Foreign Pensioners and Non-Habitual Residents

Jan 16, 2023 | Europe, Pension Transfers, Pensions, Retirement, Tax

Are you retired and thinking of moving to Portugal? Or are you already living in Portugal and wondering how your retirement income is taxed? You’re in luck – we’re here to break it all down for you. Keep reading to learn more about the different types of retirement income, how they’re taxed, and some tips.

The purpose of this article is to provide you with information about a low-tax retiree programme in Portugal and to highlight the potential benefits of transferring your pension abroad.

Portugal’s Non-Habitual Residence Regime

Many people’s ultimate dream is to work hard, save money, and retire abroad in a climate with year-round sunshine. Moving overseas now has an added financial incentive.

New pension liberties enable you to relocate abroad, bring your hard-earned savings with you, and potentially avoid some of the taxes that would otherwise apply in your home country.

If your home country has a double tax treaty with Portugal, you can move to Portugal and pay a low tax rate on your pension, whether you take it as a lump sum or as a regular income.

What is it?

The essence of this scheme is that those who qualify for non-habitual residence (NHR) can receive tax-free pensions, dividends, royalties, and interest income in both Portugal and the country from which their income is derived. Of course, there are exceptions, so always consult a tax professional.

The exception for UK citizens is UK government pensions, which include the local authority, army, police, teaching, fire service, and some NHS pensions. In the United Kingdom, these pensions are always taxable.

To be eligible for the NHR scheme, one must become a Portuguese tax resident after not being a tax resident in Portugal for the previous five years. This status is valid for ten years.

To become a Portuguese tax resident, you must spend more than 183 days in Portugal during the fiscal year, which runs from January 1st to December 31st. Another option is to demonstrate that you have a residence in Portugal by December 31st of that year with the intention of making it your habitual residence.

Successful NHRs will be able to enjoy all of the benefits of being a regular Portuguese tax resident, including healthcare. Remember that you must demonstrate that you have not been taxed in Portugal as a tax resident in the previous five years.

Non-habitual residence regime changes

The Portuguese government intends to tax foreign pension income under the NHR at a flat rate of 10% beginning March 31, 2020. The new foreign pension tax applies only to those who apply for NHR after March 31, 2020, and the flat rate of 10% tax is valid for up to 10 full tax years.

UK government pensions will continue to be taxed only in the United Kingdom. Only foreign pensions are affected by the changes to the NHR regime; everything else remains unchanged. Even a 10% tax on foreign pension income appears to be a better deal than UK tax rates.

Furthermore, under the NHR, you can still receive other forms of foreign income tax-free in Portugal for the first ten years.

How does NHR work for a British Retiree?

The key concept here is double taxation treaties (DTT).

The sole purpose of double taxation treaties is to ensure that citizens of countries with mutual DDT do not have to pay taxes in both their domicile (usually their country of citizenship) and their residence country.

The United Kingdom has double tax treaties with a large number of countries around the world. It’s a brilliant arrangement for British expats because it keeps them from having to pay taxes in both Britain and their new home country.

Each treaty is a distinct document that states:

  • the country in which you pay taxes
  • the country in which you seek relief
  • how much tax relief you will receive

Treaties may differ from one country to the next. For example, many, but not all, double taxation treaties provide UK state pension relief from UK income tax.

The Double Taxation Agreement between the United Kingdom and Portugal ensures that pensions and annuities are taxed only in the country where the individual resides, with the exception of government pensions.

This means that if you are a tax resident in Portugal, your personal pension, which includes employer schemes and personal accounts such as SIPPs (self-invested personal pensions) and QROPS, as well as your state pension, will be taxed only by Portugal and not by the UK.

If you obtain NHR status, your foreign-sourced pension will be taxed at a flat 10% rate for the next ten years. Your pension income will be taxed at the scale rates after this period.

Caution! If you withdraw your entire UK pension fund as lump sums before your 10-year NHR expires, you may have to pay income tax on your pension. It is strongly advised that you seek professional financial advice to ensure that you can fully benefit from your NHR status.

How to Register in Portugal as a Tax Resident

To obtain non-habitual resident status, you must first register in Portugal as a tax resident. Those who wish to apply for the regime must generally:

  • Non-resident taxpayers must register
  • Obtain a residence permit (for EU citizens)
  • Become a tax resident
  • Only then should you apply for non-habitual resident status

How to Obtain NHR Status

The year after acquiring Portuguese tax residence, you must apply before March 31st of the tax year. The Director of the Taxable Persons Registration Service (Serviços de Registo de Contribuintes) is the recipient of this application.

All NHR applications must now be submitted through the website of the tax authorities.

Furthermore, individuals must submit a statement in which they solemnly declare that they did not meet the criteria for being considered a Portuguese tax resident during the previous five years.

If the process seems daunting, there are dozens of legal firms in Portugal that will gladly assist you and advise you on the best course of action.

Transferring your UK pension to another country

Your UK pensions can be transferred to a European-regulated pension scheme in either GBP or EUR. This is usually to a QROPS or a SIPP.

We hope this article has given you a better understanding of how pension income is taxed in Portugal and some of the benefits of the low-tax retiree programme. If you have any further questions or would like assistance with transferring your pension, our team at SJB GLOBAL would be happy to help. Contact us today to learn more.

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

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By scheduling an appointment with an adviser they will reach out to you at your requested time. 
Personal advice, whenever it suits you.

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