK pension funds into more tax-efficient arrangements.

But settling in Portugal is about much more than financial benefits.

For those already living here, it will be no surprise that Portugal is ranked the ‘best country in the world for expatriates’ quality of life.

For strategic cross-border financial advice contact us today

Credit to: Portugalresident.com