Portugal and taxation: Busting the myths
8 Oct 15
A Portuguese tax resident can be taxed at a rate of 56.5%, but director at Blevins Franks Jason Porter unveils some of the exemptions and reliefs offered to UK expats who decide to make Portugal their home.
The potential benefits of retiring in Portugal under the non-habitual residence (NHR) regime are significant, but it is worth noting that UK government pensions (e.g. army, civil service, teachers) will remain taxable in the UK, and not Portugal.
In relation to pension income, the legislation provides for full exemption on foreign pension income if the income is taxed in the other country in accordance with the double-taxation treaties (DTT) between Portugal and that country. Or the income is not regarded as Portuguese-source in accordance with domestic legislation.
Pension income is considered as being from a Portuguese source only if it is paid (or borne) by a tax resident entity or permanent establishment in Portugal.
Exclusive
As most DTTs grant exclusive taxation rights on pension income to the country of residence, in practice, foreign pension income may be excluded from taxation both in Portugal and in the UK.
Although the pension income is exempt from tax in Portugal, it is taken into account in order to calculate the rates of tax attributable to any other Portuguese taxable income.
This is potentially a significant benefit for those looking to retire in Portugal and it is the intention of the Portuguese Government for this exclusion (in both countries) to apply in practice.
With the introduction of the UK pension freedoms, a combination of taking the pension as a lump sum or a series thereof during the period of NHR, with the DTT, should mean a full withdrawal of a UK scheme in the first 10 years will not suffer any tax in the UK or Portugal.
Even if the UK pension scheme deducts basic rate tax on any payment, this should be fully recoverable in the first 10 years.
The above rules will apply to UK Company and personal pension schemes, and also State Pensions.
