Beneficiaries of retirement pensions from French sources (excluding public sector retirees) who settled in Portugal before 01 April 2020 may benefit from the Non-Habitual Resident scheme, an attractive tax-free regime for a period of 10 years. This favourable assessment results from a combined application of the double tax treaty concluded between France and Portugal and the “Non-Habitual Resident” tax regime (“NHR”), established by the Portuguese legislator in 2009.
- The Franco-Portuguese tax convention provides that Portugal alone has the right to tax French retirement pensions (excluding public pensions) received by a Portuguese resident.
- Under the “NHR” rules, Portugal grants a total exemption for ten years from taxation of pensions to taxpayers settling in Portugal.
Other Tax Authorities in the European Union are concerned by this situation which they consider to be the subject of aggressive tax competition on the part of Portugal. These criticisms have led to regime changes recently introduced by the 2020 State Budget.
In France, the Tax Authority has expressed its intention to monitor these taxpayers closely. In particular, it considers that a taxpayer who pays no tax in Portugal cannot be classified as a Portuguese fiscal resident within the context of the bilateral tax treaty and therefore cannot benefit from the protection of this agreement. The French Tax Authority intends to rule out the application of the tax treaty and regain its right to tax retirement pensions from French sources.
- French pension beneficiaries who have declared tax residency in Portugal must indicate that they do not benefit from the protection of the tax treaty. These French nationals must declare their retirement pension in France in addition to other sources of income;
- or by sending a rectification proposal leading to a tax adjustment in France.
French courts have not yet ruled on the treatment of such “NHR” taxpayers. There is little doubt that the outcome will be controversial between the position of the French tax administration and that of taxpayers. In all in cases, any letters received from the tax authorities should not be left unanswered. The response to be made and the arguments to be put forward (scope of the agreement tax, existence of taxable income provided that it is not fictitious, the effectiveness of the Portuguese residence) must be adapted to each particular situation.
The 2020 Portuguese State Budget entered into force as of 01 April 1 2020. It reformed the tax system of NHR beneficiaries, by introducing, instead of a total exemption, a flat rate assessment at the rate of 10% for a period of 10 years on pensions from foreign sources. More specifically, the 10% rate applies not only to pension income paid as a result of retirement but also to other types of pensions such as income allocated in the event of early retirement, as well as other benefits granted under compulsory social security pension schemes, including amounts paid by the employer on life insurance contracts as well as contributions to pension funds, retirement savings schemes or any complementary Social Security plan. If retirement is also taxable in the source country, Portugal will grant a tax credit which may be deducted from the tax due abroad.
With regard to other types of income (dividends, rental income, etc.), no amendment was introduced in the State Budget. In practice, these changes also concern taxpayers who already benefit from the scheme. “NHR” taxpayers who are resident in Portugal and who have already applied for but who have not yet received a response can choose the application of the new regime to their 2020 income tax return.