Portugal to start taxing foreign pensions under NHR

The Portuguese parliament approved the 2020 Budget bill on 6 February, which includes changes that would raise the tax rate on the overseas pensions of non-habitual residents (NHRs) from zero to 10%, and limit the granting of so-called ‘golden visas’ to property purchases outside Lisbon, Porto and coastal regions of the mainland.

The NHR tax rule, introduced in 2009, allows for a flat 20% personal income tax-rate for any earnings in Portugal; plus, a tax exemption on all foreign income, including pensions, for 10 years. A qualifying applicant must spend 183 days or more a year in the country (owning or renting a property), and cannot already be a resident.

The proposed tax increase on the overseas pensions of NHRs followed complaints from Finland and Sweden that, when combined with bilateral tax treaties, the scheme results in an effective zero tax rate on private pensions.

From 31 March 2020, the NHR exemptions will no longer apply to pensions; instead there will be a flat 10% tax on all foreign pension income. The rest of the NHR regime remains the same.

While less beneficial than zero tax, a 10% tax on foreign pension income is still lower than that charged in many other countries and is a significant reduction on the usual Portuguese income tax rates of 14.5% to 48%. And, of course, NHR still offers the opportunity to receive other forms of foreign income tax-free for your first 10 years in Portugal.

The Budget legislation has also introduced amendments to the authorisations of residency through investment (ARI), commonly known as ‘Golden Visas’. Between 2012, when the scheme started, and 2019, Portugal issued more than 8,200 ‘golden visas’, of which more than half went to Chinese citizens. Although the visas can be granted for job creation and some other projects, property purchases account for more than €4.5 billion of €5 billion invested through the programme.

At present, the scheme is open to those who wish to invest in the cities of Lisbon and Porto and coastal regions of the mainland, which together are estimated to represent about two-thirds of total property investment to date. The amendment would restrict the scheme only to property based in inland municipalities, as well as the Azores and Madeira.

The changes will only come into force next year. Those who already have Golden Visas through the scheme will not be penalised when the time comes to renew their permits for applicants and their family members.

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