In a move that epitomises the Portuguese government’s ‘lure them in and tax them later’ attitude to foreign retirees and 'non-habitual residents,' the Finance Minister has confirmed that he is studying how to impose income tax on those foreign pensioners who have moved to Portugal under the advantageous tax rules currently in play.
Mário Centeno confirmed that the Government has been looking, "for a few months," at the introduction of a minimum IRS rate for retirees all in the name of "good tax relation" with other European countries and not, of course, to swell the treasury's coffers.
In September 2009, the Government approved changes to the Investment Tax Code in which it created a special tax break for non-habitual residents (NHR).
Following an informal meeting of euro and EU finance ministers in Talin today, Centeno was questioned on the rumour that the government is considering a change to this NHR tax regime for foreign retirees and 'non-habitual residents' in the face of discontent from some fellow European countries, led by Finland, Sweden and the Netherlands.
The finance minister confirmed that this indeed is the case and admitted that amendments will come into force as early as next year, although the matter is still "under analysis."
“We have been looking at this issue for a few months now, in a context which also takes into account the reality of other European countries. We think there are adjustments to be made in this matter. We think that in a context, in addition to transparency, of good fiscal relations in European terms, this deserved our attention," said the minister.
Asked if he felt pressure from other countries, such as Finland, the minister pointed out that "there are taxation agreements with many countries that are managed bilaterally, these agreements are in place and are being complied with, and there are times these agreements are discussed."
According to Centeno, it is clear that Portugal wants to preserve its "fiscal independence" in order work with internal tax policies it considers appropriate, but it is also "very important to respect a European framework."
Asked about a timetable for the introduction of this minimum IRS for retired foreigners and 'non-habitual residents', Centeno declined to commit to deadlines - although conceding that "it is possible" the new tax rate will apply as early as 2018 and that "there is still no set rate, there are studies that are being done."
In February this year, the Swedish Finance Minister, Magdalena Andersson, said "the Swedes take their often large, completely tax-free pensions when they move to Portugal," "If they move to Portugal because they like fado or vinho verde, or because they love the weather, then they should be able to do it. But if they move just to avoid paying taxes, then I think they should look in the mirror and think about whether they want even make that decision," adding that "people must pay taxes either in Portugal or Sweden" and that "it is unacceptable that the Portuguese system does not levy tax on these pensioners."
Estate agencies association president Luís Lima commented, “We seem to destroy whatever works well in Portugal. We created Golden Visas which brought in thousands of euros of foreign investment but quickly became the target of bureaucratic problems which have damaged its credibility.”
“Now, we are targeting the non habitual resident programme, which has been one of the primary drivers of the recovery of the property market, just because other countries are dissatisfied. It’s absurd.”
The last big betrayal of foreign residents was the changing of the taxation advantages applicable to offshore companies owning properties in Portugal, the much advised and well promoted method though which thousands of foreigners bought retirement and holiday homes.
This scheme was changed in 2002 with the blacklisting of most offshore companies leading to thousands of people having to bring their own homes into private ownership, triggering often huge capital gains tax charges and stamp duty obligations.
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This news service often has pointed out the inequality inherent in offering, often already wealthy foreigners, a 'zero income tax' break while those living here and paying upto 48% income tax, have no option but to pay up or move country.
If Centeno changes the rules and starts to apply income tax to those foreign retirees currently enjoying significant tax breaks in Portugal, this will represent another betrayal and will affect the property market currently being fuelled by pensioners coming to Portugal from other European countries.
If the tax break is removed, new arrivals will not be able to benefit from a scheme that others enjoy, the only difference being the date of arrival and registration.
Centento has not mentioned Golden Visa holders who enjoy no local taxation on their worldwide income. If he leaves these out of the frame and sticks to European retirees in Portugal, the government will lay itself open to charges of sucking up to the rich while others have to pay to run the government and local services.
More details will emerge in the next few weeks but Centeno already has shaken the market, with those choosing a retirement location now wary of impending change in Portugal's tax system and are likely to delay a decision - or choose another country.
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Information: tax regime for non-habitual residents
On September 2009, the Portuguese Government approved new legislation establishing a regime for non-habitual tax resident individuals.
The tax regime for non-habitual residents is part of the Investment Tax Code and is intended to attract individuals and investments to Portugal.
Taxation
Under the regime’s rules, employment and self-employment income derived from “high value-added activities of a scientific, artistic or technical nature” (included in a list of activities plublished by the Portuguese Government) earned by non-habitual residents in Portugal will be taxed at a flat rate of 20%.
Additionally, the regime also establishes a tax exemption for foreign-sourced income, such as, employment income, self-employment income, rental income, interest, dividends as well as other investment income, under certain specific conditions.
The regime is applicable for a period of ten consecutive years.
Conditions
The regime will apply to individuals who become Portuguese tax residents under Portuguese domestic law in a certain year and have not qualified as tax residents in Portugal in any of the previous five years.
Practicalities
The status of non-habitual tax resident becomes effective upon registration with the Portuguese tax authorities, which should be applied for until 31 March of the following year to which the taxpayer becomes tax resident in Portugal.
For more tax information, see the pwc 2017 tax guide:http://www.pwc.pt/en/pwcinforfisco/tax-guide/2017/pit.html
