Cross-border financial planning for your move to Portugal

1. Tax residency

From the date you arrive in Portugal with the intention of staying permanently, you could be considered a tax resident.

You are deemed a tax resident by the Portuguese tax authorities if you spend more than 183 days within a 12-month period in Portugal.

Some expats make the mistake of assuming that by not spending the minimum number of days there, they will not be considered a tax resident, however you are also deemed a Portuguese tax resident if you own a property in Portugal and there is evidence that the property is your habitual residence. A 12-month rental contract can qualify as proof of your intention to make Portugal your home.

If you meet any of the residency criteria, submitting your declaration and the relevant tax return with the Portuguese local tax office is obligatory.

2. Double Taxation Agreements

If you are considered a tax resident in both Portugal and your current country of residence, i.e. the UK or South Africa, or if your tax status is unclear, your tax residency will be determined by the double taxation agreement (DTA) between the two countries.

A DTA is an agreement between two or more countries that prevents your income from being taxed twice (by the country in which your income is earned and your current country of residency) and sets out “tie-breaker” rules.

“Tie-breaker” rules are included in tax-treaties to help determine which country has the right to tax an individual as the country of residence in the case that the individual qualifies as a resident (for tax purposes) under the domestic laws of both countries.

Your tax status will be determined by your vital centre of interest, which includes factors such as the location of your permanent home, where your finances are based and where you normally live. If your residency still cannot be decided, it comes down to your nationality or a mutual agreement between the countries where you are deemed resident.

Once you are a resident in Portugal, your worldwide income and certain gains become liable for Portuguese taxation.

It’s important to notify HMRC (in the UK) or SARS (in South Africa) if you plan to live in Portugal permanently, to ensure that your tax status has been changed to non-resident (understanding the relevant tax implications, if applicable).

To seek advice around your tax residency status, get in touch with one of our consultants who can help you determine your status.

3. Taxation in Portugal: The basics

Pensioners, high-net-worth individuals and entrepreneurs can enjoy tax benefits while appreciating Portugal’s sunny climate and delicious local food.

If you have not lived in Portugal in any of the last five tax years and are planning to retire or expecting to receive interest or dividends, by relocating to Portugal, you may benefit from a low tax burden for the first 10 years of residence there.

The Portuguese Non-Habitual Resident (NHR) tax regime, was first implemented in 2009 to increase the country’s international competitiveness by offering tax benefits to individuals who qualify. The scheme has been highly successful by attracting over 10,000 non-habitual tax regime residents to Portugal.

It needs to be noted that, to benefit from the NHR, one needs to apply online for this status with the Portuguese tax authorities by 31 March of the tax year following that in which your Portuguese tax residence is acquired.

Qualifying foreign sourced income (certain dividend income and employment income), is exempt from tax under this regime.

For pensioners, there is a 10% flat rate of tax on qualifying foreign pension income making the NHR an attractive option when compared to other countries tax brackets.

If you hold the NHR status and provide the necessary declaration to the Portuguese tax authorities to prove that you qualify under a high value added profession, which is then approved, the NHR could grant you a fixed 20% income tax rate on income sourced and received in Portugal.

At the end of the 10 years period, the holders of the Non-Habitual Resident status will be taxed according to the general rules of the Portuguese Income Tax Code (CIRS), but even so, with the appropriate financial advice, you could be looking at a reduced tax burden compared to if you were in your current country of residence.

4. Other direct taxes

The wealth tax in Portugal is exclusively on real estate.

Once you own your Portuguese home, you are committed to paying Council Tax i.e. Imposto Municipal sobre Imóveis (IMI), which is calculated as a percentage of the tax valuation of the property.

An extension to the IMI is an additional tax, Adicional ao Imposto Municipal sobre Imóveis (AIMI).

AIMI is an annual fixed rate levied on the sum value of the tax assets of urban buildings (with certain exceptions) located in Portuguese territory that you are the holder of, on the sum that is greater than the €600, 000 allowance.

AIMI rates are 0.4% for properties held by companies (with certain exemptions and allowance exclusions) and 0.7% for individuals (1% for when Portuguese property exceeds €1 million and 1.5% for when it is in excess of €2 million).

Married or living in non-marital partnership taxpayers, who opt to submit a joint tax return, have the right to deduct €1,200,000 to the sum of the Tax Registration Value of all their urban properties.

5. Revisiting your investment portfolio

What was suitable for you in your country of residence e.g. in the UK or South Africa, may no longer be tax efficient or suitable for the NHR, being a Portuguese tax resident.

As there is no one-size-fits-all solution, it is essential that before you relocate to Portugal, you seek financial advice from a cross-border financial advisor, to obtain a pre-assessment of your existing assets to allow consideration for where these are domiciled, to get to know more about your options around currency mismatching, diversification and the required reconstruction of your investments, and to understand your tax implications (where applicable).

For example, if you are a UK domicile residing in South Africa, thinking about relocating to Portugal, cross-border financial planning is essential.

Important to note is that the Brexit transition period is coming to an end on 31 December 2020, which may result in a change of investment options for UK expats and the way in which these will be taxed.

6. Vulnerability to currency exchange rate volatility

Once you are living in Portugal and spending in Euros, holding your savings or income in Sterling or Rand could bring about unnecessary exchange rate fluctuations. Currency choice and specific currency denominated portfolios to assist with currency mismatching should be considered.

7. Portuguese succession law: The basics

Who you are going to leave your estate to may not be the first thing on your mind, especially when you have many years ahead of you.

Succession law and tax in the UK and South Africa is very different to how it works in Portugal.

As a habitual resident in Portugal, even if your estate is in other countries, local Portuguese succession law applies.

If you are already living in Portugal, or are thinking of moving, it’s crucial to understand how Portuguese succession law works, especially if you have specific plans for how or to whom you wish to bequeath your estate to.

Portuguese law includes two types of succession: legal and voluntary, the latter being governed by a will. When there is no will, “forced heirship” rules apply i.e. your estate is divided among children, spouses and parents – referred to in the Civil Code as legitimate heirs. In the absence of any legitimate heirs, the estate reverts to the State.

Portuguese inheritance law does not allow you to distribute all your goods at will. The fact is that you can only dispose freely of a third of your estate (known as the available quota), leaving it to whomever you want in your will.

The remaining two thirds (known as the unavailable or the legitimate quota) must be divided among spouse, children and forebears (parents, grandparents and great-grandparents). These relatives are always entitled to part of the estate and cannot be disinherited, regardless of your wishes as testator.

Inheritance Tax (“stamp duty”)

Spouses or civil partners, children and parents are exempt from paying 10% inheritance tax (“stamp duty”).

A couple can be considered married for tax purposes if they have lived together for two years and have informed the Portuguese authorities. Any legally adopted children will also be recognised as direct family.

Remaining beneficiaries, regardless of their relation to you (for example stepchildren and siblings) could be liable for the 10% inheritance tax when receiving Portuguese assets.

By ensuring you have all your necessary affairs in order, for you and your chosen heirs, by way of a thought through will and estate plan you can get the peace of mind that you need.

Professional advice is key

Cross-border wealth and tax planning can be complicated, which is why we recommend that you obtain personalised and professional guidance and advice before you relocate.

With early, careful planning you can significantly mitigate tax and have the financial peace of mind to relax and fully enjoy your new life in Portugal.

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Our consultants stay up to date on all the latest news and amendments to the rules and regulations. For expert advice, get in touch with our Wealth team by calling us on +44 (0) 20 7759 7519 (UK) or +27 (0) 21 657 154 (SA) or emailing nhr@sableinternational.com.