FOREIGN residents receiving pensions from their home jurisdictions first need to study the nature of their pension to see how it is to be reported and assessed.
Three types of pensions are taxable under the rules of this category. Each may receive different treatment under the Double Taxation Agreement between Portugal and the home country that governs which jurisdiction is entitled to assessment:
• Civil Service Pensions: government, military, foreign service, etc.
• Social Security Pensions: old age, disability
• Private Pensions: company pensions, annuities, SIPP’s, etc.
If you take early retirement, there are complex rules for determining whether early retirement benefits are considered salary or pension. Before making your first submission, it is wise to get professional advice on the correct interpretation of your individual circumstances within the context of Portuguese legislation.
I receive a military pension, which is taxed at source. Should I pay tax
here in Portugal?
Civil Service or Government Pensions (not to be confused with what the British call “State Pensions” or “Old Age Pensions” which are, in fact, from Social Security) are solely taxable in the country of origin in most cases (although Germany is a notable exception to this rule).However, although not taxed in Portugal, these pensions should be reported both for reasons of transparency as well as determination of your tax bracket.
I turn 65 this year and start receiving a Social Security Pension. Where do I pay tax?
Social Security Pensions are customarily taxed in the country of residence (Portugal).However, these are subject to specific negotiations in Double Taxation Treaties and the outcome is varied. In some instances, the source country retains the sole taxation rights. In other instances, it is the country of residence that taxes exclusively. Finally, there are cases when both jurisdictions are allowed to assess, first the home jurisdiction, then the residence country after granting the appropriate tax credit. It goes without saying that it is crucial to be fully informed before filing.
Where do I pay tax on my company pension?
Private pensions, from company service, personal pension plans, annuities and the like, are normally assessed in the country of residence: in this case, Portugal. In most double tax treaties, the source country cedes the taxation rights to the country of residence. This means that all withholding should stop and that the pension should be paid gross. In order to achieve this feat, you must first declare yourself to be resident for tax purposes in Portugal, normally after your first IRS submission. This is done via a Certificate of Fiscal Residency issued by the Finanças or via a special dual-language form that is submitted to the authorities in both jurisdictions. Once accepted and processed, you should receive a full refund from your country of origin for any tax withheld after the commencement date of your residency in Portugal. From then on, you should be paid your income gross and are required to declare this income in Portugal.
Are there any
pension allowances?
In the year 2004, the deductible allowance for pensions is 8,121.00 euros per individual. For those with a 60 per cent or greater handicap, this allowance increases to 10,557.32 euros. While couples must file a joint declaration, their income is viewed individually within the return. As such, each is entitled to a pension allowance, but cannot pass on any unused benefits to the spouse.
Next week: Tax credits for medical expenses
