Tax benefits designed for foreign-source retirees allow foreign taxpayers who transfer their residence to benefit instead of the ordinary rules from a reduced rate on income earned abroad
Portugal and Greece-as well as Italy for foreigners-are attractive tax destinations
In recent decades, several jurisdictions have introduced favorable tax regimes to attract new taxpayers to the territory.
In the wake of this trend, even foreign source pension holders who wish to transfer their residence to another state can enjoy certain benefits.
Subsidized schemes for retirees
Many states, including European ones that are in tax competition with each other to attract human capital, thus new potentially high-spending taxpayers willing to make investments in the territory, have introduced particularly advantageous tax measures. Consider, for example, the benefits provided for:
- researchers
- impatriate workers
- professional sportsmen
- new residents.
Each of these measures is designed for different categories of individuals but generally responds to the goal of attracting people who are tax residents abroad to move to another state to contribute to the economic, cultural, and scientific development of that country.
Many jurisdictions have turned their attention to the older population segment believing that any move to the territory, where incentivized by favorable tax treatment, is apt to generate numerous benefits
Of course, one might think that investing in the relocation of older people by giving them favorable tax treatment is not the right move. The most senior segment of the population, as is well known, is the one that tends to be most in need of care and welfare services; therefore, it is the one that, in some ways, has the most significant impact on public spending.
However, such an observation is only partly true. The generalized progress of recent years has led toward a marked improvement in health conditions and, therefore, in life expectancy: not only has the concept of old age changed, but the so-called elderly are now very active in society: they invest, they spend, they plan.
Well, in the wake of this change, the state, and with it the IRS, in recent decades, has begun to turn its gaze with interest toward this segment of the population, considering it not as a “cost” but as a resource; a resource that, under certain conditions, can give new impetus to the economy.
How do benefits for pensioners work?
At certain times in history, the legislature, to favor certain conduct or, for example, to incentivize the use of newly introduced legal institutions, provides measures that, by derogating from the ordinary tax treatment, thus affect the quantum of the tax or the tax assumption, reduce the tax burden of specific categories of taxpayers.
Tax benefits designed for foreign source pensioners, in principle, allow a foreign taxpayer who transfers their residence to another state to benefit from a reduced rate on income earned abroad in place of the ordinary rules.
Portugal
Portugal is an attractive destination from a tax perspective for those considering a move to another state. The defiscalization policies implemented by the Portuguese government to attract high-profile taxpayers within the territory are known virtually worldwide.
A European citizen, such as an Italian retiree who intends to move to Portugal, can enjoy tax benefits by obtaining non-habitual resident status. This regime-which can be used for ten years, allows individuals who have not been resident in Portugal for the previous five years to benefit from preferential taxation on foreign-source income. More specifically, a reduced rate of 10 percent on a pension is provided by a state other than Portugal.
The benefits also extend to:
- rental income
- capital gains
- interest, accrued or received outside Portugal.
It should be pointed out, however, that one forfeits the benefit in question if the income received comes from off-shore jurisdictions.
Greece
Because of the tax breaks provided for foreigners, Greece continues to be a favorite country for relocating. Particularly by HNWIs and people with particularly substantial personal or family wealth.
Greece provides a preferential tax regime for foreigners (e.g., Italians, French, Germans) who generate income abroad – thus in their home jurisdictions or other states – but who wish to transfer their tax residence to Greece.
The recently amended Greek Non-dom regime allows foreign investors, under certain conditions, to benefit from a flat tax of 100,000 euros per tax period on foreign-source income generated in that same period and to benefit, for Greek-source income, from domestic income taxes. On a par, therefore, with another Greek resident.
This privileged regime is not infinite; on the contrary, the beneficiary can benefit for up to 15 years, provided specific criteria are met.
For example, the taxpayer may be required to prove:
- that he has not been a resident of Greece within the last seven years, as opposed to the eight years preceding the transfer;
- that he or a relative has invested at least 500,000 euros in real estate or other assets, including financial assets, in Greece.
Another highlight of the Greek legislation concerns the tax regime designed to attract pensioners; thus, individuals who receive pension income from a foreign source.
As of January 1, 2020, individuals who receive pension income from countries other than Greece and intend to move to a city in the state are granted a privileged income tax regime. It means that for 15 years, the foreign pensioner taxpayer who moves to Greece will be eligible for a fixed 7 percent rate on a pension.
This favorable regime applies, however, under certain conditions. The foreign pensioner who decides to change residence and move to Greece will have to prove, among other things, that:
- they have not been a tax resident in Greece for the last five years, out of the six years preceding the move;
- they are from a state with which Greece has entered into tax agreements and adheres to the exchange of information and tax cooperation schemes.
Italy
In addition to Greece and Portugal, Italy, with the 2019 Budget Law, through Article 24-ter of the T.U.I.R., has also introduced tax benefits for retirees who intend to reside here.
The national legislature, aiming to attract human capital and stimulate certain territories’ growth, has provided a favorable optional regime for foreign retirees who decide to move to the South. Said favorable regime allows taxpayers to opt for the Irpef substitute tax at a rate of 7 percent on any income category produced abroad instead of the ordinary regime.
In addition, the favorable tax regime allows:
- exemption from the obligation of tax monitoring regarding foreign assets and investments provided for by Italian law
- the exemption from the payment of Ivie and Ivafe.
As known:
- the Ivie is a tax due on the value of real estate located abroad and held as property or another real right by individuals resident in the territory of the State
- the Ivafe is a tax on the value of financial products, current accounts, and savings accounts payable by residents for financial assets held abroad by ownership or other real rights.
To gain access to the concessional scheme dedicated to pensioners, which provides the exemption of pension income and other foreign source income for ten tax periods, interested parties will, in principle, have to prove that they integrate four specific conditions.
Individuals who wish to benefit from the measure must, among other things:
- Receive pension income (or equivalent allowances) provided by foreign entities
- Have been tax residents in the foreign State for the previous five tax periods
- be willing to transfer residence to Italy
- come from countries with which administrative cooperation agreements are in force.
Foreign retirees in Italy: where to transfer residence?
It is worth spending a few words with specific reference to where one needs to transfer one’s residence. The foreign person coming to Italy will be bound to move to a municipality in the Mezzogiorno or a city located in one of the areas affected by the earthquake events of 2016 to take advantage of the mentioned scheme.
As previously said, the fiscal relief has a maximum duration of 10 tax periods. Therefore an individual that transfers their tax residence to Italy in 2022 will be able to benefit from the substitute taxation from that year until 2031 (inclusive). Without, however, the possibility of renewing the option upon expiration.
As is clear, the rule incentivizes the entrenchment of retirees in small municipalities located in less competitive areas to encourage their growth through increased investment and consumption. The legislature intends to address the problem of emptying small Italian cities by imposing this constraint on the benefits.
In the rationale that led to the introduction of this scheme, one can also read the desire to solve, through the fiscal instrument, and thus through competitive regimes aimed at specific categories of subjects, old and unresolved social and territorial criticalities.
A word of advice
In conclusion, it should be noted that there may be numerous difficulties, including bureaucratic ones, despite all the presented benefits.
Therefore, before deciding to move to a foreign state for tax reasons, it is always worth getting support from an experienced advisor to prepare effective tax and estate planning and carry out the necessary paperwork to obtain resident status.
