The tax-holiday regime for Non-Habitual Residents (NHR), launched in 2009 to entice wealthy foreigners to participate to Portugal’s economic development in exchange for low or no taxation, reveals a very asymmetrical distribution between the two NHR target groups: “value-added” professionals and pensioners. Amongst the 27,367 beneficiaries of the NHR statute allowing for a partial or complete 10-year tax holiday in Portugal, there are only 2,140 “value-added” professionals (8%). Of these, almost half are senior executives of multinational companies. Continue reading
Opinions and proposals, shared on the “Great Debate” website (https://granddebat.fr/) – an initiative by French President Emmanuel Macron to respond to the protests of the “yellow vests” – refer to migrating French nationals who enjoy Portuguese Non-Habitual Residency (“NHR”) as “tax exiles” and to Portugal as “a fiscal eldorado” within Europe. Some participants contend that this double relief (tax exemption for pensions both at source in France and for 10 years in Portugal with “NHR” status) is intrinsically unjust, depriving both states of much-needed tax revenues and increasing the burden on paying taxpayers. The scheme is seen as promoting unfair tax competition among the Member States of the European Union.
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.
Estimates surpass a total of 27,000 foreign taxpayers in Portugal currently enrolled in the NHR programme. The latest developments come from Sweden, looking to broach negotiations of its tax treaty with Portugal. This initiative follows on the heels of Finland’s threat to tear up its tax accord with Portugal if the Portuguese legislature fails to ratify a newly negotiated settlement by the end of November. With changes validated, new rules could apply to Finnish residents in Portugal as of 2022.
Non-Habitual Resident migrants nearly double
Improved conditions and generous tax breaks have attracted more foreigners to Portugal in the last year and a half. The increase in the number of Non-Habitual Residents was 83% over the period, currently totalling 23,767 with NHR status. The rise is mainly from France, Italy and the UK. Emigrated Portuguese nationals are also returning but only account for 6% of the total.
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.
The Finnish Parliament has approved the termination of the tax treaty between Finland and Portugal which prevented Finnish tax authorities from assessing pensioners who have non-habitual residence (NHR) status in Portugal. Finnish tax subcommittee chairman, Esko Kiviranta, still expects the two countries to ratify a new agreement by 1 January 2019. “In this way, we will avoid a situation where there is no tax treaty between Finland and Portugal. This is still possible if Portugal finalises the approval process and notifies Finland by 1 December 2018.”
According to Chairman Esko Kiviranta, the impact of the end of the agreement on pension revenues is expected to be between three and six million euros per year based on the 2016 data. In 2017, 500 Finnish pensioners benefitted from the zero tax rate on their retirement benefits under NHR.
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.
Despite millions in tax concessions, the overall impact on tax revenues from Non-Habitual Residents has proven to be propitious for Portugal, due to total taxable income generated, such as capital gains, rates, VAT, etc. Simultaneously, there is also a significantly healthy impact on local economies arising from new construction, urban rehabilitation and real estate transactions.