Foreign retirees taxed despite incentives programme

By ANA TAVARES [email protected]

Portugal’s Finance Ministry is taxing foreign retirees despite a fiscal regime for non-habitual residents created in 2009 exempting the payment of IRS on foreign pensions.

The confusing situation is expected to be clarified after the launch of the Reforma ao Sol (Retirement in the Sun) programme due this year.

The programme was announced last year by Economy Minister Álvaro Santos Pereira and aims to transform Portugal into “Europe’s Florida” by attracting senior citizens from Northern Europe.

But before the programme can be implemented, Finance Minister Vítor Gaspar and his Economy counterpart will need to get in sync as the ‘Retirement in the Sun’ initiative is expected to incorporate tax incentives for foreign retirees.

The programme is being developed jointly by the ministries of economy, finance and foreign affairs. “The government is committed to boosting the senior resident segment and is working on a list of measures to that effect. These will be announced in due time,” a source from the Ministry of Economy told Dinheiro Vivo online newspaper.

It is expected that the launch of the programme will shed some light on the subject of double taxation as well as create a number of policies to attract foreign citizens to the country.

According to Filipe Sousa, from renowned consultancy company PwC Portugal (a branch of PricewaterhouseCoopers International), the tax treaties to avoid double taxation give Portugal, as the country of residence, the exclusive right to charge taxes, which means that foreign pensions should not be taxed in their country of origin.

But, in fact, the combination of tax conventions to avoid double taxation with the fiscal regime for non-habitual residents would mean that foreign retirees should not pay taxes neither here nor in their country of origin. Regardless, the Ministry of Finance has been instructing its staff to warn pensioners that they will be taxed.

Created in 2009 under the government of José Sócrates, the fiscal regime for non-habitual residents was designed to attract high-net-worth qualified professionals and other individuals, such as pensioners.

The regime caught the attention of several Swedish, German, Dutch and British citizens, however it is now clear that tax exemption may not be guaranteed.

Strategy for growth

Constantino Jordan, a real estate consultant campaigning to attract foreign citizens to come and live in the Algarve, said: “With tourism struggling with low occupancy rates despite bargain deals and the second home market in a terrible state, current and future foreign residents are the lifeline for the economy in the Algarve.

“This year we will see more companies closing and unemployment rising. Foreign residents are consumers and employers, and pay taxes while not receiving any social security or unemployment benefits.

“Additionally, they are great ambassadors to the Algarve and are hosts to friends and family, who come here and spend money.”

The entrepreneur says finding incentives to maintain and increase the number of foreign residents should be part of the government’s national strategy for growth.

“Retirement in Portugal should be actively promoted and include tax benefits. Seniors help greatly to boost jobs,” said Constantino Jordan.

“Taxes represent an additional expense for foreign investors, who will want to avoid them by going elsewhere.”

Too good to be true

Speaking about the subject of double taxation, a source from Blevins Franks Financial Management told the Algarve Resident: “That the non-habitual residents scheme avoids Portuguese and, for example, UK tax on UK-source pension income for residents sounds too good to be true.  

“The UK usually limits the opportunity for tax-free income by residents abroad by saying that such UK-source income will remain taxable in the UK.  

“When the legislation was introduced, it was unclear how it would apply practically, and the application and scope of some rules. That an individual should not be taxed at all on foreign source income was an anomaly, and it appears the Portuguese tax authorities don’t like it and are trying to limit this benefit.”

The company specialising in integrated tax planning and wealth management says “Portugal, like most countries at the moment, needs money”.

“While such income does have an impact on the tax, as people pay higher taxes on Portuguese source income, if there is none Portugal gets nothing. It may be that we can expect some tax to be imposed or the regime to be changed in future,” said the source.

“Even with a change in the law, Portugal can remain an attractive place to live from a tax point of view if you have the right tax planning in place.”

The company says there are a number of successful strategies that can be employed to avoid the “snags of this regime and Portugal’s higher tax rates in general”.

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