Business Personal Finance

Wednesday 21 August 2019

Could I save on pension tax by retiring in Portugal?

Your questions answered

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Michael Gaffney

Q My wife and I are both retired. I have a private pension - plus my State pension. My wife was a public servant and has the appropriate pension - but no State pension. We are both in the PAYE system and paying tax at the higher tax rate on our pensions. We have always been resident in Ireland and we have a mortgage-free property.

About eight years ago, we bought a second home in Portugal. The cost was about €250,000 and we took out a mortgage to buy the property. We now spend about 20 weeks a year in Portugal. The Portuguese authorities offer very generous tax terms on foreign income from private pensions. I believe that you must own a property in the country and spend a minimum of 183 days per year in Portugal in order to declare as a non-resident taxpayer over there. We are spending more time in Portugal each year, so the 183-day requirement could be easily met. We would continue to live in Ireland for the remainder of the year. My understanding is that the income from my State pension and the total income from my wife's pension would not be eligible for the zero percent Portuguese tax rate.

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However, I would still make a substantial saving on the tax payable on my private pension - if my pension was taxed in Portugal rather than Ireland. There may well be additional savings in future years in terms of Capital Gains Tax, income from dividends and so on. Would you have any advice on me making arrangements to have my private pension taxed in Portugal, rather than in Ireland - including any pitfalls or disadvantages? Also, how would I approach the Revenue Commissioners in Ireland to make such arrangements? John,Dublin

An individual who is tax resident in Portugal can be exempt from Irish tax on a private pension under the terms of the Ireland-Portugal double taxation treaty. However, there are a number of complications.

Firstly, you cannot pre-agree your change of tax residence with the tax authorities. You have to become tax resident in Portugal and get a certificate from the Portuguese authorities to that effect. Then you can make a claim to the Irish Revenue Commissioners for a tax exemption or refund. This claim is made on the form IC2. (You will find the IC2 form - together with instructions on where to send it - on the Revenue Commissioners' website). By the time you make this claim, you may have paid further PAYE on your pension - which will need to be reclaimed.

A further complication arises if you also continue to live for part of the year in Ireland. This could mean that you continue to be tax resident in Ireland (as well as in Portugal). Even if you spend less than 183 days in Ireland in a given year, you can still be tax resident in Ireland if the total number of days in a year - plus the total number of days in the previous year - come to 280 or more. Any part of a day counts as a day here. If you are tax resident in Ireland, you might still be able to claim the tax exemption in the Ireland-Portugal double taxation treaty for your private pension, but there are detailed rules. Broadly speaking, you can do so if you don't retain a residence for your use in Ireland. If you do retain a house or other residence available to you in Ireland, then you will have to prove that your personal and economic interests are closer to Portugal than Ireland. This is a somewhat vague concept so in practice, it can be difficult to prove this.

You will need to get Portuguese advice on the tax rules there. However, there are two points to note. Firstly, the favourable Portuguese tax regime which you mention doesn't generally cover Capital Gains Tax - it only does so in some narrow circumstances. Secondly, the laws and rules for interpreting tax treaties are evolving. It is therefore possible that cases where taxpayers end up not paying tax in either country could be severely curtailed, so it is best not to assume that the current situation will continue to exist into the future.

So if you plan to spend most of your time in Portugal, by all means claim the tax exemption under the Ireland-Portugal double tax treaty when the time comes - if there is nothing to lose by doing so. However, as you will see, there are complications and risks so it does not seem advisable to go very far out of your way to do so.

Travel guide tax limbo

Q My son has been working as a travel guide since 2017 for a company based in London. He is not an employee and is paid a daily rate in sterling, which is converted to euro when lodged to his account. His work is mostly on the continent with the odd trip to Ireland and the UK. He hasn't lived in Ireland since early 2017 and he does not have an address in the UK as he is constantly travelling. The company [which he acts as a tour guide for] provides him with accommodation and meals (similar to that provided to the tourists on the trip). He gets tips. Previously he was a PAYE worker.

My son wants to bring his tax affairs up to date, but is unsure how to do so. Firstly, is he liable for tax in Ireland or the UK? Assuming it's Ireland, how would he go about making a tax return? Padraig, Co Wicklow

As you say, the first question is whether he is subject to Irish or UK tax.

Let's take Ireland first. You have to decide if he is resident in Ireland for tax purposes. The rules are that for any given year he was Irish resident if either he was in Ireland in that year for 183 days or more - or if he was in Ireland for 280 days or more in that given year and the year before it combined.

For the above purposes, any part of the day in Ireland counts as a day.

So assuming your son lived in Ireland in 2016, it is likely that he was tax resident in Ireland in 2017 - as taking 2016 plus 2017, he likely was resident for 280 or more days in Ireland. For 2018 and later years, it looks like he will not be tax resident in Ireland if he stays in this job.

So for Ireland, he should submit a tax return and pay tax on his 2017 income. The best way to do this is to register through the Revenue Online System (ROS) on the website of the Revenue Commissioners. The tax return can be done online and the tax paid. The Irish tax return for 2017 should have been done in late 2018 so there could be some small amount of penalties and interest on late payment of tax. However, when the taxpayer volunteers themselves to the Revenue Commissioners without too much delay in a case like this, the penalties and interest should not be too big.

The rules for tax residence in the UK are more complicated and he will need to check these. (The website of the UK tax authority, the HM Revenue and Customs, is a good starting point). From what you say, if he does not have accommodation in the UK and spends very little time there, it looks like he is not tax resident there and would not in that case have to pay UK tax.

Michael Gaffney is a tax expert with KPMG

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