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The ‘Non Habitual Residence’ Tax Scheme applies to those who have not established residency in Portugal in the previous five tax years. For those that qualify a special rate of tax of only 20% applies for employment income and self-employment income.
For those holding pensions, foreign sourced investment income and real estate income, the proceeds will be free of tax in Portugal subject to an appropriate tax treaty.
The special tax treatment will apply for ten years, thereafter standard Portuguese tax rates apply.
Good news, Stamp Duty as it’s known in Portugal (Inheritance tax in the UK) only applies to assets held in Portugal and is exempt for gifts to spouses and children. For everyone else the taxation is only 10%.
Buyer beware. Residents of Portugal should only hold assets in jurisdictions that are EU compliant and are recognised by the tax authorities in Portugal. Failure to heed this warning will give rise to taxation in Portugal at the highest rate.
For example interest from bank accounts are taxed at a flat rate of 28% in Portugal. If the account however is held in a jurisdiction on Portugal’s blacklist of tax havens such as the Isle of Man, Channel Islands or Gibraltar, interest is taxed at the higher rate of 35%.
In addition many of the tax benefits associated with UK products such as PEPS and ISA’s are only applicable whilst resident in the UK. Holding products like these once a resident of Portugal can give rise to unexpected and high tax rates. Utilising Portuguese tax compliant products held in an EU or EEA jurisdiction is a must in Portugal.
Careful consideration and expert advice should be taken regards this subject. However once a UK pension enters drawdown, a state where either capital, income or a combination of both has been taken from the scheme, on death the pension fund will be subject to a 55% tax charge by HMRC regardless of where you are resident in the world, if the fund is passed on as a lump sum.
It may be possible that UK income tax is due on your fund even if you are resident in Portugal, which could mean you are paying more tax than is necessary.
With careful planning it could be possible to have no tax liability on your pension income in Portugal for 10 years.
Contact us today on +34 9650 60689 for a FREE initial consultation. Many of our clients prefer to deal with us over the phone and email, or if you prefer we can arrange for one of our local advisers to make contact. We have advisers covering the Algarve and the Western coast of Portugal.