Why wealthy, overtaxed South Africans want to retire in Portugal

Tax-battered wealthy South Africans, hoping to protect their retirement income, are retiring to Portugal for six months a year on the country’s Non-Habitual Residence (NHR) programme – which includes an attractive 10-year tax break.

In a move originally designed to increase investment into the country, the NHR programme has been operating in Portugal since 2010 and has proved beneficial to older high net worth South Africans seeking to reduce their tax load, says Mike Abbott, Director of Wealth at Sable International.

The programme invites foreign citizens to come and live in Portugal, become residents there, and get a tax break on their income.

However, Abbott warned that there are terms and conditions in terms of which income streams qualify for the tax benefit.

“The income is quite specific on how it’s treated. Qualifying income like pensions, dividends, royalties and interest, is exempt. Earned income could be exempt depending on the nature and where it is sourced from. If it’s Portuguese-sourced income, it will be taxable. Capital gains are still taxable,” he said.

“Because of the types of income they do exempt, most income streams can be planned or restructured to be one of the qualifying streams. Barring capital gains tax, you’re able to really reduce your average tax rate across everything and most capital gains if they’re restructured before you move, can be turned into one of the qualifying incomes.”

No Financial emigration

According to Abbott, one doesn’t have to financially immigrate, because financial immigration is an issue which is specific to the reserve bank.

“It doesn’t change your citizenship and it’s not relevant to your residence, because you can become a non-resident long before you financially immigrate,” he said. “It does not require financial immigration, but you need to move there. You need to move your tax residency there.”

Abbott said the programme is attractive to South Africans because its relatively easy to implement and living in Portugal is comfortable retirement option.

“The key thing about the Non-Habitual Residence programme is that you can go live in Portugal; you have to be there for more than 183 days of the year; you have to go settle there; you don’t need to buy a house, you can rent – and you can restructure your income streams before you leave South Africa, to make them tax efficient for Portugal.

“The other thing about Portugal which is great is that effectively there isn’t any inheritance tax. It also doesn’t have a wealth tax, but it does have a succession tax system.”

Residence and tax jurisdictions

Abbott warned anyone considering the move to work through a checklist to ensure they optimise their move financially and don’t run into problems.

“Restructure your assets in a tax efficient way before you apply for Portuguese residence, and make sure that in becoming a Non-Habitual resident in Portugal, you’ve not retained residency in South Africa or elsewhere, because you will run into tax problems.

“If you have income in a different jurisdiction that is not Portugal or South Africa, then you probably need to be aware of and pay attention to the changes of section 10 of the tax act, which will look to tax foreign incomes abroad that are not being taxed and to tax them here in South Africa. Section 10 comes into effect in March 2019.”

Overall for retirees, especially with children working in Europe, it ticks the boxes, Abbott said.

“Many years ago, a lot of people might have retired to a house on the coast somewhere in South Africa, where their kids would visit and spend time with them. But now the kids are probably living in Europe, or Asia. If they are in Europe or London, it is about a two-hour flight to Portugal and costs about £150. It’s more accessible and life on the Algarve is really not that bad,” he said.

And although it is a 10-year programme, Abbott said that with the use of certain financial products you can extend the low tax or tax-free nature of your income for longer.

“With things like life insurance product wrappers and certain types of pension products, you can actually extend the nature of that tax-free income for slightly longer than 10 years. It is a significant tax planning opportunity for wealthy individuals.”


Read: How much UK, US, Australian and other popular visas will cost South Africans in 2018

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