Comprehensive Guide To Non-Habitual Residence In Portugal For Expats

This guide covers a low-tax retiree programme in Portugal and brings to your attention the possible benefits of transferring your pension abroad.

Portugal’s Non-Habitual Residence Regime – the low-tax life for retirees

It is the ultimate dream for many people: to work hard, build up a nest egg and retire abroad in a climate with year-round sunshine. Now there is an added financial motive to moving overseas.

New pension freedoms allow you to move abroad, take your hard-earned savings with you, and potentially escape some of the taxes that would otherwise apply in your home country.

It is possible to move to Portugal and pay a low tax rate on your pension, whether you decide to take it as one lump sum or as a regular income if your home country has a double tax treaty with Portugal.

What is the non-habitual residence regime?

A non-habitual residence regime is one of the biggest attractions for those planning to retire to Portugal. The essence of this scheme is that those who qualify for non-habitual residence (NHR) can receive a tax-free pension, dividend, royalty and interest income, both in Portugal and their income’s source country.

There are exceptions, of course, so always consult a tax specialist.

For example, for UK citizens, the exception is UK government pensions, including local authority, army, police, teaching, fire service and some NHS pensions. These pensions always remain taxable in the UK.

To qualify for the NHR scheme, one needs to become a Portuguese tax resident while not having been a tax resident in Portugal for the previous 5 years. This status is granted for 10 years.

To become a Portuguese tax resident, you need to spend more than 183 days in Portugal in the tax year, which runs from 1st January to 31st December.

Another option is to prove that you have a dwelling in Portugal by the 31st of December of that year with the intention of holding it as your habitual residence.

Successful NHRs will have access to all the benefits of an ordinary Portuguese tax resident – including healthcare.

Don’t forget that you need to prove you haven’t been taxed in Portugal, as a tax resident, in the previous five years.

The non-habitual residence regime changes

From March 31, 2020, the Portuguese government intends to tax foreign pension incomes under the NHR at a flat rate of 10 percent.  

The new tax on foreign pensions only applies to those who register for NHR after March 31, 2020. 

This is a considerable change to the existing NHR, where foreign pensions aren’t taxed at all. The change comes after continued pressure from some EU states and from within Portugal itself for fairer taxation of pensions. 

If you have registered before March 31, 2020, you will still be able to enjoy your full 10-year tax-free period.

UK government pensions (civil service, teacher and police pensions) will go on being taxed in the UK only. The changes to the NHR regime concern only foreign pensions; all the rest remains the same.

However, even a 10 percent tax on foreign pension income looks like a better deal than UK tax rates. 

Besides, under the NHR you can still receive other forms of foreign income tax-free for your first 10 years in Portugal.

How does NHR work for a British Retiree?

The key thing to remember here is double taxation treaties (DTT).

The sole purpose of double taxation treaties is to ensure that citizens of the countries which have mutual DDT don’t have to pay taxes both in their domicile country (usually the country of their citizenship) and in their residence country.

Great Britain has double tax treaties with quite a significant number of countries around the world. It’s a brilliant arrangement for British expats that prevents them from having to pay tax in both Britain and their new country of residence.

Each treaty is a unique document that sets out:

• the country you pay tax in;
• the country you apply for relief in;
• how much tax relief you get.

Treaties might differ from country to country. For example, UK state pension relief from UK income tax is available under the terms of many, but not all, double taxation treaties.

The Double Tax Agreement between the UK and Portugal ensures that pensions and annuities are not taxed simultaneously by both countries, but only in the country where the individual resides – with the exclusion of government pensions.

“Article 17 Pensions

(1)   Any pensions and other similar remuneration … paid in consideration of past employment to a resident of a Contracting State and any annuity paid to such a resident shall be taxable only in that State.

From UK/Portugal Income Tax Convention Signed 27 March 1968

This means that if you are a tax resident in Portugal, then your personal pension, which includes employer schemes and personal accounts such as SIPPs (self-invested personal pensions), and your state pension will only be taxed by Portugal, and not by the UK.

If you acquire an NHR status, your foreign-sourced pension will be taxed at a flat rate of 10% in the next 10 years. After this time your pension income will be taxed at the scale rates.

Caution! You may have to pay income tax on your pension if you withdraw your entire UK pension fund as lump sums before your 10-year NHR expires. It’s highly advisable to seek professional financial advice to make sure you can fully benefit from your NHR status.

How to register as a tax resident in Portugal 

To obtain the non-habitual resident status, you first need to register as a tax resident in Portugal. Those wishing to apply for the regime generally must:

• Register as non-resident taxpayers;
• Obtain residence cards (for EU nationals);
• Register as tax residents;
• Only then apply for the non-habitual resident status.

How to apply for NHR status 

The year after you have acquired Portuguese tax residence you must submit an application before March 31^st of the tax year. This application is addressed to the Director of the Taxable Persons Registration Service (Serviços de Registo de Contribuintes).

It is now a requirement that all the NHR applications have to be submitted on the tax authorities’ website.

Moreover, individuals must submit a statement whereby they solemnly declare that they have not fulfilled the criteria necessary for being considered a Portuguese tax resident during the preceding five years.

If it sounds a bit daunting, there are dozens of legal companies in Portugal that will gladly help you with the process and advise you on the best course of action. If you need a recommendation, contact us and we will put you in touch with a trustworthy specialist.

Transferring your UK pension abroad 

You can transfer your UK pensions abroad to a European-regulated pension scheme in either GBP or EUR.

Usually, this will be QROPS in Malta or Gibraltar. 

The transfer removes your entire pension from the UK, so you won’t have to pay UK death taxes as long as you remain tax resident outside the UK.

In summary, it means that 100% of your pension pot can be passed on to the family or any chosen beneficiaries upon death, tax-free.

There may be other benefits to QROPS, such as access to wider investment opportunities and better saving rates. However, professional financial advice is crucial before you make any decisions concerning your pensions. To understand your options and find the optimal financial solution, contact us via our Advice page, and we will be happy to help. 

For detailed information on your pension options, leaving your pension pot in the UK vs transferring them abroad, and your UK state pension when you retire abroad, read our Expat Guide to UK Pensions Abroad.

You might find useful:

• Living in Portugal – The Expats’ Guide – the pros and cons of living in Portugal, the cost of living, healthcare, taxes and more.
• Best Places To Live In Portugal – a detailed overview of Portugal’s most popular locations for expats.
• Living In The Algarve: Everything You Need To Know Before You Move – the complete guide to Portugal’s hot spot for expats.
• Haven’t found what you were looking for? Contact us or comment below with your question and we’ll do our best to help.