From an international tax point of view, Pensions are a somewhat unusual form of income. Most types of income are first taxable at source. Then the country of residence (in this case, Portugal), grants a tax credit equal to the home jurisdiction assessment, thereby eliminating the double taxation. The process concludes with the application of Portuguese fiscal rules. In many cases, the final Portuguese assessment is similar to the tax credit, so the conclusion is usually neutral.
Pensions are different. In the overwhelming number of double tax treaties, the country of residence has exclusive taxation rights. When you become resident for tax purposes in Portugal, your home country should refund any inappropriate withholdings and pay your pension gross. These are the conventional rules. In the case of the United Kingdom, they have been in place since 1968, long before the UK joined the European Union and certainly prior to the upheaval that Brexit may cause British Expats living in abroad. Gazing into the hazy future through my crystal ball, it seems to be common sense that the same rules will continue to apply once Brexit comes into place.
Non-compliant residents
A surprising number of pensioners live a majority of the year in Madeira, yet fail to report their income and do not pay income tax in Portugal. In most instances, they continue to be assessed in their country of origin as if they were still residing there. Given the changing landscape – the pending conclusion of Brexit, coupled with increased international information sharing (the Common Reporting Standard) – this “do-nothing” approach looks increasingly precarious as time progresses.
While long-term residents may no longer be eligible for Non-Habitual Residency status, these “on-paper” non-residents can still qualify for the 10-year tax holiday on pensions available under “NHR”. Becoming compliant can be a beneficial solution to what otherwise could develop into a nasty complication.
Dennis Swing Greene is chairman and International Tax Consultant for euroFINESCOs.a.
