Advocaten / Avocats / Lawyers

Tuesday, 28 April 2020

Spain and Portugal: slightly less sunny tax-wise

In a context of increasing mobility within the European Union, Spain and Portugal are popular destinations for, among others, pensioners looking for a milder (tax) climate. There are however, in the long run, some tax measures that could reduce the attractiveness of these two countries.

Spain for example, intends to combat tax competition between its Autonomous Regions by harmonizing both its inheritance and gift taxes as its wealth tax through the introduction of a minimum tax.

In Portugal, the Government has decided to amend its 'non-habitual residents' regime ('NHR regime) and to impose a flat rate of 10% on the pensions of foreign pensioners coming to settle in Portugal as of 1 January 2021.

1. Spain: minimum taxation in the autonomous regions

In Spain, inheritance and gift taxes are only due if one of the following conditions is met: (i) the heir or donee is a tax resident of Spain or (ii) the assets are located on the Spanish territory. Both taxes fall under the competence of the Autonomous Regions, which are free to determine the rates as well as any exemptions. The standard progressive Spanish donation and inheritance tax rates vary between 7.65% and 34% applies.

In addition, wealth tax (Impuesto sobre el Patrimonio) is also payable in Spain. This tax is levied on the worldwide net wealth of Spanish residents and on the wealth of non-residents in Spain. The progressive standard Spanish wealth tax rates vary between 0.2 and 2.5%. However, the Autonomous Regions are authorized to set their own rates and to grant a general exemption for an amount up to EUR 700,000. Some Autonomous Regions have increased their rates (e.g. 2.75% in Catalonia and 3.12% in Valencia), while others have abolished them (e.g. Madrid) or introduced a lower tax (e.g. the Canary Islands and Andalusia).

Initially, this wealth tax was temporarily reintroduced for the years 2011 and 2012. Since then, however, its application has been extended annually. As this tax seems to become applicable indefinitely, the differences in taxation between the Autonomous Region may have a more or less significant impact on a taxpayer's situation. This may, in practice, even go that far that it could lead to a change of residence within Spanish territory of the taxpayer.

In order to reduce tax competition between the Autonomous Regions, the Spanish Government intends to harmonize inheritance and gift tax and the wealth tax by introducing a minimum tax. To date, no legal text on this subject has been published. This is therefore an item to follow up, in particular as regards the date of entry into force.

2. Portugal: end of total exemption for pensions of foreign pensioners established in Portugal

In Portugal the regime of non-habitual residents (hereinafter 'NHR regime') has been modified regarding to foreign pensioners who settle in Portugal as from 1 April 2020.

The preferential NHR regime was introduced in 2009, In 2013 it was subsequently made clear that the regime also applies to foreign pensions of pensioners.

In order to benefit from the NHR regime, the following conditions must be met:

  • one must become a tax resident in Portugal (either by having resided there for at least 183 days during the last 12 months or by designating Portugal as usual -/main residence);
  • one must be registered for tax purposes with the competent Portuguese authorities; and
  • one must not have been taxed as a Portuguese resident during the five years preceding the application for registration.

Once registration as a resident is completed, an application for the NHR regime must be made by 31 March of the year following the establishment of residence in Portugal.

The NHR regime is attractive because, under the Portuguese tax law, an exemption is granted for certain types of foreign income (dividends, interest, rent, pensions, etc.) which do not originate from tax havens. Certain types of income are de facto excluded from the preferential regime (e.g. capital gains on shares).

However, this exemption becomes more interesting in so far as Portugal has, further to the application of a double tax treaty, the power to tax and in so far as this income is not taxed in its country of origin.

As regard to professional income which is obtained in Portugal under the NHR regime, a "special" rate of 20% is applied to income from professions with "high added value ", i.e. architects, engineers, artists, doctors, university professors, senior managers, etc.

Until recently, the NHR regime was particularly attractive to pensioners who receive a non-Portuguese pension and settle in Portugal as some foreign pensioners established in Portugal are exempt from income tax for 10 years. In practice, Belgian private sector pensioners are fully exempt from taxation on their pension. Further to the application of the double tax treaty concluded between Belgium and Portugal, Belgium retains the power to tax pensions granted to retired civil servants. The power to tax pensions of private sector pensioners is, however, attributed to the country of residence.

This favorable regime was strongly criticized by some countries such as Finland, France and Sweden in light of the impact of the total exemption on pensions. The Portuguese government has therefore decided to amend the NHR regime and to tax foreign pensioners who settle in Portugal as from 1 April 2020 (i.e. with an application for application of the NHR regime submitted by 31 March 2021 at the latest) at a flat rate of 10%.

Despite this change, if you are a Belgian pensioner from the private sector, it is still interesting to reside in Portugal and receive your pension there if this pension amounts to approximately EUR 34,000 net per household per year. Below this threshold, Belgium also offers a relatively favorable tax climate. It is therefore important to take this into account when considering moving to Portugal. Receiving significant movable or miscellaneous income (dividends, capital gains, etc.) can also have an impact on your tax situation. This should therefore also be taken into account.

Pensioners who have already settled in Portugal or will settle there before 1 April 2020 (with an application for application of the NHR regime submitted by 31 March 2021 at the latest) will continue to benefit from the NHR regime as applicable until then (i.e. income tax exemption).

For any questions, please contact the authors of this article.

Romina Abiuso - Counsel (romina.abiuso@tiberghien.com)

Nathalie Lauwens - Associate (nathalie.lauwens@tiberghien.com)

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