The French government has turned its attention to the thousands of its retirees moving to Portugal, taking full fiscal advantage of the Non-habitual Residents scheme that has been one of the key drivers of the Algarve's property market since 2009.
Not only is the weather better and costs generally lower in Portugal, tax exemptions have been the deciding factor for many French citizens moving to the Algarve in retirement. Certainly, their purchasing power is improved than if they had stayed ‘dans la belle France.’
Finland already has torn up its tax agreement with Portugal, irritated that its escapee citizens have been living the life of Riley overseas while domestic taxpayers foot the bill for Finland's public services – Sweden is following suit.*
To qualify as non-habitual resident, a person must be considered as a tax resident under Portuguese law, that is to have stayed in Portugal for a total of 183 days or more, or during the year of application have bought or rented accommodation at any time during the year.
This registration allows immigrants to benefit from tax breaks for a period of ten years. This scheme was extended in 2013 to include retirement pensions. As a result, French-source pensions - other than those paid by civil service schemes - are exempt from tax in Portugal.
However, the Franco-Portuguese tax treaty, in line with the OECD model, provides that retirement pensions are taxable in the state of residence of the pensioner. The result is a "double non-taxation," on the one hand France having no right to impose them under the tax treaty, while on the other hand, Portugal provides for their exemption.
Since the purpose of tax treaties is to avoid double taxation and not to create double exemptions, things could change dramatically following two recent decisions of the Conseil d'Etat (decisions of 9 November 2015 no. 370054 and no. 371132).
These did not concern Portugal specifically but they are intended to apply to all cases where the country of residence does not exercise its right to tax world income - Portugal is in the lineup.
France’s Conseil d'Etat now considers that to be tax resident of a country, tax actually must be imposed. Therefore, if an immigrant to Portugal is exempt from tax, he or she can not take advantage of the tax convention. And if the tax convention is not applicable, French tax law applies and French taxes will be applied.
The French government now is of the opinion that it is not enough for its citizens to live more than 183 days a year in Portugal to be considered as a non-resident, equally, simply owning a property in Portugal is not enough to avoid French taxes.
Case law considers that a person who lives abroad and receives a retirement pension paid by a French pension fund must be regarded as having retained the center of his economic interests in France.
Consequently, he or she must be considered as fiscally domiciled in France, especially if this pension is the sole source of income, and therefore be subject to income tax in France.
French pensioners in Portugal are at risk of being considered French tax residents and losing the generous benefits of "non-habitual resident" status, not because of a change in any bilateral tax treaty but because of a change in the French government’s interpretation of French domestic law.
"For the moment, the tax administration has not yet decided, but to avoid seeing pensions subject to tax in France, immigrants not only should have the centre of their economic interests in Portugal, but also other have sources of taxable income in Portugal.
In other words, French pensioners living and receiving their pension in Portugal under the non-habitual Residents scheme soon could be treated differently by the French tax authorities and lose the zero tax rate, to the distress of thousands of estate agents.
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(*See reader's comment from Jobroco, "Sweden has NOT followed suit. It has been discussed and even proposed by the previous government. Since the recent usual mess of a general election, it is undecided what a new government will look like.")
