How moving to Portugal can save tax for pensioners and professionals
The non-habitual residency tax regime is earmarking the Algarve as a retirement hotspot. Here, we take a closer look at the regime, find out how it works and for whom, and what impact it has had on the Algarve real estate market.
Imagine spending your retirement, as a foreigner, in Portugal, and not having to pay any taxes on the pension you receive (provided that its origin is outside Portugal) for 10 years. Or coming to work in Portugal, in a profession of “added value”, of a scientific, artistic or technical nature, for which you would only have to pay an income tax rate of 20%. In the broadest of terms, this is what the non-habitual residency tax regime (NHR) entails.
At the time of press, the Ministry of Finance had received 7921 applications for NHR status, of which 5653 had been granted and 1754 were being examined. The figures, given by the Portuguese ministry to the Diário de Notícias/Dinheiro Vivo, also reveal that 514 requests have been rejected.
The tax concept of non-habitual resident was created in September, 2009, and updated in 2013, with the previously ambiguous issue of retirement cleared up. Once it was made clear that income derived from pensions was exempted from taxation – both in Portugal, and abroad – the number of requests rose: between 2009 and 2012 only 100 foreigners wanted NHR status, while in 2013 some one thousand applications were made. Last year was higher still, with 3474 applications, 74% of the total thus far.
The NHR regime is aimed primarily at two groups: retirees, receiving pensions from abroad, and employed and self-employed workers, in professions of high added value. Such professions include: architects, engineers, artists, auditors, doctors, university teachers and company managers, among others. But, while retirees are exempt from taxation on pensions obtained abroad, workers in high added value professions pay a tax rate of 20% on earnings in Portugal. In both cases, the regime is effective for 10 consecutive years, a period, which, currently, cannot be extended. In addition, applicants must not have been resident in Portugal during the last five years. A declaration attesting to this fact must be supplied, alongside any additional information the Portuguese tax authorities may request.
There are, however, exceptions: if NHR applicants have income in their country of origin, such as fixed term deposits or dividends, they may have to pay tax in the country of origin (albeit often at a lower rate), depending on the double taxation agreement applicable between Portugal and their country. For this reason Pedro Rosado, lawyer at Rosado Advogados, who teaches International Taxation at the University of the Algarve, says that the citizens to benefit most from acquiring NHR status are: “those who come from countries with the oldest agreements, such as the UK and France.” Another important proviso is that the regime applies to “pensions of a private nature”, known in the UK as company pensions, annuities or old age pensions. Meaning, that if the applicant has worked as a civil servant in his/her country of origin and receives a government pension, he/she will still pay taxes on it in his/her country of origin.
The lawyer, who dealt with his first NHR case in 2012, has already helped some one hundred clients obtain this status, primarily retirees from the UK and France, but also Swedes, Dutch and Irish. The French, he says, are fleeing the heavy taxation regime demanded by the current French government, know little about the Algarve, and hence choose to rent a property to begin with. UK clients, however, “are better acquainted with the region and buy immediately, often in advance”.
The majority of Gavin Scott’s clientele, senior partner of international financial consultants Blevins Franks, near Almancil, is also made up of British retirees: “Since the scheme was launched we have advised around 50 people, mainly British. I believe that the NHR regime has encouraged many people to come to Portugal, allowing them to buy larger properties thanks to their increased purchasing power in light of tax benefits.”
Stressing the regime’s importance, Pedro Rosado says that it is important to clear up a general misunderstanding: that people with NHR status do not pay taxes in Portugal. “The NHR regime is a tax incentive allowing these people to make a choice – to live in Portugal – which in normal circumstances they wouldn’t make,” he explains. “They are only exempt from income obtained abroad, which in normal circumstances, they would never pay in Portugal, not least because the control Portuguese authorities would have over this is much reduced.”
In applying to become residents, these citizens will have to prove that they really do live in the country, i.e. they will have to purchase or rent a property in Portugal.
“The purchase of a property costing €400,000 supplies Portuguese coffers with around €30,000 in purchase taxes alone – Property Transfer Tax (IMT) and Stamp Duty. The following year, this person will pay Municipal Property Tax (IMI) on the tax valuation of the property, i.e. a further one to two thousand euros. Then, they buy a car, because they can only bring a foreign-registered car into the country under certain conditions, and they will pay VAT, motor vehicle purchase tax (ISV) and road tax (IUC). They will go to restaurants and bars, buy rounds of golf, furniture – they might not pay income tax, but they pay Portugal’s most important tax, VAT.”
Countries such as Malta have similar tax benefit systems, but Portugal has managed to take on its greatest competitor – Spain – by offering more benefits. In Portugal’s neighbour, the NHR regime has tax incentives for no more than five years and retirees are not covered. Pedro Rosado also praises the simplicity of the application process, which involves changing your tax status at the tax office (made, for example, by presenting proof of property purchase or rental agreement) and submitting an application for registration to the Taxpayer Registration Office, in Lisbon.
“The average turnaround time is seven to eight months, but there are quicker cases,” the lawyer reveals. It is also expected that this turnaround will be significantly reduced with the implementation of a new online application facility, on the tax authority’s website.
Any criticism? For Rosado, consolidating the regime is vital, adding to the list of high added value professions, the initial line-up of which was only experimental, and clarifying the issue of property gains. Given the regulations of the double taxation agreements, capital gains tax, such as selling shares, can still be taxed in Portugal to a non-habitual resident – even if they are obtained abroad. “If they don’t tax pensions, dividends and interest, why do they tax this? It is a contradiction, which needs to be quickly resolved, to make our regime more competitive and not put doubts in the minds of people when choosing Portugal.”
Impact on the real estate market
How much impact does this measure really have on the Algarve’s real estate market? Despite not publishing figures per region – we don’t know where non-habitual residents live – records reveal that most of them are retired persons. In 2014 alone, 801 foreign pensioners were granted NHR status. The vast majority came from France (327), then Sweden (128) and Finland (87), but applications were also received from Britons, Germans and even Tunisians. And one thing is certain: many of the retirees choose the Algarve in which to live.
For many specialists, the Golden Visa scheme has benefitted Lisbon’s real estate market the most, while the NHR regime has helped revive the Algarve’s market, as retirees are attracted to the region by its pleasant climate and relaxed lifestyle. “The NHR tax regime is used more by buyers from the EU, such as the French, who generally invest more in the Algarve region,” explains Luís Lima, president of the Portuguese Real Estate Professionals and Brokers Association (APEMIP). The APEMIP head says he is in no doubt that both programmes have boosted the Portuguese market’s recovery, which began in 2013, and he estimates that, “between 180,000 and 185,000 properties in Portugal in 2015, in a total of 11 to 15 million euros” have changed hands.
If you consider foreign real estate investment alone, 3.3 billion Euros entered Portugal in 2015 – a record, according to many international consultancies operating in the country.
According to the Portuguese Construction and Real Estate Confederation, Portugal received 1.1 billion euros of foreign investment for major transactions in the residential sector, mainly because of Golden Visas, which require a real estate investment of €500,000 or over. Smaller transactions represented 327 million euros – a more modest amount, but which many attribute to non-habitual residents.
What do local estate agents say
In the Algarve, those who run estate agencies are in no doubt that this tax benefit regime has helped bring more buyers to the region, especially, “from markets that until recently were quiet, such as the French and the Swedish,” informs Luís Ledo, MD of Casas do Barlavento, in Lagos. Another area in which local agents are in agreement is that the Algarve market has benefitted much more from the NHR regime than from Golden Visas. “Golden Visa buyers are more interested in buying in cities, and purchasing properties that they then let, as an investment, while non-habitual residents are buying in the Algarve,” reveals Kerstin Buechner, director of Quinta Properties, in Quinta do Lago.
Nevertheless, every market has its own specific characteristics: at Quinta Properties, non-habitual residents are not well represented in the company’s 2015 sales, perhaps because they are looking for properties in the countryside, outside luxury resorts, with prices of around a million euros. “Many of them aren’t pensioners, but they are wealthy, of all ages, and French, Irish or British,” reveals Kerstin Buechner.
As for the Western Algarve, Luís Ledo says that last year he had at least nine buyers applying for NHR status. Most of them are retirees, French and Swedish, and around 60% invest in apartments, the remainder in villas.
In Carvoeiro, Patrícia Candeias, from Fine & Country, attributes much of the estate agency’s success to the NHR regime. “Around 40% of our clients are French and almost all of them are here because of the NHR regime. We have witnessed a significant increase in the number of requests for information and sales from Scandinavians. Other nationalities, such as Germans, are also an important market for us, but in general they don’t seem to be familiar with the NHR regime. As for British buyers, our greatest market, we are starting to have more pensioners coming to the Algarve as a result of this regime, but many are still not aware of the potential in terms of tax benefits.”
In addition to the above-mentioned, Essential Algarve spoke to various other estate agents in the Algarve to ascertain the impact of non-habitual residents on real estate sales in 2015. Responses varied greatly: while one agent linked 50% of his total sales to the regime, the average settled at around 20%.
Martin A. is one British buyer who was actually aware of the tax benefits, and for one simple reason: he and his partner Helen were accountants in a multinational company. The two British retirees, 57 and 52, respectively, are now renting an apartment in Alvor until work on the house they bought is completed. When asked as to why they chose Portugal above Spain, the accountant and golf fan, who had already enjoyed many holidays in both countries, highlighted the fact that the Portuguese speak English, lower living costs and Portugal’s milder climate.
As to the application process for NHR status, both of them applied in February, 2015, but the time they had to wait varied: Helen’s status was approved by June, while Martin had to wait until October. “We think that they approved Helen’s without looking too much into it, while my application was examined in greater detail. They didn’t ask for any additional information, though.” The new resident would advise anyone who is interested in this regime to find a specialist “with experience in NHR cases”, while stressing that the regime has afforded them a much greater “financial flexibility”, as they live tax-free.
John and Jane Knight, 61 and 57, have a similar story: the couple enjoyed holidays in Portugal in the four years prior to moving to the country. Once they had travelled through Europe, the two retirees – John a financial director and Jane self-employed – ended up choosing the Algarve, where they bought a house in Estoi. “We both liked the climate, the people, the rhythm of life, the choice of leisure activities (golf, cycling, swimming, diving), and the experience of other foreigners, who had quickly settled into the community. The most important factor was probably the cost of living and the price of real estate,” says John. But it’s not just retirees coming here. Chris Howell, the current chairman of the Oceânico Golf group, and non-habitual resident since 2013, is one of the qualified workers, who have chosen to accept the invitation to come to Portugal. “Although the climate, the food and the qualities of the Portuguese were also decisive in my decision to come to Portugal, instead of staying in the UK or moving to Canada or the Netherlands, the NHR tax implications were also important, in particular the income tax of 20% on my salary,” the specialist in administration and company rehabilitation ensures us.
By Ana Tavares
Photo: ©Martinhal Beach Resort & Hotel ©www.reusse.de