Beneficiaries of retirement pensions from French sources (excluding public sector retirees) who settled in Portugal before April 1, 2020 can benefit from the non-habitual resident regime, an attractive exempt tax regime for a period of 10 years.
This favorable assessment results from a combined application of the double taxation agreement concluded between France and Portugal and from the tax regime for “non-habitual residents” (“NHR”), introduced by the Portuguese legislator in 2009.
- The Franco-Portuguese tax convention provides that Portugal alone has the right to tax French retirement pensions (excluding public pensions) received by a Portuguese resident.
- Under the NHR rules, Portugal grants total exemption for ten years from the taxation of pensions to taxpayers settling in Portugal.
- Other tax authorities in the European Union are concerned about this situation, which they consider to be the subject of aggressive tax competition from Portugal. These criticisms have led to regime changes recently introduced by the 2020 state budget.
- In France, the tax administration has expressed its intention to follow these taxpayers closely. In particular, it considers that a taxpayer who pays no tax in Portugal cannot be classified as a Portuguese tax resident under the bilateral tax treaty and therefore cannot benefit from the protection of this agreement. The French tax authorities intend to exclude the application of the tax treaty and regain their right to tax retirement pensions from French sources.
- French pension beneficiaries who have declared their tax residence in Portugal must indicate that they do not benefit from the protection of the tax treaty. These French nationals must declare their retirement pension in France in addition to other sources of income;
- or by sending a rectification proposal leading to a tax adjustment in France.
French courts have yet to rule on the treatment of these “NHR” taxpayers. There is no doubt that the outcome will be controversial between the position of the French tax administration and that of taxpayers. In all cases, letters received from the tax authorities must not remain unanswered. The response to be made and the arguments to be advanced (scope of the tax treaty, existence of taxable income provided that it is not fictitious, efficiency of the Portuguese residence) must be adapted to each particular situation.
The Portuguese state budget for 2020 entered into force on April 1, 2020. It reformed the tax regime for NHR beneficiaries, by introducing, instead of full exemption, a flat-rate contribution at the rate of 10% for a 10 year period. pensions from foreign sources. More specifically, the 10% rate applies not only to pension income paid after retirement, but also to other types of pensions such as income allocated in the event of early retirement, as well as to other benefits granted under compulsory social security pension schemes, including amounts paid by the employer on life insurance contracts as well as contributions to pension funds, retirement savings schemes or any supplementary social security scheme. If retirement is also taxable in the country of origin, Portugal will grant a tax credit which can be deducted from the tax due abroad.
Regarding other types of income (dividends, rental income, etc.), no amendment was introduced into the state budget. In practice, these changes also affect taxpayers who already benefit from the scheme. “NHR” taxpayers who reside in Portugal and who have already applied but have not yet received a response can choose to apply the new regime to their 2020 income tax return.
Dennis Swing Greene is president and international tax consultant at euroFINESCO s, a,