Amendments to the NHR regime – 10% tax on pensions
New amendments to the non-habitual tax regime will be in force soon, when the 2020 State Budget is approved in full.
Despite the fears that the non-habitual tax regime was to be amended extensively, most of its benefits were kept intact.
The non-habitual tax residency is a special income tax regime for inbounds, designed to offer attractive tax-saving opportunities to value-added professionals, entrepreneurs and investors who want to reside and do business in or from Portugal. Until now, pensioners benefited from a full exemption on non-Portuguese pensions, both in Portugal and in the State of Source.
The program has been incredibly successful. The latest official information available shows that 27367 taxpayers benefit from the regime since its creation in 2009.
New rules will be the outcome of a proposal to amend the State Budget 2020 introduced by the Socialist Party, the Partido Socialista (PS). PS, a center-left social-democratic party, has been in power since late 2015. The party that created the NHR regime in 2009 is now amending it.
This proposal was voted and approved in the Committee on Budget and Finance on February 5th, 2020. Democratic-Socialist Party – Partido Social Democrata (PSD), the second political party in Portugal voted in favor. Chega, a nationalist and populist party voted against, and so did the Liberal Initiative, the classical liberal party. Left-wing and communist parties abstained, as their votes were not required for the bill to pass.
The entire State Budget will have to be voted and approved on plenary meeting. Chances of another amendment of the NHR regime are low. Rumors in the legal community regarding a proposal for additional taxation on other types of income turned out to be false.
In GFDL’s opinion, Portugal wavered and ended yielding to foreign pressure and criticism regarding this tax regime. In most cases, it was the combination of the NHR regime, of the applicable a double tax treaty and domestic provisions of the State of Source that allowed for preferential tax positions, particularly where pension income is concerned.
Member States of the EU still have the power to adjust their fiscal and tax policy, and the renegotiation of the Tax Treaties would be a more elegant solution, rather than force Portugal to tax what it did not want to tax.
The 10% rate
According to the newly approved proposal, pensions paid to non-habitual residents will be taxed at 10%. The 10% rate will be liable on net pension income. A minimum tax rule of € 7500 was discussed but failed to be approved.
Still, the 10% rate is a compromise.
The new tax is still low in comparison to many other countries worldwide. Portugal’s attractiveness does not rely solely on the non-taxation of pensions and the Portuguese tax regime is still extremely attractive for both pensions and businesspeople.
It allows the Portuguese Government to avoid further criticism and keep this tax policy tool to attract capital to Portugal.
One advantageous measure is that a tax credit system will apply. Any non-habitual resident will be able to deduct any taxes paid at the source on pensions.
Legitimate expectations and deadlines
The legitimate expectations of current non-habitual residents are secured.
Whoever is already registered as a non-habitual resident and whoever applies for the regime until the end of March will benefit from the old regime – a zero tax on pensions.
New inbounds applying for the regime for fiscal years 2019 and 2020 are safeguarded if they are residents in Portugal, for tax purposes, before the new law is enacted, and provided the status is requested until the end of March 2020 or 2021. They will be able to choose which tax regime to apply.
Considering these deadlines, it is expected that the number of applicants rises in the coming weeks.
This regime is available to any individual who was not a Portuguese tax resident in the previous five years before moving to and becoming a tax resident in Portugal. The regime is applicable for 10 years.
It provides attractive tax-saving opportunities to value-added professionals, entrepreneurs and investors who want to reside and do business in or from Portugal.
In contrast to the taxation regime of ordinary residents, the non-habitual residency regime provides special exemptions and tax rate caps.
Portuguese source employment and self-employment income derived from high value-added activities of a scientific, artistic or technical nature are taxed at a 20% rate.
Tax exemptions exist for specific types of income, mainly passive income such as dividends and interest. As a rule, foreign source income will be tax-exempt in Portugal if it was taxed at source (regardless of the rate) or might have been taxed at source according to the applicable Treaty to Avoid Double Taxation.
GFDL’s team members assist non-habitual residents since 2009 and are experienced in analyzing the tax and immigration implications of moving to Portugal, in preparing the application for the NHR status, and properly structure the affairs of our clients.