Elimination of IRS exemption for pensions from foreign sources
State Budget 2020
On the past March 31, the State Budget for the year 2020 was published.
Among the changes in tax matters, the expected change in the regime applicable to taxpayers who benefit from Non-Habitual Resident (RNH) status is included.
The RNH Regime was established with the objective of granting a more favourable taxation regime, both to qualified professionals and to individuals with investment portfolios and pensioners, on their income obtained abroad (with the exception of wages where the application of the reduced rate of 20% is foreseen for income earned in Portugal), who have not been tax residents in Portugal in the previous five years.
The new wording of the Law focuses on the regime applicable to income qualifying as pensions.
In particular, a reduced 10% IRS rate is expected to be applicable. However, the change introduced in the Law has a greater scope than the mere application of a reduced rate to the income that should be qualified as pensions.
For the purpose of taxing taxpayers with non-habitual resident status, the scope of this reduced rate includes:
a) Pre-retirement situations or equivalent, with or without effective work, as well as benefits provided, no matter what, before the verification of the mandatory requirements of social security systems applicable to the transition to a retirement situation are verified, even if the employment contract does not exist, are subordinate to the condition that they are due until such requirements are met, even if, in any of the cases previously provided, they are due by pension funds or other entities, which replace the entity that originally owed.
b) The amounts spent, mandatorily or optionally, by the employer:
- With life insurance and operations, contributions to pension funds, retirement savings funds or any complementary social security schemes, provided that they are acquired and individualized rights of the respective beneficiaries;
- For the purposes foreseen in the previous sub-paragraph and that, not constituting acquired and individualized rights of the respective beneficiaries, are for these objects of redemption, advance, redemption or any other form of anticipation of the corresponding availability.
c) The contributions referred to in subparagraph b) above, not previously subject to taxation, when there is receivement in terms of capital, even if the requirements required by the mandatory social security systems, applicable for the transition to retirement status, have been met or if this has occurred.
In other words, with the wording of the Law now introduced, some realities that were previously taxable in accordance with the rules foreseen for Category A of IRS - Salaries, are now being taxed under a regime equivalent to that of pensions. It is, therefore, potentially applicable to these realities a regime, in essence, more favourable than the one previously foreseen.
We alert, as always, that the relevant concept of “pensions” is what is used in Portuguese law and, for this reason, it is very important to analyse whether foreign investment and savings products, even though considered pensions in their countries of origin, are also in the light of the national concept.
Regarding the application of the Law over time, the State Budget for the year 2020 provides that the new wording is only mandatory for taxpayers who were not registered as tax residents on the date of its entry into force - April 1, 2020. For the others, the application of the new wording is optional and the option to maintain the previous regime can be exercised, that is, the application of the exemption method to income qualified as pensions.
Cortesy : Martínez-Echevarría & Ferreira- Sociedade de Advogados