“Death, taxes and childbirth! There’s never a convenient time for any of them,” wrote Margaret Mitchell in “Gone With the Wind”. After a lifetime of long British winters, hefty tax bills and children, many people dream of a comfortable life abroad sipping cocktails under the shade of a palm tree, enjoying dining out for a fraction of UK prices and just relishing an overall more measured pace of life.
If this is your dream look no further, Portugal provides an excellent standard of life; the tax regime for individuals is very attractive; a friendly residence permit regime; the possibility to apply for Portuguese nationality, and consequently EU passports, all making Portugal incredibly attractive (especially with Brexit). At the beginning of 2018, 784,900 Brits currently live in the EU and from them 39% reside in Portugal. The allure of Portugal isn’t exclusive to Brits as other northern European countries have also found themselves enticed down south by the Portuguese special tax regime.
In 2009 Portugal introduced the non-habitual residents program incentive in an effort to tempt highly skilled foreign workers and ultra-high-net-worth individuals back to Portugal. The regime offers non habitual residents a reduced 20% PIT (Personal Income Tax) rate on salaries and business/professional income of a Portuguese source. If they receive a salary from a non-Portuguese source they will be exempt from PIT.
Pensions paid from a foreign source under the Portugal non-habitual residents program are also exempt from taxes. Whether you choose to access your UK pension as a regular income, cash withdrawals or lump sums, the non-habitual program gives you the flexibility for 10 consecutive years of no tax payments. This includes civil service pensions and other UK income and gains, which are taxable in the UK. Whereas in Portugal, they are also exempt from taxation under the non-habitual resident rules and this remains the case even if they are not taxed in the UK. Combining the tax relief with a lower cost of living and a favourable exchange rate, expats enjoy a theoretically larger pension and get much more for their money.
Of course all good things come to an end and at some point the 10 tax free years/ 20% PIT will be up. The good news is because you have had 10 years tax free it has given you more time to prepare and save for the next 10 years of your life. That is why it is important to get your finances into order.
The non-habitual residents program is available to all EU individuals becoming tax residents in Portugal (as long as they were not Portuguese tax residents in the previous 5 years), and the status is granted for a period of ten consecutive years. To be considered a tax resident, the individual should remain for more than 183 days in Portugal during the relevant fiscal year or have a dwelling in Portugal at 31 December of that year with the intention to hold it as his or her habitual residence.
Seems too good to be true? Portugal´s non-habitual residents program has also had some backlash from Portuguese citizens, with the socialist government coming under fire for providing tax breaks to foreigners while many of its citizens are struggling financially. Portugal’s tax burden reached a 22 year high in 2017, according to a report by the public financial council. Critics also complain that the influx has helped to bolster real estate prices, which according to the country´s statistics rose by 9.2 per cent in 2017. Portugal’s Left Bloc Party, which with the communists, supports the minority Socialist government in parliament. They see the non-habitual residents program as one of the main factors behind rising real estate prices, a party spokeswoman said in an email statement. “When you don’t tax one group of people you end up having to increase the tax burden on another group. That’s unfair,” said also Richard Cabral, a professor of economics.
However, expatriates aren’t living a completely tax free life. Cross border double taxation treaties can hit hard if expats are not properly advised. In the UK, CGT (Capital Gains Tax) is a tax on the profit you make when you sell or dispose of any asset. This includes: anything that is over £6000, property, shares (not ISA or PEP) and assets. Living in Portugal, even though you may be deemed a non-resident for income purposes, you are still treated as a temporary non-resident for CGT purposes for 5 whole UK tax years. Gains made during that time are taxed in the year you return to the UK if within the five years. But, if the assets were acquired after you left the UK, then the gains are not subject to UK CGT. When the double tax agreement is taken into account (like Portugal has with the UK) CGT can be completely exempt, but you are taxable in your country of residence. With the case of Portugal they only apply CGT on property and investments. Unlike the UK, Portugal does not tax personal items, inherited/gifted property or assets.
When it comes to cross border taxation it can be very complicated and without expertise it can easily go wrong. Being an expatriate, not only do you have to deal with a foreign tax system but you also need to understand the sticky rules that interact with UK taxes. If you are interested in reducing you tax bill and meeting obligations in the most tax efficient way for your personal situation; get in touch with one of deVere Portugal’s international advisors who specialise in cross border cases. They can help you establish the most suitable approach for your personal situation.
Needless to say, the move to Portugal for many is not simply about the money. The beautiful landscape; sunshine for 300 days of the year; the European lifestyle and of course the wonderful golfing resorts all explain why 10,684 foreigners decided to make it their permanent residence in 2017.