To qualify for the NHR scheme you must not have been tax resident in Portugal in the preceding 5 years prior to becoming resident. NHR status then applies for a consecutive 10-year period and requires the taxpayer to be registered as a ‘non-habitual resident’ with the Portuguese tax authorities.
Due to the 10-year limit, those individuals who became NHR in 2011 will soon lose this status, if they have not already, and will thereafter be taxed under the ‘normal’ regime. But this needn’t mean they can no longer continue to enjoy a tax-efficient way of living in Portugal.
One of the key features of NHR was the tax exemption it extended to pensions, both at source and country of residence – indeed under Portugal’s double taxation treaties (DTTs), the authority to tax private pensions lays exclusively with Portugal. Under original NHR regulations, if the source of the pension income originates outside of Portugal it is totally exempt from tax – however, last year the rules were changed and a 10% reduced tax rate was introduced. This tax rate is mandatory for all those that registered as tax residents after the 1st April 2020, and optional for those that registered before.
The initial, very generous terms of NHR made it extremely attractive to pensioners and naturally they have become one of the largest groups to take advantage of it; they will therefore be most affected by the new changes. It is important to understand that the notion of a pension is broader than just social security – they comprise all kinds of financial products that are designed to help individuals save and guarantee enough funds for a comfortable old age, and this includes annuities.
Under Portuguese law, pensions designated as category “H” income comprise of:
- The benefits due as retirement or retirement pensions, old age, disability or survivors, as well as others of a similar nature, including the income referred to in Article 2-A (2), as well as maintenance payments
- Benefits payable by insurance companies, pension funds, or any other entities, due under complementary social security schemes due to employer contributions, and which are not considered income from dependent employment
- Pensions and subsidies not included in the previous paragraphs
- Temporary or lifetime annuities
- Indemnities that aim to compensate for losses of income in this category
If we take as an example the DTT in force between Portugal and the United Kingdom, pensions due as a result of former employment in the private sector (meaning pensions arising from work as a public employee, public officer or elected positions) have a different set of rules and the annuities paid can only be taxed by the residency jurisdiction. According to the DTT, annuities are any fixed amount payable on pre-established dates as the result of an obligation rising from the investment of money or cash values.
Moreover, under Portuguese tax law, for annuities in which it is not possible to distinguish capital reimbursement from the income, the law assumes a taxable rate of just 15% on each payment. It must be emphasised however, that this regime is not applicable if contributions to the financial product were made by a third party (for example an employer) and were not taxed when payment was made.
For anyone who has lost, or is about to lose, their NHR status, it is still possible to benefit from a favourable tax regime in Portugal by changing your pension investment into a financial product that pays an annuity temporarily, or for life. Since this is not a ‘one size fits all’ solution, Blacktower’s financial advisors are on hand to help you make the correct decisions to safeguard your finances for you and your loved ones.
Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, independent advice on securing your financial future. Get in touch with us on: (+351) 289 355 685 or email us at: firstname.lastname@example.org.
This communication is based on our understanding of current taxation legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice form a professional adviser before embarking on any financial planning activity.
*Source: taxation information was provided by specialist Tax Adviser, Dr. Francisco Furtado