NHR Foreign Pension Exemption: How It Works in 2020

One of the most attractive features of Portugal’s Non-Habitual Resident (NHR) regime has been the treatment of foreign pension income. Here’s how it currently works.

The Basic Framework

Under NHR, foreign-source income may be exempt from Portuguese tax if:

• It is taxable in the source country under an applicable tax treaty, OR
• It would be taxable in the source country if that country had jurisdiction

Foreign Pension Treatment

General Rule

Foreign pensions have historically been exempt from Portuguese tax under NHR:

• No Portuguese tax on foreign pension income
• Applies to government and private pensions
• Valid for full 10-year NHR period

Recent Developments

Changes are being implemented:

• New 10% flat rate introduced for some pensions
• Grandfathering provisions for existing NHR holders
• Application depends on registration date and timing

Treaty Considerations

Tax treaty provisions affect pension taxation:

Common Treaty Positions

• Government pensions: Often taxable only in paying state
• Private pensions: May be taxable in residence state (Portugal)
• Social security: Varies by treaty

Planning Implications

• Treaty position determines NHR exemption eligibility
• Some pensions may be taxable in Portugal regardless
• Source country rules also apply

Practical Application

For prospective retirees:

1. Identify all pension income sources
2. Review applicable tax treaties
3. Determine NHR exemption eligibility
4. Consider timing of Portuguese tax residency
5. Plan for potential changes to regime

Professional tax advice is essential given the complexity and evolving nature of these rules.