Accountants BDO have been considering the tax benefits of certain locations to go alongside the promise of a better lifestyle. Here they consider the merits of Portugal and Spain
Portugal, and in particular the Algarve, is a key holiday and retirement destination. As well as offering a good quality of life, Portugal has a favourable tax regime for new residents who either have a particular area of expertise or who wish to retire to the country.
The 'Non-habitual Residents (NHR)’ regime was initially introduced in 2009 to attract highly skilled workers to Portugal and to boost the business sector. However, it has a much wider reach than that, providing pensioners with an attractive option when considering tax-efficient retirement destinations. Under the regime, qualifying individuals who obtain NHR status may, for a 10 year (renewable) period, limit their liability to Portuguese tax on domestic source income and gains only.
Subject to meeting the various conditions, certain sources of non-Portuguese income such as pensions and dividends may be exempt from tax in Portugal and, in certain circumstances, may also be exempt from tax in the source country. This can result in considerable tax savings.
Earnings from prescribed activities of a scientific or highly technical nature, deriving from employment or self employment activities are subject to a lower flat rate of tax, instead of the usual progressive rates. Added to this are the benefits of no wealth tax, gift or inheritance tax in Portugal and an exemption from stamp duty on transfers of property to spouses, ascendants or descendants.
Spain has traditionally been a favoured destination for migrating Britons and Scandinavians. Despite the relatively high tax rates for residents, Spain has a favourable tax regime for certain immigrants, which may not be widely known.
The ‘Beckham Law’ was named after David Beckham, one of the first foreigners to take advantage of the regime following his move to Real Madrid in 2003. The regime offers individuals taking up residence in Spain under a contract of employment the opportunity of limiting their Spanish tax liabilities to Spanish source income and Spanish capital gains only.
Spanish income/gains are subject to lower tax rates under the regime than those applicable to normal residents. Subject to meeting certain conditions, including an earnings cap, having a Spanish employer, and not having had tax residence in Spain in the previous 10 years, qualifying individuals may not pay tax on their overseas income and gains for up to six tax years.
However, while it is attractive from an income tax perspective, the Beckham Law does not provide protection from exposure to Spanish estate taxes and forced heirship provisions which can lead to unexpected and undesirable consequences in the absence of professional advice.