Portugal

Living In Portugal

Defining a Portuguese resident in Portugal

In Portugal, the definition of a tax resident is primarily based on the individual’s presence and/or ties to the country. According to Portuguese tax law, an individual is considered a tax resident if they meet any of the following criteria:

• Habitual Residence: An individual who spends more than 183 days (consecutive or non-consecutive) in Portugal during a calendar year is considered a tax resident for that year.
•  Permanent Residence: Individuals with a permanent home available to them in Portugal, whether owned or rented, are considered tax residents, even if they spend less than 183 days in the country.
•  Centre of Vital Interests: If an individual has personal or economic ties indicating that Portugal is the centre of their vital interests, they may be considered a tax resident, regardless of the number of days spent in the country.
•  Professional Activity: Individuals employed in Portugal, whether under a contract of employment or carrying out independent professional activities, may be considered tax residents, even if they spend less than 183 days in the country.

It’s important to note that Portugal applies the “centre of vital interests” test to determine tax residency, which takes into account various factors such as family ties, economic activity, and other relevant connections to Portugal. Additionally, individuals who are tax residents in Portugal are subject to tax on their worldwide income and assets, whereas non-residents are generally only taxed on their Portuguese-source income.

Tax residency status can have significant implications for an individual’s tax obligations in Portugal, so it’s essential to understand the criteria and seek professional advice if there is uncertainty about residency status. 

Reporting on foreign assets in Portugal

Reporting on foreign assets in Portugal involves complying with the country’s regulations and tax laws. Here’s an overview of what individuals or entities need to consider when reporting foreign assets in Portugal:

• Residency Status: Individuals who are tax residents in Portugal are required to report their worldwide income and assets to the Portuguese tax authorities.
• Foreign Assets Declaration: Portuguese tax residents must report their foreign assets if the total value exceeds €50,000 at any time during the tax year. This includes bank accounts, real estate, investments, and other assets located outside Portugal.
• Tax Forms: Foreign assets are typically declared on the Portuguese tax return form, Modelo 3. Specific sections of this form are dedicated to reporting foreign income and assets.
• Tax Treaties and Agreements: Portugal has tax treaties and agreements with various countries to prevent double taxation and facilitate the exchange of information on foreign assets. Tax residents should be aware of these agreements and how they impact their reporting obligations.
• Penalties for Non-Compliance: Failure to report foreign assets or income can result in penalties imposed by the Portuguese tax authorities. These penalties may include fines or other punitive measures.
• Professional Assistance: Given the complexities of international tax reporting, individuals with significant foreign assets may seek the assistance of tax advisors or accountants specializing in cross-border taxation to ensure compliance with Portuguese tax laws.
• Automatic Exchange of Information (AEoI): Portugal participates in international initiatives such as the Common Reporting Standard (CRS), which facilitates the automatic exchange of financial information between tax authorities of different countries. This means that information on foreign assets held by Portuguese tax residents may be automatically shared with the tax authorities of other countries.
• Regular Updates and Compliance: Tax laws and reporting requirements can change, so it’s essential for individuals with foreign assets in Portugal to stay informed about any updates and ensure ongoing compliance with reporting obligations.

Overall, reporting foreign assets in Portugal requires careful attention to detail and adherence to the country’s tax laws and regulations. Failure to comply can result in financial penalties and other consequences. Therefore, seeking professional advice and staying informed about relevant regulations are crucial for individuals with foreign assets in Portugal.

Taxes in Portugal

Tax Position for Non-Residents in Portugal

For non-residents in Portugal, their tax position is different from that of residents. Here’s an overview of the key aspects of the tax position for non-residents in Portugal:

• Taxation on Portuguese Source Income: Non-residents are generally only subject to taxation on income derived from Portuguese sources. This may include income from employment performed in Portugal, rental income from Portuguese properties, and certain other types of income generated within Portugal.
• Withholding Tax: Taxes on certain types of income, such as employment income and investment income sourced in Portugal, may be subject to withholding tax at the source. The rates and rules for withholding tax can vary depending on the type of income and any applicable tax treaties.
• Flat Tax Rates on Certain Types of Income: Portugal applies flat tax rates on certain types of income earned by non-residents. For example, rental income from Portuguese properties is typically subject to a flat tax rate of 28%.
• Tax Treaties for Double Taxation Relief: Non-residents may benefit from tax treaties between Portugal and their home countries to prevent double taxation on income earned in Portugal. These treaties may provide for reduced withholding tax rates or other forms of relief.
• Annual Tax Return Obligations: In some cases, non-residents may be required to file an annual tax return (Modelo 3) with the Portuguese tax authorities to report Portuguese-source income and claim any applicable deductions or credits.
• Non-Resident Stamp Duty: Non-residents who own property in Portugal may be subject to non-resident stamp duty (Imposto do Selo) on certain transactions related to their Portuguese properties, such as property acquisitions or sales.
• Taxation of Capital Gains: Non-residents may be subject to Portuguese capital gains tax on gains derived from the sale of Portuguese real estate or other assets located in Portugal, depending on the specific circumstances and any applicable exemptions or reliefs.
• Taxation of Pensions and Annuities: Non-residents receiving pensions or annuities from Portuguese sources may be subject to taxation in Portugal, depending on the terms of any applicable tax treaties and the nature of the income.

It’s important for non-residents with income or assets in Portugal to understand their tax obligations and seek professional advice to ensure compliance with Portuguese tax laws and to optimize their tax position within the framework of applicable regulations.

Non-Habitual Resident (NHR) Scheme

The Non-Habitual Resident (NHR) scheme in Portugal, initiated in 2009, has been a pivotal draw for expatriates and investors, offering enticing benefits such as tax exemptions on specific transactions and reduced taxes on pension income or wealth. Under this scheme, if structured correctly, individuals can enjoy substantial tax advantages for up to a decade.

However, as of October 2023, the Portuguese Prime Minister proposed the discontinuation of the NHR scheme starting in 2024. The NHR regime officially ended in January 2024, as outlined in the Portuguese government’s State Budget Proposal for 2024, which included amendments leading to the termination of the non-habitual resident regime.

The final vote on the budget legislation occurred on November 29, 2023, introducing a transitional regime preceding the conclusion of the NHR tax regime in 2025. Individuals who became tax residents in Portugal in 2023 and had not been taxed in Portugal in the preceding five years could still apply until March 31, 2024.

For some individuals, there was an extension until March 31, 2025, but eligibility criteria were stricter. To qualify, individuals had to meet at least one of several specified criteria, such as having employment contracts or property agreements signed by specific dates in 2023. Under these conditions, qualifying individuals would attain NHR status from their date of becoming tax residents, whether in 2024 or the first quarter of 2025, until December 31, 2033.

The replacement for the NHR scheme is the Incentivised Tax Status Program (ITS) or the Tax Incentive for Scientific Research and Innovation. This new program offers a flat tax rate of 20 percent on eligible professional income arising from Portugal, possibly including an exemption on professional foreign-sourced income. However, unlike the previous NHR program, pensions are not included in this exemption.

To qualify, individuals must become tax residents in Portugal, not having been tax residents in the previous five years, and earn income in certain professional categories. The categories eligible for the Tax Incentive for Scientific Research and Innovation program include various professions in sectors such as teaching, science, tourism, IT, agriculture, research and development, and more.

Benefits of the NHR Tax Regime include a 20 percent flat tax rate on most types of income earned in Portugal, exemption from tax on foreign-sourced income if subject to tax in another country under a double taxation agreement, and a 10 percent flat tax rate on pensions from foreign sources.

In summary, the NHR scheme in Portugal provided significant tax advantages to eligible individuals, but its discontinuation led to the introduction of the Tax Incentive for Scientific Research and Innovation program as its replacement.

Golden Visa in Portugal

The Golden Visa program in Portugal is an investment immigration initiative catering to non-EU/EEA citizens and their families, offering a pathway to residency permits through investment. Below is a summary of its key aspects:

• Investment Choices: The program offers various investment avenues, including real estate, capital transfer, job creation, scientific research, and cultural preservation. Among these, real estate investment is the most common route.
• Real Estate Investment: To qualify, applicants must invest a minimum amount in Portuguese property, typically starting from €500,000 for urban areas and €350,000 for properties in less populated regions or requiring renovation.
• Capital Transfer: Alternatively, applicants can meet criteria by transferring funds into Portugal, supporting job creation, or contributing to scientific and cultural projects.
• Application Procedure: The process entails submitting necessary documents like investment proofs, background checks, and health insurance to the Portuguese Immigration and Borders Service (SEF).
• Residency Permit: Successful candidates and their families receive a temporary residency permit, enabling them to reside, work, and study in Portugal. The initial permit lasts for one year and is renewable for two-year periods as long as the investment is maintained.
• Residency Obligations: While specific residency requirements aren’t stipulated, applicants are generally expected to spend a minimum of 7 days annually in Portugal to retain their residency status.
• Path to Permanent Residency and Citizenship: After holding the Golden Visa for five years, investors and their families may apply for permanent residency. Citizenship eligibility arises after six years, subject to meeting language and integration criteria.
• Benefits: The program provides visa-free travel within the Schengen Area, access to Portugal’s healthcare and education systems, and the opportunity to live and work in a stable European country.

In essence, the Golden Visa program presents a viable avenue for investors seeking residency and potential citizenship in Portugal, offering access to Europe’s opportunities and benefits.

Income Tax in Portugal 

2024 income tax bands are as follows for annual earnings between:

Solidarity tax

An additional solidarity tax ranging from 2.5% to 5% applies for taxpayers earning more than €80,000 a year.

Inheritance Tax in Portugal

Portugal does not have a specific inheritance tax. Instead, Portugal imposes a stamp duty known as Imposto do Selo on inheritances and gifts of Portuguese-sited assets.

Stamp tax in Portugal

Stamp Duty (Imposto de Selo) is a transfer tax that impacts property buyers in Portugal. It applies to all documents and arrangements related to real estate, including deeds, contracts, and mortgages. The duty is paid by the buyer and is charged at a fixed rate of 0.8% of the property’s registered fiscal value.

Here are some key points regarding Stamp Duty in Portugal:

• Stamp duty is levied on contracts, documents, acts, and acquisitions involving consideration or donations of property at a general rate of 0.8%.
• Certain acquisitions of goods by individuals, such as inheritance and gifts of Portuguese-sited assets, are subject to a rate of 10% based on the tax value of the asset. However, exemptions apply in cases of transfers between direct descendants, such as from parents to children or between spouses.
• Long-term leasing or subleasing contracts, calculated based on the monthly rental amount, are also subject to a 10% tax rate.

Capital Gains Tax in Portugal

Capital gains tax in Portugal applies to profits gained from the sale or transfer of assets such as real estate, stocks, and other investments. Below is an overview of how this tax system operates:

1. Taxation on Capital Gains: Capital gains tax is calculated based on the difference between the selling price of an asset and its acquisition cost. The resulting net gain from the sale or transfer is subject to taxation.
2. Tax Rates: Portugal applies different tax rates for short-term and long-term capital gains. Short-term gains, from assets held for less than a year, are taxed at progressive income tax rates ranging from 14.5% to 48%. Long-term gains, from assets held for a year or more, incur a flat tax rate of 28%.
3. Exemptions and Deductions: Certain exemptions and deductions may apply to reduce the taxable amount of capital gains. For instance, gains from selling a primary residence may qualify for a partial or complete exemption, subject to specific conditions.
4. Reporting and Payment: Taxpayers are required to report capital gains in their annual tax return (Modelo 3) and calculate the tax owed based on applicable rates and deductions. Any taxes owed must be paid to the Portuguese tax authorities.
5. Withholding Tax: In some cases, a withholding tax may be applied, especially for non-residents selling property in Portugal. The buyer typically withholds the tax amount and remits it to the tax authorities on behalf of the seller.
6. Tax Treaties: Portugal has tax treaties with many countries to prevent double taxation on capital gains. These treaties often include provisions to reduce or eliminate taxes on gains if taxes have already been paid in another country.

If a bank account or investment is within a jurisdiction classed as a ‘tax haven’ by Portuguese authorities, income is taxed at a higher rate of 35%. This includes Gibraltar and Guernsey.

If you’re a resident of Portugal and sell property worldwide, half of the profit is added to your annual income and subject to relevant income tax rates. However, a significant exemption applies if you sell your primary residence and reinvest the proceeds to purchase another primary home in Portugal or elsewhere in the EU/EEA. This exemption allows you to avoid capital gains tax.

Retirees or residents aged over 65 can also benefit from avoiding Portuguese capital gains tax by reinvesting in an eligible insurance contract or pension fund within six months of the sale. This is particularly advantageous for those downsizing. Eligible life assurance policies, which offer a tax-efficient structure for holding a variety of investment assets, qualify for this relief.

A recent change affects non-residents who own property in Portugal. Previously, they were taxed at a flat rate of 28% on 100% of the gain. Now, only half of the profit is taxed, and at scale rates, mirroring the treatment of residents.

Understanding these capital gains tax regulations is crucial for individuals selling assets in Portugal, and seeking professional advice can ensure compliance with Portuguese tax laws.”

Corporation tax in Portugal

Businesses operating in Portugal are subject to corporate tax at a flat rate of 21% on any taxable profits generated. Over the past decade, this rate has gradually decreased, positioning it slightly below the European Union average of 21.9%.

In addition to corporate tax, businesses may be required to pay surcharges, which are as follows:

Up to a 1.5% local surcharge, known as Derrama, imposed by the regional municipality on the profits earned.

A 3% state surcharge, called Derrama Estadual, applicable to profits falling between €1.5 million and €7.5 million. In Madeira and the Azores, this surcharge is set at 2.1%.

A 5% surcharge imposed on profits ranging from €7.5 million to €35 million. In Madeira and the Azores, this surcharge is 3.5%.

A 9% surcharge levied on profits exceeding €35 million. In Madeira and the Azores, this surcharge is set at 6.3%.

It’s essential for businesses operating in Portugal to account for these corporate tax rates and surcharges when planning their financial strategies and ensuring compliance with tax regulations. Understanding the nuances of corporate taxation in Portugal can help businesses manage their tax liabilities effectively and optimize their financial performance.

VAT rates in Portugal

The standard VAT rate in Portugal stands at 23%, applicable to most goods and services unless exempted or subject to a reduced rate.

Standard Rate: The standard VAT rate of 23% is applied to goods and services not covered by exemptions or reduced rates.

First Reduced Rate (13%): A reduced VAT rate of 13% is applicable to specific items such as certain food products, wine, select fossil fuels, and musical instruments, among others.

Second Reduced Rate (6%): Another reduced VAT rate of 6% is applied to essential items like basic food products, certain books and newspapers, select pharmaceutical products, medical equipment, passenger transport, and hotel accommodation, among others.

Zero Rate (0%): Certain supplies and services, such as exports and intra-Community supplies, are taxed at a 0% VAT rate.

Exempt Supplies: Some supplies are completely exempt from VAT, including health services, public education, financial services, and others.

Understanding the various VAT rates and exemptions is crucial for businesses and consumers alike to accurately calculate VAT liabilities and expenses, ensuring compliance with Portuguese tax regulations.

Social Security in Portugal

Social security contributions in Portugal are a shared responsibility between employees and employers. Typically, these contributions are calculated based on the employee’s gross remuneration, with rates set at 11% for employees and 23.75% for employers. These contributions serve to fund various benefits, including those related to family support, pensions, and unemployment.

Additionally, apart from the general social security contributions at a rate of 23.75%, employers are required to purchase insurance premiums to safeguard against occupational accidents. The cost of these premiums varies depending on factors such as the nature of the work and its associated risk classification.

UK Pension Planning in Portugal

There are 2 main types of pensions you can transfer from the UK:

Defined Contribution – a pension pot based on how much is paid in

Defined Benefit – usually a workplace pension based on your salary and how long you’ve worked for your employer.

Defined Contribution Pensions

Below is a list of some of the reasons people would transfer away from a defined contribution scheme:

Avoid purchasing an annuity – Many UK schemes only allow the option to purchase an annuity such as Prudential, Scottish Widows, Canada Sun Life and many more. At the time of writing, annuity rates are at record lows, meaning you must live around 40 years to get your money back. They also provide no flexibility and are the main reason pension freedoms came into play to give people the freedom to transfer to more flexible schemes such as an SIPP or QROPS. You are unlikely to be able to have an annuity being based in Spain.

Multi-currency options – UK pensions only have the option to have your pension denominated in Sterling whereas SIPPs and QROPS allow multi-currency. This has become ever more important in times when Sterling has weakened against its peers as retirees who are relying on an income in any currency other than Sterling have seen their income drop in recent years due to currency fluctuations alone. If this reduction reduces your income below your means of living, then you may find yourself requiring larger withdrawals.

Diversified investments – UK pensions are only invested in UK markets. This can have a detrimental effect on your returns as the UK market vs the US market for example has underperformed by hundreds of percent since 2000. Another benefit of transferring is having access to thematic ETFs, allowing you to invest in megatrends which are going to change the way the future works. It often makes sense to have the option to diversify into thematic ETFs and invest outside of the UK market, both of which are options if you transfer to a SIPP or QROPS.

Death Benefits – we often find with DC schemes that the death benefit options can cause serious issues if beneficiaries are outside the UK, because in the UK for example, if you passed away pre-75, the beneficiary can receive the pension tax-free. Post 75 they pay tax at their marginal rate but if the beneficiary lives outside the UK, regardless of when you pass away, it is almost always taxed based on the beneficiary’s marginal tax rate, so what we can do is transfer to an alternative arrangement which gives the option of a dependent’s pension meaning the funds can stay within the scheme and the beneficiary only draws out money when they need it.

Consolidating pensions into one pot – Should you have various pensions with different providers then it can be difficult to manage pre- and post-retirement. Consolidating them into one place with online access and a financial adviser providing regular updates can help you manage your pensions much more effectively.

Defined Benefit Pensions 

Before discussing some of the potential benefits, it’s important to mention that a lot of times it might not be beneficial to transfer your DB pension. You are giving up guarantees for something that isn’t guaranteed, so the decision is not black and white. However below are some of the reasons people transfer away:

Greater Flexibility – Defined Benefit Schemes offer a guaranteed income for life from your normal retirement date. This is a good guarantee that is lost should you transfer away. However, a guaranteed income is rigid and cannot be changed once you begin to receive your pension. Transferring to a SIPP or QROPS allows you to have the following flexibilities:

• You can access your pension earlier or defer it to a later date without penalties, unlike a DB scheme.
• You can invest in any regulated investment.
• You can take 100% of your pension as a lump sum, provided you are over 55.
• You can increase or decrease your income. The reasons could be:
  1. You become ill and want to spend the money while you can.
  2. You never want to access the funds and therefore pass them to your family.
  3. You can decrease or stop your income if you find part-time work or receive an inheritance in retirement.
  4. There are many other reasons.
• You can take ad-hoc lump sums through retirement. The reasons could be:
  1. To give money to a loved one.
  2. To go on holiday.
  3. To buy a property.
• You can take your 25% pension commencement lump sum and then defer taking the rest of your pension until whichever age you wish. The reasons could be:
  1. You want to pay off your mortgage and then defer taking the rest of your pension until you are retired.
  2. Purchase an investment property or business idea and then defer the rest of your pension until you are retired.

Cash equivalent transfer values (CETVs) – The CETV you receive is closely linked to UK gilt rates so if interest rates are low, CETVs go up significantly. If rates are high, it becomes unattractive to transfer a DB pension.

Your scheme will provide you with a “Cash Equivalent Transfer Value” (CETV) which is the amount of money the scheme requires to purchase your guaranteed income in today’s money. As yields fall, transfer values go up. If yields fall too much, schemes will struggle to pay guarantees as the performance of the assets they hold could become lower than the amount of money they need to pay for your guarantees. What once was a benefit, could, in turn, become a drawback, as schemes have the right to offer a reduced transfer value should they be unable to pay members benefits.

Reduced Life Expectancy – Although this is a very morbid thing to think about, it is an important factor to consider when reviewing a defined benefit pension. The analysis you receive will compare the income between when you retire and when you die and work out whether you would be better off in the scheme you are in or in a SIPP or QROPS. Advice is calculated using the average life expectancy for both males and females in the UK.

Therefore, if the life expectancy is much lower in your family, spending more in earlier years becomes much more important as you can access 100% of your pension from age 55 in a SIPP or QROPS. This means that should you become ill, you can spend your pension before you die or pass 100% of the remaining pension to your loved ones.

Avoid your pension going into the PPF – The pension deficit of defined benefit schemes has been increasing significantly over the past decade. Many large defined benefit schemes have gone into liquidation over the past few years such as BHS, British Steel, Carillion and many more. When schemes go into liquidation, they enter the pension protection fund (PPF) and you automatically lose 10% of your pension and potentially much more. In many instances, some of your guaranteed increases could also be lost completely.

It is important to note that the PPF is not backed by the treasury and could also go into liquidation should too many schemes enter. The PPF as of June 2020 is in fact in deficit. Upon transfer to a SIPP/ROPS, you will be protected against your scheme going into liquidation. Your funds are completely ring-fenced inside a SIPP/ROPS, meaning that if the SIPP/ROPS trustees go into liquidation, your funds are completely protected.

There are many other benefits and drawbacks in addition to the ones mentioned above. Some schemes have restrictions or penalties to transfer away which may defer a transfer being in your interest. We help you understand whether it is worth looking into alternative options and if it is, we can then assess whether a QROPS or SIPP would be more beneficial.

UK Pension Options in Portugal

You have 3 options with what to do with your UK pensions in Portugal:

• Retain the existing benefits 
• Transfer to an overseas scheme (QROPS)
• Transfer to an alternative UK scheme (SIPP)

Retain the existing benefits 

Before Brexit, leaving your pension where it is might have been the best option, depending on whether you have a defined contribution or defined benefit pension but since Brexit, it has become very difficult to access UK pension schemes in Portugal. If you have an annuity as the only retirement option, you most likely won’t be able to access your pension in Portugal. Some schemes don’t even allow access to flexi-access drawdown outside of the UK. If this is the case, you have to transfer.

Some UK pensions have very good guarantees before and after retirement as well as on death. Other pensions may have restrictions about how you can access your funds, high fees, limited investment and currency options among other things.

Understanding what your pension offers you as well as understanding what your needs and objectives are is important before looking at other options as your pension could be suitable where it is currently based. We provide a free initial consultation to first understand what type of scheme you have to give you a fair understanding of whether it is worth looking into alternative options.

Some of the main reasons people look at moving away from their scheme are listed below: 

Transfer to an overseas scheme (QROPS)

A QROPS stands for Qualifying Recognised Overseas Pension Scheme; an alternative pension that accepts transfers from the UK defined contribution and defined benefit scheme. Portuguese residents qualify for a transfer to a QROPS; however, in 2017 the government announced a 25% overseas transfer charge to anyone who transfers to a QROPS that is based outside of the EEA.

Following the UK government’s spring budget on 8th March 2017, HMRC released an update in their Pension Schemes Newsletter on a few key points, including the QROPS rules, which we need to bring to your attention:

Transfers to QROPS requested on or after the 9th March 2017 will be subject to a 25% tax charge, unless:

• The QROPS is in the EEA and the Member is also resident in an EEA country.
• Subject to the 5-year rule, where the exemption proceeds no longer apply, the 25% charge can be retrospectively applied. However, curiously, within the newsletter from HMRC, they confirm that “A change in member’s circumstances within 5 years may result in a change to the tax treatment of the original transfer and could lead to a repayment being due.”
• In the 2024 tax year, anyone transferring to a QROPS with a pension scheme above the lifetime allowance will be taxed 25% on the excess.

The benefits of a QROPS are as follows:

• Payments from a QROPS are paid gross from UK income taxes.
• You will be entitled to a 25% lump sum from the age of 55.
• You will be able to withdraw from your pension via drawdown or Flexi-access in Malta but not in Gibraltar (GAD).
• You can withdraw 100% of your pension from age 55.
• Greater investment choice.
• Have your pension denominated in any major worldwide currency.
• You will no longer be subject to UK pension legislation changes.
• UK inheritance tax tax does not apply.

As you may be aware, trusts can cause many problems in Portugal, similar to most civil law jurisdictions. Most QROPS fall under a trust law framework hence they are not completely ideal for some individuals in Portugal. This is why it is extremely important to speak to one of our independent financial advisers before choosing a QROPS as it could seriously impact the amount of tax you will have to pay.

Few QROPS providers have established schemes based on contract law which becomes friendly under Portuguese law, although jurisdiction is extremely important when choosing a QROPS provider as Portugal has an anti-abuse provision against any jurisdiction that is deemed to be a tax haven under Portuguese law.

There will be no ‘overseas transfer charge’ providing you remain an EEA resident for 5 years from the date of transfer.

Transfer to an alternative UK scheme (SIPP)

SIPP stands for ‘Self-Invested Personal Pension’. It is recognized as an international pension scheme that HM Revenue & Customs (HMRC) identifies as eligible to receive transfers from registered pension schemes in the UK. To qualify as an international SIPP, the scheme must meet the requirements set by UK tax law and you must be a non-UK resident. SIPPs can receive the transfer value from your scheme and then the funds are invested to provide you with retirement benefits at any time from age 55.

Most SIPPs are ‘money purchase’ or ‘defined contribution’ schemes where the member knows how much they are investing, but not what they will receive, because the pension fund size will depend upon the performance of the underlying investments of the SIPP. The performance is not guaranteed.

A major benefit of a transfer to one of these arrangements is that your pension fund does not force you to buy an annuity and could therefore be passed on to a nominated beneficiary on your death – in some cases, free of UK tax. Additional benefits would include wider retirement options, greater investment choice, the ability to have your fund managed by an overseas IFA, choice of any major currency denomination, plus more:

• Payments from your UK pension will be taxed as ‘earned income’ at source by HMRC, although this can be avoided. Still, this can be claimed back under the double taxation treaty.
• You will be entitled to a 25% lump sum from the age of 55.
• You will be able to withdraw from your pension via drawdown or Flexi-access.
• You can withdraw 100% of your pension from age 55.
• Much greater investment choice.
• Have your pension denominated in any major worldwide currency.
• You will be subject to any UK pension legislation changes.
• UK pension death tax applies to UK pensions regardless of where you are resident. This means if you die after the age of 75, your pension will be taxed at your beneficiary’s marginal rate on receipt up to 45%. In Spain however, you would be taxed if the beneficiary is a Portuguese resident regardless.

 Comparison of SIPP vs QROPS

• There could be a 25% overseas transfer charge applied to a ROPS transfer if you don’t live in the EEA or you move outside of the EEA within 5 years of the transfer. This does not apply to a SIPP transfer.
• There could be an additional charge if your pension values are above the LTA amount and you transfer to a QROPS. This doesn’t apply in a SIPP
• Both a SIPP and QROPS do not force you to buy an annuity.
• They both offer the ability to take benefits through drawdown or flexi-access.
• They both allow you to hold your pension fund in any major currency of your choice.
• They both can be managed by an independent financial adviser.
• A SIPP has a lifetime allowance of £1,073,100 that increases by inflation unless you have lifetime allowance protection, whereas a QROPS has no lifetime allowance.
• A SIPP is cheaper than a QROPS.
• A SIPP is FCA-regulated whereas a QROPS is regulated by either the MFSA or GFSC.

 Taxation on UK Pensions in Portugal

UK pensions received by residents of Portugal are subject to taxation in Portugal according to Portuguese tax laws. Occupational pensions, including private or company pensions received from the UK, are generally taxable in Portugal. They are treated as ordinary income and taxed at progressive rates, which can range from 14.5% to 48%, depending on the total income.

If you are taxed on your UK pensions in both the UK and Portugal, you may be eligible for tax relief in Portugal for the taxes paid in the UK. This is usually done through tax credits or exemptions to avoid double taxation.

Retirees and pensioners who qualify for the Non-Habitual Resident (NHR) regime may benefit from favourable tax treatment on their foreign-sourced income, including UK pensions. Under this regime, qualifying individuals may be eligible for a flat tax rate of 10% on certain types of foreign income, including pensions, for ten years.

Taxation on QROPS in Portugal

Portugal has double taxation treaties with many countries, including the UK where most QROPS are established. These treaties may provide provisions for avoiding double taxation on pension income, ensuring that taxes paid in one country can be credited against taxes owed in the other.

Taxpayers in Portugal are required to report all income, including income from QROPS, in their annual tax returns. Compliance with Portuguese tax regulations is essential to avoid penalties and ensure tax obligations are met. 

Death Tax on UK Pensions in Portugal

In Portugal, there is no specific “death tax” imposed on UK pensions received by beneficiaries upon the death of the pension holder. However, the taxation of UK pensions in Portugal upon the death of the pension holder depends on various factors, including the type of pension, the beneficiary’s relationship to the pension holder, and the specific terms of the pension scheme.

The tax treatment of UK pensions in Portugal may also depend on how the pension holder has designated beneficiaries in the pension scheme. Different tax rules may apply depending on whether the beneficiaries are spouses, children, or other relatives.

It’s important for beneficiaries of UK pensions in Portugal to seek advice from a tax advisor or accountant who is knowledgeable about both Portuguese and UK tax laws, as well as the specific terms of the pension scheme, to understand the tax implications and obligations upon the death of the pension holder.

UK State Pensions in Portugal

Income from UK government service pensions remains taxable in the UK (and not Portugal). You still include it on your Portugal income tax return, but receive a credit equal to the Portuguese tax and social charges. Government pensions are exempt from social charges in Portugal and they still increase to UK inflation which is a great benefit to have. You can claim your Portuguese and UK state pensions together or separately (if you meet the minimum required amounts in both countries). You can top up your UK state pension from abroad too, giving you a great tool to increase your retirement income.

*Please note: The information provided is general information based on our understanding of the current Portuguese tax legislation as of 2024. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.

Tax-Efficient Opportunities in Portugal

The Portuguese Investment Bond is a unique financial product tailored for individuals residing in Portugal seeking a tax-efficient investment avenue with potential for capital growth over a chosen period.

Portuguese Compliant Bond

Functioning similarly to traditional bonds, the Portuguese Investment Bond involves investing a single premium in a life insurance contract linked to a diversified portfolio of assets. Upon withdrawal, investors are subject to taxation only on their earnings at a reduced rate of 11.2%, significantly lower than the standard rate of 28%. This feature presents expatriates and investors with substantial tax savings opportunities.

Benefits of the Portuguese Investment Bond include:

• Tax Efficiency: Investors can legally reduce their tax liabilities, allowing for greater liquidity and wealth accumulation without undue tax burden. Tax payment is deferred until the policy is surrendered or a withdrawal is made, with tax payable solely on capital gains.
• Succession Planning: Nomination of beneficiaries facilitates efficient wealth transfer, with death payments falling outside the scope of Portuguese stamp tax. Flexibility in changing beneficiaries ensures adaptability to evolving circumstances.
• Exemption from VAT and Stamp Duty: Premiums and associated charges are exempt from VAT and stamp duty, enhancing cost-effectiveness.
• Accessibility and Security: Simplified setup procedures make the bond accessible, while the option to pledge the policy as collateral offers additional liquidity if needed.
• Portability: The bond is portable, allowing investors to convert it to a UK-compliant bond should they relocate to the UK, ensuring continuity of investment strategy.

In conclusion, the Portuguese Investment Bond provides a compelling option for individuals residing or planning to retire in Portugal, offering substantial tax advantages and opportunities for long-term wealth accumulation. As with any investment, thorough research and consideration of individual circumstances are advisable. Partnering with reputable financial advisors, such as The Wealth Genesis, can offer valuable insights and guidance in navigating investment decisions and retirement planning strategies tailored to individual needs and goals.

How is a Portuguese Compliant Bond Taxed?

• Tax Deferral During Accumulation Phase: Offshore bonds offer the advantage of tax deferral during the accumulation phase. Unlike directly held portfolios, which are subject to capital gains tax and income tax as gains arise, offshore bonds allow gains to grow free of income and capital gains tax. This feature, known as “gross roll-up,” enables investors to maximize growth potential without immediate tax implications.
• Control of Timing of Tax Events: Policyholders have control over the timing of taxable events by determining when to make withdrawals from the bond. This flexibility allows investors to strategically plan withdrawals to coincide with low-income periods or other favourable tax circumstances, optimizing tax efficiency.
• Low Effective Tax Rates on Withdrawals: Withdrawals from offshore bonds in Portugal are divided into two components: the initial capital and the growth element. Tax is only levied on the growth element of the withdrawal, resulting in low effective tax rates. While the tax rate on the growth element initially starts at 28%, investors benefit from tax reductions over time. After five years of holding the investment, a 20% tax reduction is applied, increasing to a 60% reduction after eight years.

To illustrate, suppose an investor initially invests €500k in the bond, which grows by 10%, resulting in a €50k withdrawal. Only 10% of the withdrawal (€5k) is taxable. This translates to an effective tax rate of 2.8% in years 1-5, 2.24% in years 5-8, and just 1.12% from year 8 onwards.

In summary, offshore bonds offer valuable tax advantages, including tax deferral during accumulation, control over the timing of tax events, and low effective tax rates on withdrawals. These features make offshore bonds an attractive option for investors seeking tax-efficient wealth accumulation and management strategies.

*Please note: The information provided is general information on the basis of our understanding of the current Portuguese tax legislation as of April 2024. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.