Portugal's regime for foreign pensioners, allowing a personal income tax (PIT) rate of 10 %, is one of the most damaging to tax competition in the European Union (EU), reveals a European study published today.
Portugal is one of the most dangerous EU countries for foreign retirees
Portugal is one of the most dangerous EU countries for foreign retirees
This conclusion comes fromEuropean Union Tax Observatory (EU), an independent body on EU taxation which, in a report published today, states that "the most striking trend in European tax competition is the increase in the number of personal income tax regimes targeting foreign individuals", from five in 1995 to 28 today.
A provisional classification suggests that the most damaging are the Italian and Greek high-net-worth individual schemes, the Cypriot high-income scheme and the pension schemes of Cyprus, Greece and Portugal, says the European Tax Observatory.
More specifically, according to the structure, these schemes are of long duration, offer substantial tax advantages and are only aimed at very high-income earners or do not result in any real economic activity in the Member State.
In total, these preferential schemes now apply to over 200,000 beneficiaries in the EU, estimates the independent body, which speaks of a total fiscal cost to the European Union of 4.5 billion euros per year.
"This sum is equivalent to the budget of the Erasmus program," compares the EU Tax Observatory in its report.
In the case of Portugal, the non-habitual resident (RNH) scheme was created in 2009 and applies to high value-added workers, but also to retirees receiving pensions from abroad, including Portuguese nationals who have worked abroad and are returning to Portugal to retire.
Modified in 2012 and again in 2020, the RNH provides for the application of an IRS rate of 10 % on foreign pension income, according to the most recent amendment.
Non-usual resident status also gives workers in professions considered as high value-added the opportunity to benefit from a special IRS rate of 20%. Each non-habitual resident can benefit from this tax regime for a maximum period of 10 years.
In its report published today, the European Tax Observatory notes that "tax competition is increasingly taking the form of preferential or narrowly targeted tax regimes, in addition to general rate reductions" at EU level.
To reverse these trends, the framework suggests reforming the European Code of Conduct "to make it a binding instrument, and to extend its mandate to personal income tax and non-preferential corporate tax regimes that lead to generally low levels of taxation of multinationals".
Furthermore, "in the absence of a coordinated approach - which is always the ideal solution - Member States could consider unilateral taxation of their expatriates, which, under certain conditions, could mitigate the effects of preferential personal income tax regimes", he further suggests.
In our view, the aim of this report is to encourage EU countries that don't offer tax advantages for working people or retirees to introduce a floor tax. A bit like what the USA does to its citizens, who for the record pay their income tax in the USA, regardless of their country of residence.
