TAX-free Retirement in the Heart of Europe

 

Anyone who is nearing or at retirement age wants to protect his or her hard-earned pension. What better way to do this than via tax-free retirement?

Many want to do this in a safe country with a warm climate, friendly people and a great lifestyle. And in a region voted Europe’s best golfing destination by the World Travel Awards.

Now one country has made it easy to do all the above.

Portugal has recently improved legislation aimed at attracting foreign residents and investors to the country. The Non-Habitual Resident (NHR) law allows qualifying individuals to receive a private pension or non-Portuguese income, tax-free for a period of ten (10) years. To qualify, applicants may not have been fiscally resident in Portugal during the previous five (5) years. Foreign or non-Portuguese income is exempt from taxation if the country from which it is paid has the right to tax the payment (even if it does not). Qualifying individuals include EU/EEA/Swiss nationals, who have the automatic right to settle. Those obtaining residence via programs such as dependent employee, entrepreneurship, study, business investment or the Golden Visa, can also apply.

The Golden Visa allows non-EU citizens (extending to close family members) to benefit from permanent residence. This may be converted into citizenship after a period of 5 years. Golden Visa real estate investments begin at €280,000 and rise to €500,000, depending on the location. With property values still at very competitive levels, the combination of the two solutions may provide a tax-free entrance for non-EU nationals to the European Union.

Although Portugal does not implement strict controls on the movement of individuals, especially within the Schengen space, the formal requirement for residency is 183 days per year. Alternatively possessing what could be deemed as an habitual (owned or rented) residence on the 31^st December of the respective tax year is also accepted. Exceptions to this exist, such as the Golden visa, where permanence requirements are significantly lower.

The Non-Habitual Resident regime

Under the NHR law, a flat rate of 20%* (less than half the highest taxpayer rate of tax) is levied on any income originating from Portuguese sources.

Most double tax treaties (conventions) allow for the taxation of income at source. In practice, many countries do not exercise this right if the person is non-resident. It thus follows that, under the NHR law, most foreign income will be tax-free. Each sub-category of assets must be analysed in order to ensure that maximum tax relief is obtained. These will include dividends, royalties, and bank interest, among others. The use of a suitably qualified tax advisory professional is recommended and the investment is quickly recouped. Costs are typically between €1,500 and €3,000 depending on complexity of an individual’s financial affairs.

The NHR law provides an excellent solution for pensioners as well as liberal professionals. These include consultants, company directors, doctors, dentists, architects and engineers, and anyone promoting active investment in the country. Occupational pensions, as long as deemed not to be sourced in Portugal, are exempt under the NHR law.

The possibility of a tax-free pension, the absence of inheritance or gift tax, no wealth taxes (other than annual taxes on real estate), access to the state health system for residents and EU citizens, a lower cost of living than most of the EU-18, and the availability of quality and cost-effective private health, have earned Portugal the Telegraph accolade of the “2^nd best place to retire abroad”.

As an alternative to the purchase of real estate, we have launched a rental-based site for long-stays in the Algarve. www.algarvelonglets.com. Rentals also afford NHR status to qualifying individuals, who do not need to purchase a property.

* In 2013 there is a 3.5% surcharge imposed on all personal income tax in Portugal, linked to the ending of Portugal’s bail-out from the EU/ECB/IMF.