If in the last decade there has been an ideal country for retirees and pensioners who want to pay less tax it has been Portugal.

For this purpose, the Portuguese government implemented in 2009 the so-called Non-Habitual Resident Regime or NHR regime, as we have already explained in the article on tax residency in Portugal.

Among other things, this regime deemed as exempt those foreign pensioners resident in the country from paying taxes on their pensions during the first 10 years of residency.

This caused a wave of transfers of pensioners wishing to pay less tax and the consequent anger of neighboring countries, so in 2020 Portugal reversed itself and modified this regime.

Nevertheless, it is still very attractive, as we will see below.

Why was the NHR modified in 2020?

The regime for non-habitual residents or NHR was formulated by combining two very advantageous facts:

• The fact that most double taxation treaties provide that occupational or private pensions are taxed exclusively in the country of residence (in this case Portugal).
• That the regime for non-habitual residents or NHR allowed obtaining these pensions totally exempt, i.e. without paying taxes.

To understand the debate, it is important to bear in mind something:

• Many countries had developed personal income tax exemptions for contributions to private pension plans with the intention of favoring savings. This was a tax deferral until actual retirement, when the pension would be paid and then taxes would be paid.

But if someone who had benefited from these exemptions moved to another country to collect the pension, a large tax loss will be generated for the administration of the country of origin.

This is why the no taxation or low taxation of the NHR caused friction with several countries. And there were two main consequences:

• The suspension of Portugal’s double taxation avoidance treaties with Sweden and Finland.
  Portugal’s concession to change the regime from April 2020.

How was the non-habitual resident or NHR regime changed?

Regarding pensions, the NHR looks as follows from April 2020:

• A flat tax of 10% on overseas pension income and pension scheme surrenders.
• Elimination of the full exemption option from January 1, 2020.
• Maintenance of the total exemption for financial products earned abroad (i.e. dividends, interest, capital gains).
• In spite of this low taxation, it will be very important to take into account the Double Taxation Avoidance Agreement of the country of origin where the income comes from, since the withholding taxes in those countries could exceed 10% and make the change of residence unsuccessful.

How are retirement pensions received in Portugal taxed?

To the extent that a resident in Portugal by NHR obtains a pension that is not territorially linked to Portugal, he/she will be taxed on it at 10%.

This rate will always be 10%, regardless of whether it is paid through annuities or similar payments, such as a single surrender of the entire plan.

Regarding possible withholdings in the source country for Non-Resident Income Tax, according to the Agreement to avoid double taxation between Portugal and most of the OECD countries, pensions will be taxed only in the country of residence, i.e. in Portugal.

In short: under the Non-Habitual Resident regime,  public pensions will be taxed in Portugal only at 10%, without paying any tax in the state of source.

The only exception is pensions received by former government officials, which will invariably be subject to withholding tax at source according to the progressive personal income tax rates, regardless of whether they are tax resident in Portugal.

And how are a pension plans taxed in Portugal under the NHR?

An individual pension plan subscribed in a non-Portuguese insurance company or financial entity would also be taxed at 10% on the totality of the gain.

According to the agreement to avoid double taxation between Portugal and most OECD countries, such amount would be considered “other income” and would only be taxed in the state of residence of the beneficiary, i.e. in Portugal.

Therefore, collecting a private pension plan in Portugal is exactly the same as collecting a public pension (except for the aforementioned case of former civil servants).

What are the main advantages of moving to Portugal for a retiree?

In general, the advantages of NHR are:

• Pensions, private pension plans and unit links are not subject to exit tax  (if there is any, such in France or Spain).
• It allows passive income (dividends, interest and capital gains) to be received at 0% taxation in Portugal as long as they are generated outside Portugal and deemed to be taxed abroad.
• Pensions and private pension plans are taxed at 10% in Portugal and not taxed in Spain.
• There is no wealth tax or inheritance and gift tax on assets outside Portugal.

Is it convenient  to transfer your tax residency to Portugal as a NHR?

The key points to analyze if you want to move to Portugal as a non-habitual resident or NHR are the following

• Determine the type of pension income and see what type of pension plan you have.
• Carefully evaluate the qualification and applicable tax treaty provisions to make sure that in your home country you do not have a lot of tax withheld.
• Any taxation at source on pensions should be credited against the 10% Portuguese tax if you do not want to pay twice.

Thinking into transfer your residency to Portugal?

Portugal is an ideal place to retire and pay less taxes.

If you want to start your retirement in Portugal, our international tax experts are waiting to help you both to settle in Portugal and to minimize your tax bill in your home country.

If you have any doubts and would like us to help you with the process, please write to us at [email protected] or via the contact form.

And if you are interested in changing your tax residence but are not sure which is your ideal destination, we recommend you to download for free and read our updated report “The top three tax destinations right now”, available below.