NHR – 2020 State Budget requires a minimum tax of 10% for foreign pensioners

Expatriates to pay at least €7,500 in income tax per year on foreign sourced pensions

With the proposed NHR changes in the 2020 State Budget, promoting Portugal as the “Florida of Europe” might soon become more difficult. Foreign pensioners who join the non-habitual residency scheme (NHR) in the future will lose the double tax exemption and will be required to pay a 10% tax rate in Portugal with a minimum assessment of €7,500 per annum. However, the intention is not to drive away wealthy foreign fiscal residents from a regime that has earned for Portugal many millions of real estate and other taxes.

The new requirements will only apply to future applicants who request NHR status after the 2020 State Budget becomes passed into law. However, it is also possible for those who have already joined the NHR scheme to opt for this limited taxation. Paying this minimum tax in Portugal provides a window of opportunity that may prove valuable to Finns, Swedes and others who are at risk being taxed in their countries of origin at much higher tax rates.

NHR emerged in 2009 as a way to attract highly skilled individuals to Portugal in exchange for a flat-rate assessment of 20% rather than the high tax rate of 48%. However, the scheme also provides a generous framework for foreign pensioners who benefit from a 10-year “IRS” exemption on pensions received from abroad. As tax residents in Portugal, these fiscal migrants no longer pay tax in the country of origin.

It is this double exemption that continues to prove seductive to many foreigners. It is also this double exemption that leads to Portugal being accused of promoting unfair tax competition. To restore a level playing field, opponents to the NHR tax exemption have proposed the 10% minimum income tax rate.

Existing Pension Exclusion
Under the Portuguese tax code (CIRS), contributions to pension plans are normally considered to be capital. In other words, these contributions have already satisfied tax obligations in the fiscal year in which they were made. Only the subsequent growth of the Pension Fund is taxable upon withdrawal. When the appropriate statutory criteria have been satisfied, 85% of pension income may be excluded with the remaining 15% liable for assessment.

Example: As habitual residents (living in Portugal more than 183 days per annum), a couple, each earning €75,000 in pensions, will have a total gross tax before deductions of just €2,000 (1.33%) on their total income of €150,000 after exclusions.

With tax treatment like this on the books for decades, who needs the confusion and disarray of the Non-Habitual Resident status in the first place?

By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.