For years, Portugal has been a tax haven for foreign retirees, but this will soon be changing.
The program that turned Portugal into a tax haven for foreign retirees began in 2009. It was designed to attract more foreigners to the country to retire and take up residence there via tax advantages. There is no need to buy a house. Instead, retirees only need to rent it and reside there for a minimum of 180 days in a year, or at least have the intention of doing so.
The program meant that retirees did not pay taxes on their pensions in their origin or destination countries. Professionals from highly relevant positions with extremely high earnings, such as professional athletes and football players, had to just pay taxes equal to 20 percent of their income. That exemption was set to apply for no more than a decade per person.
The official exemption indicated that there was no tax on pensions, rental income, employment income, or dividends. However, those against the end of this policy indicated that taxes on dividends were paid, as were indirect taxes. In either case, retired foreigners in Portugal did not pay income taxes or taxes on their pension, provided they met the requirements of non-habitual residence.
The Program Faced Controversy
To create this exemption and allow for the tax haven status of Portugal for foreign retirees, Portugal created agreements with various other countries, including France, Finland, and Sweden.
There was a great deal of controversy over the tax haven policy, especially under the previous government, which was socialist. Sweden and Finland also denounced the system, despite officials claiming only 2,000 Nordic citizens live in the country.
What Will Change
Due to strong pressure from the left and criticism from other countries, including Sweden and Finland, there will be some mild changes to the taxation in Portugal of foreign retirees. Now, instead of paying no taxes on their pensions, there will be a 10 percent tax.
When It Comes Into Effect
The change to tax pensions of retirees in France will not be retroactive. The change also still has to be approved, but this will likely be the case, given that the governing party of Portugal is the one that introduced the amendment. It is part of the budget amendment and is expected to be approved in mid-February, along with the rest of the budget amendment.
Information on the change is still relatively limited since it has not yet been approved. Multiple websites are posting recent advice regarding the tax haven policy and how it could be used to your advantage.
Taxes Are Still Relatively Low
Although Portugal is ending its extreme stance as a tax haven for foreign retirees, even the 10 percent tax rate is still very low compared to those found in many other countries. If you think of the degree to which a country has tax haven policies, this simply represents a small shift on the scale away from tax haven policies.
By no means is it a high tax rate, and retirees will likely still find that tax rate to be highly advantageous. Some, however, may rethink their retirement plans or consider shifting their funds to traditional tax havens.
The Important Takeaway
Portugal has had an incredibly lenient tax policy for foreign retirees for years, with no taxes paid on income and pensions. This will likely be ending very soon, with a 10 percent tax rate taking its place. While that is more than was previously required, it is still less than many European countries’ tax rates, making Portugal a still-appealing option to retirees. High-net-worth individuals, however, may want to look into other offshore options.
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