Tax treaties have been signed between Portugal and other countries of the European Economic Area. These treaties mostly follow the standard OECD tax treaty model and thus allocate the right to tax pension income to the country of residency of the tax payer.
Internal Portuguese tax rules, resulting from the financial crisis of 2008, were rolled out in an effort to attract wealthy citizens from other countries by exempting certain income types, including pensions, from Portuguese income taxes. This exemption was limited to a period of up to 10 years. The new immigrants do not pay the normal Portuguese income taxes, but indirectly bring wealth to the country by locally buying properties, goods and services.
The Portuguese tax exemption has induced pensioners from all over Europe to move to Portugal. They most often came from Nordic countries (Sweden and Finland) and also from Belgium, France and Germany. These countries were obviously not very happy with the loss of income, resulting from fiscal emigration of a part of their population and have put growing pressure on Portugal to change the rules.
Their efforts now seem to bear fruit as plans have been unveiled by the Portuguese government to change the tax exemption into a limited taxation. Mention has been made of the planned introduction of a 10% tax rate.
This new rate is in line with the lowest possible Belgian tax rate on pension lump sum payments, for persons, who retire at the age of 65 years or after a full 45-year working career. For other Belgian pensioners, the tax rates still remain higher (between 16,5% and 20%), but for them the tax incentive to relocate to Portugal will also significantly decrease.
We will need to await the further rolling out of the new tax rules by the Portuguese government, but it is likely that the recent announcements regarding the proposed changes will already start to slow down the flow of Belgian tax migrants to the country.