Retire to sunny Portugal and pay less tax

*This content is brought to you by Sable International, experts in financial and emigration solutions for South Africans.

By Niel Pretorius*

Flag map of Portugal

Portugal has opened its arms to South African retirees by offering attractive tax exemptions and savings. The Portuguese government’s rules on pension income and lump sums and inheritance tax mean that there are exemptions and reliefs galore for expats who decide to retire and move to the Iberian peninsula as non-habitual residents.

The basics

In the past, Portuguese tax residents were taxed at an exorbitant rate of up to 56.5%. As of January 2009, however, the Portuguese government introduced a number of tax reliefs and exemptions for new arrivals under the non-habitual residents (NHR) regime. This was done in an effort to attract individuals and their families to Portugal – and it’s working.

With a stable political and social environment, a fantastic quality of life and excellent tax savings to be made, it’s no wonder many South Africans are thinking of making the move to Portugal.

The requirements

To qualify as a non-habitual resident (NHR), you must become a resident of Portugal. There are a number of ways one can become a resident of Portugal, but one of the most popular routes is the Golden Residence Permit Programme (GRPP).

Residency can be achieved through GRPP by making a capital investment into Portugal. This programme is becoming increasingly popular for non-EU citizens as it offers a relatively simple way for them to secure a EU residency for themselves and their families.

If you don’t wish to take part in the GRPP you will need to, legally, apply for a retirement visa to become a tax resident. This would require you to spend 183 days or more per year in Portugal, or establish a place of abode there.

Once you have obtained Portuguese residence, you will need to apply for NHR status by March 31st of the following year. This is done by filling out a request and supplying a document stating that you were not a tax resident in Portugal in the five years preceding your arrival.

The benefits

If you wish to work in Portugal, the special tax regime offers a tax rate of 20% to employment and self-employment income derived from a “high value-added activity of a scientific, artistic or technical nature” within Portugal. What’s more, there is tax exemption for certain foreign sources of income.

Income from pensions, dividends, royalties, interest and rental income from a foreign source will be exempt from taxation, provided:

  • Such income may be taxed in the state of source under the rules of a Double Taxation Treaty (DTT); or
  • Such income may be taxed in the state of source under the rules of the OECD Model Tax Convention on income and on capital (if no DTT exists) and it does not arise from a Portuguese source

For example, South African dividends will be tax free in Portugal. However, these dividends may be taxed in South Africa at either 10% or 15% depending on the relevant shareholding arrangements.

Why the NHR is perfect for retirement

Retirement just doesn’t mean what it used to. First off, the definition of “retirement” is somewhat loose, in that you only need to ensure you’re not employed in Portugal, therefore it is possible to keep business interests in another country. This obviously opens up a lot of opportunities for anyone who wishes to keep their business interests back home alive and well.

Tax free pension income

Possibly the most beneficial tax exemption is the fact that pension income is completely tax-free in Portugal. Most DTTs grant exclusive taxation rights on pension income to the country of residence, meaning that foreign pension income may be excluded from taxation in both Portugal and South Africa. The Portuguese government did this intentionally to attract foreigners wanting to retire tax-free and live in Portugal.

This, with appropriate planning, means that one can take their pension out as a lump sum or a series thereof within the first 10 years of the NHR and will not suffer any tax in Portugal. South African workplace pensions can be received free of tax in South Africa and Portugal, whilst annuities will be taxed in South Africa at 12%.

Offshore pensions

It is also possible to structure your South African retirement, as well as South African or international discretionary funds, into a compliant offshore pension structure which would give you full flexibility and tax-free income in Portugal during the 10 year NHR tax-free period. Again, proper structuring would allow you to recapitalize the remaining pension funds at the end of the 10-year period and enjoy tax efficient income from that point onwards.

This is fantastic news for anyone looking to withdraw their pension and retire tax-free somewhere sunny in Europe. However these are not simple products to set up, and if you are interested in pursuing such an option you must contact an experienced financial advisor who can assist you and ensure you remain on the right side of all the relevant tax collectors.

No inheritance tax

Inheritance and gift tax was abolished in Portugal at the end of 2013. It was replaced by “stamp duty” which only applies to assets in Portugal. Even if an asset is classified as a Portuguese asset, any gifts or inheritances received by spouses and direct ascendants and descendants are exempt from the stamp duty altogether.

Although your South African will is valid in Portugal, it’s cheaper, and advisable, to have a Portuguese will for your Portuguese situs assets and a South African will for any assets remaining in South Africa.

Call our team today on +27 (0) 21 657 2133 or send us an email on safe@sableinternational.com to find out if this exciting programme is right for you.

  • Niel Pretorius is an independent financial planner at Sable International.