pension savings

Anyone who is nearing or at retirement age wants to protect his or her hard-earned pension.

Many want to do this in a safe country with a warm climate, friendly people and a great lifestyle.

Now one country has made it easy to do all the above.

Portugal, voted the world’s best golfing destination and Europe’s best beach destination by the World Travel Awards, has recently improved legislation aimed at attracting foreign residents and investors to the country. The Non-Habitual Resident (NHR) law allows qualifying individuals who have not been resident in Portugal during the previous five (5) years, to become resident in the country and receive a private pension or non-Portuguese income, tax-free for a period of ten (10) years. Foreign or non-Portuguese income is exempt from taxation if the country from which it is paid has the right to tax the payment (even if it does not). Qualifying individuals include EU/EEA/Swiss nationals and those who qualify based on special programs such as dependent employee, entrepreneurship, study, business investment or the Golden Visa.

The formal requirement for residency is either 183 days or possessing what could be deemed as an habitual (owned or rented) residence on the 31st December of the respective tax year. Exceptions to this exist, such as the Golden visa, which allows non-EU citizens to obtain residence by spending at least €500,000 on real estate.

Under the NHR law, a flat rate of 20%* (less than half the highest taxpayer rate of tax) will be levied on any income originating from Portuguese sources, work conducted in the country or foreign income not taxed or subject to taxes at source.

According to most double tax treaties (conventions) taxation of pension income occurs in the country where the person is resident. It thus follows that, under the NHR law, most foreign income will be tax-free. An important exception to the law involves pensions paid to anyone previously employed by the government, in that each government typically reserves the right to deduct tax at source that means that full exemption will not be possible. People who fall into this category can nonetheless offset or mitigate any tax due using the double taxation treatment between Portugal and the country of origin.

It will also be important to analyse each sub-category of assets, such as dividends, royalties, bank interest, etc. in order to ensure that maximum tax relief is obtained in each case. The use of a suitably qualified tax advisory professional is recommended and the typical investment of between €1,000 and €3,000 (depending on complexity of an individual’s financial affairs) is generally quickly recouped.

The process for eligible applicants (i.e. those who meet the prerequisites explained above) is simple: it involves registration with the local Finanças (or tax office) in order to obtain a tax number, indication of a place of residence (either proof of ownership or of a long-term rental contract) and a written request to the relevant government department. All applications must be submitted by the 31st of March of the year following that to which the application refers. Applications may take a few months to process so it is recommended that all eligible applicants submit their requests as soon as they have taken the decision to make the move, in order that the outcome is known if possible before the end of relevant tax years (not only in Portugal but in the country of origin).

The NHR law provides an excellent solution for pensioners as well as liberal professionals such as consultants, company directors, doctors, dentists, architects and engineers, and anyone promoting active investment in the country. Occupational pensions, as long as deemed not to be sourced in Portugal, are exempt under the NHR law.

The possibility of a tax-free pension, the absence of inheritance or gift tax, no wealth taxes (other than annual taxes on real estate), access to the state health system for residents and EU citizens, a lower cost of living than most of the EU-18, and the availability of quality and cost-effective private health, have earned Portugal the accolade of the “Best Place in the World to Retire” from the 2014 Overseas Retirement Index.

In addition to the traditional route involving the purchase of real estate, a rental-based solution for retirement and long-stays now also exists in the Algarve. Complete with medical, F&B and other relevant services, the solution caters for those looking to try-before-they-move, to enjoy winter stays in their destination of choice, and also affords NHR status to qualifying individuals who decide to spend the majority of their time in the country.

* From 2015 there will be a progressive reduction in the 3.5% surcharge imposed on all personal income tax in Portugal, linked to the end of Portugal’s bail-out from the EU/ECB/IMF

Written by Luis Teixeira da Silva

Founder and Director at Algarve Senior Living


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