The Portuguese Tax Regime for Non-Habitual Residents
Europe’s best kept secret. Portugal offers a very attractive tax regime for individuals who become tax resident in Portugal, referred to as Non Habitual Residents (NHRs). This regime provides for a flat personal income tax rate of 20% for qualifying (self) employment income from activities performed in Portugal and a tax exemption for almost all foreign source income.
The Portuguese economy has become increasingly diversified and service-based since the country joined the European Union (EU) in 1986. Portugal ranks 42 out of 137 countries in the 2017-2018 World Economic Forums’ Global Competitiveness Report and ranks 29 out of 190 countries in the 2018 World Bank Doing Business Report.
Add free remittance of funds, a friendly residence permit regime allowing for free movement within the Schengen area and the possibility of applying for Portuguese nationality and consequently an EU passport, the absence of wealth tax and gift and inheritance tax, and it is clear why Portugal is a very attractive location. The country is recognised as a premium tourism and real estate tourism location, as well as a leading EU country in R&D and information technology. The government has launched an economic strategy focused on boosting exports and foreign direct investment.
Portuguese tax Regime for Non Habitual Residents
The NHR tax regime, which is a beneficial Personal Income Tax (PIT) regime, is available to individuals becoming tax resident in Portugal, provided they were not Portuguese tax resident in any of the previous 5 years. The status is granted for a period of 10 years. Portugal is committed to attracting foreign talents, as well as High Net Worth Individuals (HNWIs) and their families.
A person is considered Tax Resident in Portugal if one of the following conditions is met:
- Spend more than 183 days, consecutive or not, in Portugal in any 12-month period starting or ending in the fiscal year concerned; or
- Regardless of spending less than 183 days in Portugal, maintain a residence suggesting being a habitual resident in Portugal during any day of the period referred above.
Under certain circumstances, split-year residence is possible, i.e. taxpayers may be regarded as tax resident during only part of the tax year and as non-resident for the remaining part.
NHRs are subject to a reduced flat 20% personal income tax rate on salaries, as well as on business and professional income, of a Portuguese source arising from “high value-added activities of a scientific, artistic or technical nature”, as per a list published by the Portuguese tax authorities.
As a result, multinational corporations will have a huge advantage in locating their Centre of Excellence / Shared Service Centres in Portugal and Portuguese companies will have a significant stimulus to attract the best foreign talents.
NHRs will be exempt from PIT on salaries of a non-Portuguese source, if such salaries were subject to tax in the country of source under an existing double tax treaty (DTT) or, if no DTT exists, provided that they were effectively taxed in such country.
Business and professional income of a non-Portuguese source relating to “high value-added activities of a scientific, artistic or technical nature”, as well as from intellectual or industrial property or ‘know-how’, earned by NHRs abroad is exempt from PIT, provided such income could be taxed under an existing DTT or could be taxed in another non-blacklisted jurisdiction, in accordance with the provisions of the OECD Model Tax Treaty. It is not necessary that the income is actually taxed, but merely that the country of source has the right to tax it.
Rental income, capital gains on the sale of foreign real estate and investment income, such as dividends and interest, from a non-Portuguese source are also exempt from PIT, provided the conditionsmentioned above are met.
Pensions paid from abroad to NHRs are also exempt from PIT, if such pensions are subject to tax under an existing DTT or if the pension is not considered as obtained in Portugal and the related contributions did not give rise to a PIT deduction in Portugal. Since most DTT grant exclusive taxation rights to the country of residence (Portugal), in practice, this means that the pension income may end up not being taxed in Portugal or in the country of source.
HNWIs in Portugal may be able to accrue their wealth in a friendly tax environment, to dispose of their assets while benefiting from tax exemptions, to pass on their wealth or estate without inheritance or gift taxes to the next generation and/or to enjoy their retirement without tax leakage on their pensions.
Why live and invest in Portugal?
- A 20% flat rate for Portuguese (self) employment income from qualifying activities and exemption for almost all foreign source income is available for NHRs;
- No gift and inheritance tax for assets outside of Portugal. Gift and inheritance of Portuguese assets to spouse, descendants or ascendants benefit from a tax exemption. Inheritances or gifts of Portuguese assets to other individuals will be subject to a flat 10% stamp tax rate;
- No wealth tax and free remittance of funds either to Portugal or abroad;
- Beneficial treatment for pensions and other life insurance products (including unit linked) may further significantly reduce the effective tax burden on capital invested;
- Portuguese companies may take advantage of EU non-discrimination rules and EU Directives on mergers, dividends, interest and royalties, as well as DTT signed by Portugal;
- Dividends and capital gains obtained by Portuguese companies can benefit from a participation exemption regime, which makes Portugal interesting as a location for investments abroad, including investments in Brazil and the Portuguese-speaking countries in Africa.
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