Portuguese move to increase taxes on expat pensioners just makes Spain look bad in comparison

expats in spain tax breaks
Protest against Spain’s treatment of expats

Like most people, I wasn’t aware that expat pensioners in Portugal have enjoyed a zero-tax regime for the last decade until I heard the tax rate is going up to a still-attractive 10%. Ironically, the news of taxes going up for expat pensioners in Portugal just makes Spain look like a tax turn-off in comparison.

Northern European pensioners are a potential goldmine for Spain and Portugal, where entrenched economic problems like high unemployment, high public deficits, and low productivity, mean governments are in no position to ignore gold mines. Post-war baby-boomers are just starting to retire, so there are lots of them. They live in wealthy, expensive countries with cold climates, making them drawn to Spain and Portugal with their warmer climates and lower cost of living. Expats bring money into poor areas, invest in property, create jobs in all sorts of services – often in places without much industry or wealth creating possibilities. True, they place demands on the health service, but their government back home picks up the bill under present rules. So Portugal and Spain should be bending over backwards to attract expat pensioners, especially in areas where population decline is a growing problem, which is most of the Spanish interior.

What does Portugal do to attract expat pensioners? Since 2009, under its non-habitual resident tax scheme, it has allowed expat pensioners to live in Portugal tax-free for up to 10 years, exempt from any tax on foreign-sourced pensions, dividends or employment income.

Just imagine that – your pension tax-free in a safe, democratic country with a relatively cheap cost of living, a high quality of life, and a southern European climate. What’s not to like? The scheme is reported to have attracted around 30,000 people to Portugal, including 3,000 Britons. I’m only surprised everyone didn’t retire there. Perhaps it wasn’t widely known about.

Now the Socialist-led government in Portugal, under pressure from its leftie coalition partners like the Left Bloc, and badgered by EU countries like Sweden and Finland, which think they have lost tax-paying pensioners to Portugal as a result, is raising the tax rate on expat pensioners from zero to 10%, which is still attractive by European standards.

“This tax increase will mollify the government’s left-wing allies, and the scheme’s European critics,” Miguel Nuno Cardiga, of BDO, a tax-advisory company, told The Times of London. “But at the same time, in the long term, not put off new pensioners from coming, as 10 per cent is still an attractive tax level, which may be offset by other dividends.”

What does Spain do to attract expat pensioners?

Nothing that I know of. True, we have the ‘Beckham’ tax break, named after the famous English footballer, to attract highly-paid talent, but no tax breaks for pensioners. As a result, well-off expat pensioners living in Spain (183 days or more per year) can end up paying more tax in Spain than they would back home.

Sometimes I wonder if anyone in the Spanish governing classes has even given the matter the slightest bit of thought. Indeed, the Spanish authorities seem to go out of their way to discourage expat pensioners from retiring to Spain with their spending power. Take the disgraceful Spanish Modelo 720 world-wide asset reporting obligation as an example of a big turn-off for expats. And the numerous land-grab and illegal building corruption scandals that have ruined the lives of many expat pensioners during what should have been their golden years have stained Spain’s reputation as a safe place to invest.

The Portuguese tax increase from 0% to 10% just makes Spain look bad in comparison.

On the subject of taxes, this podcast with tax historian Dominic Frisby is absolutely fascinating and well worth watching though not directly related to Spain. It’s a real eye-opener and a pleasure to watch.

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Thoughts on “Portuguese move to increase taxes on expat pensioners just makes Spain look bad in comparison

  • It has always seemed to me that the governments of Spain, of whatever stripe – the Treasury Dept in particular – are an economics-free zone. As Mark describes, Spain is a country where property sales to incomers and natives alike are dragged down by absurdly high front-end costs, which, with the difficulties it has in other areas of tax revenue earning activity, it cannot afford. That Valencia put property sales tax UP 2% at the time of the worst of the property crash deserved referral to psychiatric analysis. At least Madrid and Barça took 2% off.

    IBI – This local tax is astonishingly low – for my property in central VLC, anyway. It is 10% of what I was paying in rates on a second-to-bottom band property in Bristol.

    Has it never occured to the revenue-collecting deptartments of central, regional and local gov that IBI brings in revenue from every property, every year? And that taxes on property sales only happens at the time of the sale, which for some properties may be once in a generation of two? In times of property sales dips – guess what? Reduced revenue.

    A first year economics or maths undergrad could soon whip up a graph where the two taxes cross. That would be the point of ‘same difference’ tax revenue. Politicians would then doubtless tweak the actual legislation to produce the politico-economic bias they favoured. Perhaps the current rates achieve that for the Sanchez-Iglesias regime, but I don’t recall that it has ever been any different during PP regimes.

    Autonomo/National Insurance – I know there has been an attempt recently to make the National Insurance contributions on going autonomo ‘soft start’ but it it is still an absurd way to treat a start-up.

    Autonomo/IVA – My understanding is, from what my gestora has told me, that every autonomo is obliged to charge sales tax on every supply of goods and services, however small. That there is no threshold below which registration for IVA is waived or voluntary. I had three VAT registered businesses in UK. One because my turnover made it mandatory and the other two voluntary because all my clients were VAT registered and could thus reclaim the VAT I charged but it allowed me to reclaim VAT on qualifying purchases.

    The result of these two could not be better calculated to encourage the ‘black economy’ at worst and stifle business at best.

    All governments of all countries persist with or institute counter-productive or plain barmy legislation, particulary economic. It’s just that Spain’s seem so plainly barking as to defy beleif.

    • Mark Stücklin says:

      Chris, erudite as always. Just one thing, Only Madrid reduced the tax on home buyers to 6%. In Catalonia they raised it to 10% on all sales – the highest level allowed by law. No breaks for first time buyers at the bottom of the ladder. Talk about a stupid and regressive tax.

      By the way, I suspect you might like a podcast interview with Dominic Frisby I watched last night on how taxes around the world and throughout history have always had negative unintentional consequences and distorted society. The Corn Laws created the Irish potato famine and diaspora to the US, and the Window Tax created dark, damp, poky homes for the poor that made things like tuberculosis much worse. It’s absolutely fascinating. I strongly recommend watching it. I’m going to embed it at the end of the article but here is the link as well https://www.youtube.com/watch?v=XDfCVIzpbTE

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