By: Claudia Mendes
There are still several types of visas available such as the D7 retirement or passive income visa. Whichever route you choose, you need to review your wealth planning and the tax implications of moving beforehand, possibly restructuring your wealth and ensuring that you are tax efficient and compliant.
First assess what relocation actually means for you. Talk to a consultant to understand the tax requirements and what tax emigration implies. Look at your endowment policies - they can be very tax efficient for high earning individuals in South Africa, but it doesn’t necessarily mean it’s a viable investment to hold in Portugal.
The tax treatment of an endowment is specific to SA resident investors – its tax treatment in SA does not extend to other jurisdictions. The tax paid within an endowment will continue to be paid, regardless of whether you are a non-resident. When you then withdraw from the endowment, you will face additional tax in Portugal, at either 28% or 35%, depending on where the endowment is held, effectively resulting in double taxation.
We recommend restructuring prior to relocating, into a vehicle that is tax efficient on the new country of residence. Our wealth advice is driven by where a client is tax resident. In the EU, we don’t necessarily invest in the country our client is resident in, but look to invest in products and jurisdictions that are efficient and compliant with Portuguese legislation.
The investment process and asset allocation is in itself an important discussion to be had, as this has to be matched to the investor’s risk profile, objectives and capacity for loss.
As far as the planning process is concerned, it is vital that you understand the tax effects on leaving SA, the tax effects of your existing assets and income in Portugal, as well as the planning opportunities available to you to mitigate the tax implications in both countries.
What are your employment plans and how will this affect your income and tax? Do you intend working whilst resident in Portugal? Are there opportunities in your chosen profession? There is a resident tax regime available in Portugal that captures certain high value professions, which could bring about a cap of 20% on those earnings. However, if you’re not on that list, you form part of the progressive tax tables, which means you know you could end up paying a lot more tax than what you would have actually paid in South Africa. It is also important to note in most cases that taxing right on employment income falls to Portugal and as such it brings about an additional social security obligation.
To meet the Portuguese tax residency definition, you must be present in Portugal for more than 183 days, consecutive or otherwise, in any 12-month period, or shorter period, if you have a home under circumstances which imply an intention to keep and occupy such as permanent residence.
Portugal has a non-habitual resident regime for both retirees and passive income visa holders. As long as you haven’t been tax resident in Portugal in the previous five years you can qualify for this non-habitual resident tax regime, and that even includes people that hold Portuguese citizenship. You must be a Portuguese tax resident, physically residing in Portugal to apply.
The Non-Habitual Resident (NHR) tax regime effectively offers a 10-year tax break on qualifying foreign income, 10% on foreign pension income and an exemption foreign dividends, interest royalties, rental income, as long as it’s coming from a jurisdiction that Portugal deems whitelisted or has a tax treaty with. The EU has a list of jurisdictions that they consider as blacklisted, which are locations they view as tax havens. Portugal has its own list of blacklisted jurisdictions which also must be taken into account for existing offshore investments. Investors must ensure that they’re not in blacklisted jurisdictions or face punitive taxes, which calls for essential pre-relocation wealth restructuring.
After 10 years, you will be taxed according to the progressive tax tables, as a Portuguese tax resident.
Double Taxation Treaties (DTT) may come into play, depending on your income sources. In the cross-border space, every client is unique in terms of income source and taxation, and must be reviewed on a case by case basis.
In Portugal, if you don’t have a will, intestate succession will apply and your estate will automatically pass down to your spouse and surviving children, which that may not be favourable for your circumstances if you have a second marriage. You have the option of having a will drafted for your Portuguese based assets based on your nationality so your national country’s laws come to play as opposed to Portugal’s succession planning.
Cost of living
You should consider the cost of living in terms of your lifestyle in South Africa compared to Portugal. The cost of living and property in Portugal varies according to different areas – with coastal towns generally being more expensive than the interior.
As a retiree, if you are holding investments in rands, you are vulnerable to currency fluctuations which you need to factor into your financial plan. Ideally, you should invest in the currency that you resident in to achieve liability-matching. Being in Portugal, you should ideally hold your investments in euros. This is important when taking your SA pensions into account and to consider investment solutions that offer a rand hedge in euro.
* Claudia Mendes is an International Financial Advisor at Sable International Wealth.