Retiring tax-free in Portugal (for at least 10 years) - here’s how you do it

This article was originally published on Biznews.

Gareth: It's a pleasure to welcome Niel Pretorius and Mike Abbott on the line, who are from Sable International's wealth team. Thanks guys for taking the time to chat to me today. So, we're talking about Portugal's Non-Habitual Residence programme. What's interesting with this programme is that it seeks to attract wealthy foreigners to the country by making it beneficial to become a tax resident there. Can you tell me more?

Mike: Gareth, just on a high-level, the programme has been around for some time now, and I know there are some other European countries that are looking to do it. Essentially, it provides the opportunity for a fair amount of one's retirement – 10 years and possibly even more if one does the planning – to be tax-free from an income tax point of view. So, the programme is pretty attractive to Americans and to other European countries with higher tax. I know there are a lot of residents of Scandinavian countries that are very keen on this programme and are moving to Portugal. Obviously, having been out there and seen it for myself, there's now a fast-growing community of SA expats in Portugal as well.

The essence of the programme is a 10-year tax break on certain types of income streams, pensions being one of them. But if you do your planning correctly, you can extend that and make it tax-efficient beyond the 10 years. However, you will really need to do a fair amount of planning before you go to Portugal. The other aspect of the programme is that it does require you to live there. So, it requires you to be in the country for more than 183 days in the year. As to how well that's policed, we don't know, but that's a requirement under the rules. So that's it, in a nutshell.

Gareth: So, when you say that it's required that you live there, do you have to own property in Portugal to be able to participate in this programme?

Mike: You don't have to own property; you can rent. But you do need to have a settled presence there for 183 days of the year.

Gareth: How does Portugal benefit from this programme and why did it embark on this programme?

Mike: That wasn't immediately obvious to me when I went there. I wondered why Portugal would do something like this, particularly because people get access to their health system after five years. So, you do start to wonder as to how this works for the average Portuguese taxpayer. But when you go to Portugal and you meet the expats out there, you can actually see that this does work because the Portuguese economy has really struggled since they had the debt crisis. Post the financial crisis, in 2012/13, they had a real squeeze on their fiscal funding, and their economy is looking to create a more broad-based recovery.

With discretionary spending on the ground by wealthy people moving into the area, it actually uplifts the local economy at a very grassroots level. Of course, if you get reasonably wealthy folks from all over the world to hang out together for long enough, what they start doing is starting businesses, which employs people. When you go to Portugal you can already see that. The expats spend their first five years retired and then they get bored and start businesses. So, it does actually work for these countries and that's why the programme is still there after all these years.

Gareth: Considering what you've just said, is it likely that Portugal will persist with this programme into the long-term?

Mike: That was a question that came up very strongly a little while ago. It was about 18 months ago when a left-wing government came into power and there were concerns that these types of programmes would be shelved. But they haven't been touched. All that happened was a very small wealth tax was introduced on property, but the programme has largely been left intact, and other European countries are looking at programmes of a similar nature themselves. I think the programme has been a success and continues to be one, and that's why it's likely to stay there.

Gareth: And have a lot of South Africans taken part in the programme? Is it possible to give us an idea around numbers?

Mike: I couldn't tell you what the numbers are across the whole programme. We've got a sense of what our numbers are and we know it's a very attractive opportunity for SA clients. A lot of SA clients have taken up the Golden Visa option, which requires you to invest €500,000 in Portuguese property. The Non-Habitual Resident's programme then would be a natural extension for them if they decided to move there. They would then trigger the Non-Habitual Resident's optionality.

A lot of South Africans who were retiring about 15 to 20 years ago might have thought, "well, we'll go and buy a house down on the coast somewhere." The kids will most likely be in Cape Town or in Johannesburg and they'll spend time in the holiday home by the coast. Today, those kids are often now either in London or in Europe so, Portugal, to my mind, is a great option because it's only a two-and-a-half-hour flight away, or a two-hour flight from London, and that flight costs about £120. Portugal is very close to the major hubs of Europe and London. I think for South Africans who are retiring, where their kids are now abroad in Europe, this is a great option.

Gareth: And presumably Portugal has better weather than a lot of Europe as well?

Mike: Absolutely, and it doesn't take long to realise that they've got some great golf courses, and some pockets there where you can smell the braais constantly.

Gareth: Talking about the tax relief, can you explain more around how that works? So, they've really incentivised this, haven't they?

Mike: Yes, exactly. My colleague Niel will tell you more about how those tax reliefs work.

Niel: There are various types of income streams that are free from taxation, like salaries you receive overseas, and pensions probably being the most popular, especially seeing that most of these guys are going on retirement visas. You are also free of tax, if you are taxed in the home country or the source is not from Portugal. So, in most of the countries where these people come from, there's typically a double taxation treaty in effect.

In SA, there is specific wording on how they treat pensions, and they treat it differently whether it's a private pension or an occupational pension. The key then to boosting your retirement is to try and structure that internationally. So, get it out of the SA economy and its tax regulations and regime. Get it abroad, but then make sure that you structure it in a way that you are complying with the Portuguese requirements, to ensure you receive that tax-free status, at least for the first 10 years. If you do it properly, you can actually extend that tax-free benefit well beyond that period. So, that's where a large part of this comes in, and that part of the initial assessment is really looking at the clients, and saying, "what have you got, what do you intend doing, what do you intend to live off, and how do we structure that in the most tax-efficient way for you being a resident in Portugal?" That's probably the hardest part of this entire job: putting all of this together.

The application process, well, that in itself is administrative in terms of what the Portuguese look at. They literally want to ensure that you've got enough money not to be a burden on the state and that you have sufficient income to cover your basic needs: food, shelter, medical, etc. That's the real key of this entire exercise and if you don't do it proactively you can end up running into problems. To try and do it once you are there is just going to become a nightmare.

Gareth: Niel, how challenging or difficult is it to get your funding over there? What's involved with that and I presume that you guys at Sable International would assist quite heavily with that?

Niel: Absolutely. So, you wouldn't necessarily move the funds onshore into Portugal – it would typically be offshore. So, if you're going to be looking at drawing from a pension, you'd look at structuring something like an offshore retirement annuity fund, which is classified as a pension. So, it's not sitting within Portugal itself. It remains offshore but you enjoy that income stream in Portugal and they're happy with that because they can see the income stream. It's in a whitelisted jurisdiction and you'll enjoy the tax breaks. If you get the jurisdiction wrong – and you end up in a blacklisted jurisdiction – then you're going to have problems and get fully taxed on it.

Mike: Gareth, here it depends on various factors. With some clients this is actually quite straightforward process to execute, but with other clients it's actually quite complex and it depends on how much of their wealth is spread between retirement accounts or SA pension accounts and whether those are sitting in the living annuity yet or not, or are they still in the RA or preservation type structures.

We would also need to look at how much of their wealth is tied-up in businesses because when the individual leaves SA for good, there's a deemed disposal of these assets. That deemed disposal can be quite a challenge to manage and mitigate, so we have to look at that quite carefully, and those are the more complicated cases where we've got a large CTC disposal to manage.

Gareth: So, do you guys look at it on a case-by-case basis, essentially?

Mike: Definitely, yes, it's a holistic financial planning exercise and it's probably one of the biggest financial planning exercises a client would do.

Gareth: How long can this process take and what are the costs involved?

Niel: This process can take a couple of months. Where the differences come in is what the nationality of the client is. A lot of South Africans do have second passports, let's say Irish passports or UK passports, so for them to go there initially is fairly simple and straightforward because at this point in time, they have the right to go and reside. Once they're there, they then literally just have to file an application or register with a local authority, and then the NHR application takes place within Portugal. That application, depending on complexity, could take a couple of months.

From a pure SA point of view, it's slightly different. You have to obtain a long-term stay visa, first and foremost in SA. That is usually granted for about four months, and once in Portugal you'll go through the same exercise and do the applications for your residence permit and, at the same time, your NHR process can take place. That residence permit again, can take in excess of four months but as long as you've got proof that the application has actually been filed, they'll let you stay until it's been finalised.

Gareth: So, they're quite flexible in terms of that?

Niel: Correct. It's like anything when it comes to government. You can put any timeline on anything but it doesn't always quite work that way, but they won't kick you out until they've actually processed the residence application. So, upon completion, your period is granted for a period of a couple of years, until you do your renewal. After five years you can then apply for permanent residency and after six years, you can apply for a passport of citizenship, which doesn't alter the tax treatment but now you've got the right to that secondary passport. However, you will then be required to write a Portuguese language test, which apparently is not the hardest test in the world. It's fairly basic. But to get the passport you have to understand the lingo at least.

Gareth: Okay, so you're looking at, at least 10 to 11 years, from what you've just explained, right, in terms of getting that ultimate passport?

Niel: No, six years. The tax-free status is for 10 years but in between this you can get your permanent residency and passport, and let's say that's the end of year six, so you've still got another four years to run on the tax break, even though you're a full-on citizen of Portugal.

Gareth: Right, and finally, if somebody is interested in this how do they get in touch with you guys to help them through this process?

Mike: The first step would be just to get in touch with us on www.sableinternational.com, under the wealth page. Our direct telephone number, our London-based number, is 02077597519 or you can send us an email to wealth@sableinternational.com. That email will come to either myself or Niel, and we'll just get in touch with the client and start having a conversation, do a bit of fact finding, and start to scope out how complicated or how complex the financial planning for that client is going to be. Usually this is an initial conversation.

We then get into more detail as to what the nuts and bolts might look like, and then it's up to the client. Most of the clients then head off to Portugal to figure out whether it's something they like or whether they can see themselves living there. We then go into phase two where the financial planning actually starts.

Gareth: Yes, and the financial planning is obviously a key aspect of it, isn't it?

Mike: Absolutely, because you have to make decisions around capital gains tax. Remember when you're in Portugal on the Non-Habitual Residence programme, you're still paying capital gains tax at Portuguese rates so, you need to ensure that you've transmuted any future capital gains into a different type of income stream. So, you have to do the planning before you go there, and then you have to consider the planning from the SA side.

That's why I think in order for this to be done properly, you have to be working with an advisor who understands the SA and Portuguese tax position and who also has a fairly detailed understanding of the residency rules in SA and Portugal, and the double tax treaty, because the double tax treaty does come into play for the more complicated transactions.

Gareth: Very interesting stuff. Niel and Mike, thank you so much for taking the time to chat to me today.

Mike: It's a pleasure.

Niel: Thank you, Gareth.