Under the final version of the 2020 State Budget, pensions will no longer enjoy full exemption from taxation in Portugal. Instead, pensions will be subject to a flat tax of 10%. A minimum levy of €7,500 had been proposed, but this measure was eliminated in the final version of the Budget.
The guidelines of the Doctrine Declaration (“Ficha Doutrinária”) dated 04 December 2017 clarify tax liabilities based on nº 5 of article 81º of the IRS Code. Assessment of income from foreign sources classified under categories E (capital), F (long-term rent) and G (capital gains) earned by taxable persons considered to be Non-Habitual Residents follows the exemption method where the source country has the power to tax this income under the applicable Double Taxation Agreement. This rule infers that the tax exclusion does not hold for jurisdictions without such an agreement in place. Tax-exempt income must still be reported annually in Portugal to determine the final tax rate to be applied to total aggregate income subject to assessment.
As a relatively new tax, it is not surprising that many have been caught unaware of their liability to pay AIMI and, more importantly, how they can avoid the disturbing consequences. The additional assessment to IMI (Adicional Imposto Municipal Imobiliário) is sending shock waves to individuals and company owners who unwittingly find themselves under the weight of this added fiscal obligation. Continue reading
Due to a pending change in the French government’s interpretation of domestic law, national migrating pensioners may soon be classified as still being resident for tax purposes in France if they join the Non-Habitual Resident (“NHR”) scheme in Portugal. Under the new reading, the 10-year exemption granted to retirement pensions under NHR creates a double tax waiver that contradicts the application of the Double Taxation Agreement (“DTA”), thereby negating any change in French residency status. To avoid on-going assessment in France, French migrants should establish their “centre of economic interests” in Portugal as well as have other sources of taxable income in Portugal.
La France se prépare à attaquer l’exonération des pensions de la RNH
Grâce à un changement imminent dans l’interprétation de la législation nationale par le Conseil d’État, les retraités nationaux émigrés au Portugal pourraient bientôt être classés comme étant toujours résidents fiscaux en France s’ils adhèrent au régime de Résident Non Habituel portugais. Selon la nouvelle lecture, l’exonération de dix ans accordée aux pensions de retraite dans le cadre de la RNH crée une dispense fiscale qui contredit l’application de l’accord de double imposition, annulant ainsi toute modification du statut de résident en France. Pour éviter que les évaluations fiscales continuent en France, les migrants français devraient établir leur «centre d’intérêts économiques» au Portugal et disposer d’autres sources de revenus imposables au Portugal.
Some home buyers are eligible for a three-year exemption on the municipal tax on real estate (“IMI”), provided that the dwelling corresponds to their permanent residence. When the property is bought by more than one person (a couple, for example), the dispensation is only maintained when there is no change in the fiscal address over the period. Otherwise, the Tax Authority (“AT”) will consider that the necessary conditions to benefit from the tax break are no longer being met and the waiver will be revoked.
In theory, even though a tourist endeavour (“empreendimento turístico”) may be exempt from Municipal Property Transfer Tax (“IMT”), the benefit is rarely realised. This is due to the fact that most proposed projects acquire property long before the completion of the required bureaucratic process. In practice, the purchase appears as a routine acquisition, thus failing to qualify for the exclusion.
Amongst Tax Authorities around the EU, a new approach has emerged that can undermine the application in Portugal of the Non-Habitual Residency Regime to pensioners wishing a 10-year tax holiday on their retirement benefits. The new interpretation goes as follows:
Tax-exempt persons in their country of residence (ie. Portugal) are not considered to be resident for tax purposes in that state according to the intended meaning of the applicable tax treaty. Therefore, they cannot benefit from the provisions of these agreements.
The underlying principle is simple: these bilateral conventions exist to protect against double assessment, not doubling up on tax exemptions.
Since Portugal requires that the terms of the respective tax treaty be met in order to benefit from the Non-Habitual Residency Regime, exemption should not be granted if double relief would result. On the part of source country, potential double exemption would lead the local fiscal authorities not to recognise the non-resident status of the individual. The taxpayer would continue to be assessed as before as resident for tax purposes.
What are the alternatives?
In order to overcome the unwanted consequences of this new interpretation, several options exist. Even if the tax exclusion is partial, taxation effectively takes place. As a result, the terms of the double tax treaty can prevail. In other words, if the pension is taxable – regardless of actual amount levied – the intended purposes of the treaty are seen to be satisfied.
If one of the pensions in question is an occupational pension, most foreign residents should qualify for a partial exclusion (see [b] below), thereby averting full assessment. Alternatively, if there are other sources of income, such as a Sole Trader activity in the Simplified Regime, that are fully or partially taxed, the problem should also be solved.
“Should be solved”, but not necessarily so
While taxpayers may be able to present bonafide proof that taxation has taken place, the Fiscal Authorities are still on the “warpath” and are under orders to use their powers to throw up road blocks whenever and where ever possible for Non-Habitual Residents. Many individuals will not feel comfortable advancing in a strategy that draws them into the “crosshairs” of the taxman.
Tax Abatements on Pensions in Portugal
To select from the alternatives, it is important to understand the forms of tax breaks permitted to pensioners Portugal. Several types of tax abatements may be implemented:
- Tax Allowance (“Dedução específica”): the Portuguese Pension Allowance is €4,104 and has remained unchanged since 2012. This flat deduction applies to all pensions regardless of the gross amount received.
- Partial Tax Exclusion (“Desagravamento fiscal”): A Partial Tax Exclusion may apply to occupational pensions to rectify potential underlying double taxation issues when specified conditions are met. The criteria for eligibility are defined in the “IRS” tax code.
- Tax Relief (“Benefício fiscal”): The “Non-Habitual Residency” regime offers newly-arrived expatriates in Portugal a 10-year tax holiday on pensions. This status is designed to attract pensioners to retire in Portugal, rather than compensate them for tax issues as in [b].
Taxpayers who wish to avoid possible scrutiny of fiscal authorities in their home jurisdiction due to NHR should limit themselves to [a] the Tax Allowance and [b] a Partial Tax Exclusion where admissible but skip altogether [c] the gratuitous Tax Relief as exemplified by the Non-Habitual Residency regime. In most cases, they will find that the final assessment due in Portugal surprisingly reasonable, achieving their fundamental tax mitigation goals while sidestepping the potential negative consequences now increasingly associated with Non-Habitual Residence.
The revamped Social Security contributory plan for Sole Traders has been passed into law. Under the new regime, the deductions applicable to the Self-Employed will be based on the average income of the previous trimester, rather than the preceding year. The first declaration under the new rules will take place in January 2019, based on the earnings of the last quarter of 2018. According to the diploma, until the changes take effect, the contribution base established in October 2017 will continue to apply. Keep in mind that the following rules will only start as of January 2019, not in 2018.
Under the new regime, Social Security contributions decrease from 29.6% to 21.4%. Based on 70% of the product, Freelancers in services will have a net rate of 15%. With a corresponding coefficient of 20%, Sole Traders in production, sales or tourism will have an effective contribution of 4.28%. In all cases, the computations derive from the average income of the previous three months. Furthermore, Independent Workers will have the flexibility to adjust further their payments up or down by as much as 25%, to take into consideration on-going earnings fluctuations.
Self-employed individuals must declare their income to Social Security each quarter. The new regime creates a minimum monthly contribution of €20 to guarantee stability and continuity over the course of one’s contributory career to assure future pension entitlements as well as other social benefits associated with occurrences of unemployment or illness.
The new scheme provides that sick pay may be awarded from the 11th day onwards, rather than after the 31st day as before. Eligibility for unemployment compensation will require 360 days of contributions instead of the current 720 days.
In the case of self-employed individuals with standard accounting (“contabilidade organizada”) rather than the Simplified Regime, the relevant income corresponds to 1/12 of the taxable profit calculated in the previous year, with a minimum limit of 1.5 X IAS (±€643), to extend over a minimum period of 12 months. Nevertheless, these taxpayers may opt for the quarterly scheme.
Local Lodging exemption
Starting in 2019, a Sole Trader whose only income results from a Local Lodging activity will be exempt from Social Security contributions. Under the current system, individuals who have opened an “AL” business must begin making payments to Social Security when their first year waiver is over unless they are already contribute or receive benefits from another Social Security system. The same practice applies to those with earnings from renewable energy production.
Withholding, limits and exemptions
Contracting entities should withhold 10% in situations where the Freelancer’s economic dependence (read: income from a sole contractor) exceeds 80%, or 7% when less. Exemption from contributions will continue for self-employed workers who accumulate pension income, as well as those who have contributed the minimum monthly deduction of €20 for a period of at least one year.
On the other hand, Sole Traders who accumulate salaried work will be exempt when average monthly income (relative to the previous quarter) does not exceed the value of 4 X IAS (Social Support Index) or ±€1,715.
Before there was no such limit, that is, those accumulated income from dependent work derived from self employment could be automatically exempt from contributions on their Sole Trader earnings.