When the financial crisis in 2010 knocked Portugal’s economy, hundreds of thousands of its populace fled making the most of the EU’s free movement decree. This allowed people to find jobs in countries that had been knocked a little less, such as Germany and the UK. Now however, Portugal is getting back on track. It welcomes rich retirees going in the other direction. Instead of jobs it offers a warm climate and an inexpensive retirement.
The affluent baby-boomer generation (1946-64) have been migrating to sunny Portugal in particular Lisbon, Algarve and Porto drawn in part by the spectacular tax exemption Portugal has to offer foreign incomes. Under the non-habitual-residency scheme, pensions from overseas can be drawn down tax-free for a decade.
Bilateral agreements between countries are supposed to ensure that income does not end up being taxed twice. Some countries seeking a boost in domestic demand are luring the wealthy expatriates by arranging matters where they are able to avoid paying tax on income that is earned outside of their country of residence. This includes pensions, capital gains, dividends, rental income and interest. For a person to qualify they must first become a tax resident of Portugal, and should remain for more than 183 days in Portugal during the relevant fiscal year or have a dwelling in Portugal with the intention of holding it as the habitual residence.
Portugal is not the only EU country to offer foreign pensioners a doces deal.
Malta also exempts pensioner’s over the age of 61 years in receipt of a pension income up to €13,200 from tax altogether. This applies to all types of pensions including social security; treasury; local and also foreign pensions. Cyprus also offers a generous exemption of 5% tax or allows people to take their entire pension pot as a lump sum tax-free. This was once very attractive to UK civil servants but unfortunately it looks almost certain that those receiving UK government service pensions abroad will lose these advantages.
There has however been some backlash from governments elsewhere being undercut.
Particular vocal critics are the Nordic countries, most recently Finland. Finland has recently called for the nullification of its bilateral tax treaty with Portugal. If Portugal does not accept a draft deal letting Finland tax pension drawn-downs by its retirees there by November, it will start doing so anyway in January. The minister of finance, Petteri Orpo stated “The tax treaty between Finland and Portugal […] is inconsistent with the notion of fairness regarding [the] taxation of pensions. This is why the government is proposing that the treaty be terminated from the start of 2019.”Finland estimates it loses €3-6 million a year in revenues to Portugal but says that as a matter of principle it can no longer tolerate “tax refugees”. If Portugal fails to adopt the treaty by the beginning of 2019, the tax treatment of pensions paid to the country would be determined by the legislation of Finland. The Finnish government would thereby have the right to levy taxes on pensions paid to its citizens residing in Portugal.
It is important to remember that pensioners play a vital role in Portugal’s tourism industry, which contributed to 17% of the country’s GDP in 2017, and one in five jobs are linked to tourism. Further to that, the average pension paid to Finns living in Portugal is around €3,500 a month. Since prices are a fifth lower than the euro-area average that goes a considerable amount further. According to Sirpa Uimonen of the University of Helsinki, Finns living in the Algarve spend €14,700 a year on average, over 20% more than Portuguese locals spend.
Portugal’s generosity to retired foreigners has been disparaged by Portuguese locals. They can pay up to 48% on their pensions; and property prices rose by 10% last year which was likely caused by the extra demand from foreign buyers. The government has come under considerable fire for providing tax breaks to foreigners while many of its citizens are struggling financially. One Portuguese political party, the Left Bloc, has proposed closing the pensions loophole, stating: “When you don’t tax one group of people you end up having to increase the tax burden on another group. That’s unfair.”
Pensions: a low-hanging fruit in terms of taxes
The truth of the matter is withdrawing from a double taxation agreement is rare. However, pensions are a matter of increasing tension, especially as governments see pensions as low-hanging fruit in terms of taxes. Denmark ended its deal with Spain and France in 2009, also because of disputes regarding pensions. In the case of Portugal, other countries are likely to follow suit in relation to pensions. Sweden’s finance minister, Magdalena Anderson has voiced similar criticism expressing “swedes are free to move to Portugal because of the climate, wine or even the fado music, but not to avoid taxes,” Typically countries have taken pension matters into their own hands. France for example will begin taxing all French pensions that are paid abroad. With Brexit on the horizon those living in the EU could also be in line for repercussions. In March 2017, the British government announced it would begin charging 25 per cent exit taxation on all international pension transfers outside of the EEA or to a country without an HMRC qualifying scheme where the client is a resident.Currently, those living within the EU aren’t affected but it won’t be long until they are.
Retired foreigners may soon have to decide whether Bacalhau á Brasand pasteis de nataare enough of a draw!
If you are interested in finding out more about your pension options, 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.