Portugal - Income Tax and QROPS

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The following gives details of income tax obtained from successful completion of a pension transfer to a QROPS on behalf of a Portuguese resident. This should be read in conjunction with our Guide to Portuguese tax which is available by contacting Gerard Associates.

One immediate consideration is paying tax on your Pension income.

By transferring to a QROPS you immediately benefit from receiving the income Gross whether in the UK or Portugal. It is then for you and your tax professional/accountant to declare the income via your UK self assessment or Portuguese tax return.

This is an immediate cash advantage as you effectively defer paying tax until the future payments on account.

Portuguese tax authorities will treat you as tax resident if you spend more than 183 days in the country.

Portuguese residents are taxed on their worldwide income on an increasing scale.

The following statement is taken and updated to 2008 from the Portuguese Finance Department:

Cat. H: Pensions.

This category contains pensions in general, including annuities and alimony payments. Category H income paid on a monthly basis to a resident pensioner is subject to a withhold tax at rates between 0% and 28%, depending on the pensioner circumstances.

(Note: The income from a QROPS is paid Gross and does not impose a withholding tax)

In 2008, each pensioner with a pension or annuity income up to €30,000.00 can deduct from the gross income an amount of €6,000.00. But if the annual income is higher than €30,000.00, each pensioner is only able to deduct the amount of €6,000.00 reduced by 13% of the exceeding part of the annual income.

In addition, the pensioner may deduct 150% of the fees paid to trade unions, with the limit of 1% of the gross earnings of Cat. H, except on the part corresponding to any advantage such as health care, educational, elderly, housing, insurance or social security schemes.

Income from a QROPS (Please note an annuity in a QROPS does not mean purchasing an annuity and losing control of capital.)

Annuities – a payment by an annuity will be taxable only on the income element, when a certificate is supplied by an authorised actuary, such an annuity will comprise of both a capital and income element.

As with all taxation you should discuss your liability with a tax professional in Portugal which will also determine any other liabilities to tax that you will incur in becoming Portuguese resident.

We are happy to recommend experienced tax professionals to help with residency, fiscal representation and taxation in Portugal.

The taxation of Pension income in Portugal, especially when correctly established as a QROPS annuity is significantly less than a corresponding UK arrangement.

Inheritance Tax

The 2008 Finance Act has restored IHT protection to UK tax-relieved pension benefits that have been transferred to a ‘qualifying non-UK pension scheme.’

Inheritance Tax is levied upon provisions of the Stamp Tax Code in Portugal and may be applicable, depending on the manner in which scheme assets are treated upon the members decease.

If they revert to the estate of the deceased through specific request in the member’s letter of wishes, their subsequent distribution will be either tax free, if made to a spouse, child or grandchild, or taxable at 10 percent, if distributed to others.

If through specific request in the member’s letter of wishes the scheme assets are distributed directly to nominated beneficiaries such distribution will be tax free regardless of the relationships between the beneficiaries and the member. If on the other hand annuity payments continue to be made after the death of the member they will be subject to income tax in the hands of the recipient, subject to discrimination of income and capital, as above.

Where the scheme assets are contributed into new pension schemes to be established for nominated members by specific request in the member letter of wishes such contributions will be tax free and the members will enjoy the benefits of the pension scheme.