NON HABITUAL RESIDENT – The Portuguese special tax regime for inbounds
By Sérgio Ramos, Pontes, Baptista & Associados
In addition to the wonderful Southern European climate and culture, Portugal provides an excellent quality of life and an active environment tor investors and businessman that wish to have a residence and business in Europe.
It was not unintentional that Lisbon was chosen to be the host of Web Summit from 2016- 2018, as there is a strong start-up community based there, willing to connect and exchange ideas.
To make the option to move more appealing, in 2009 the Portuguese Government introduced the Non Habitual Resident regime (NHRs).
Once considered a NHR, a foreign individual has the ability to live in a white listed jurisdiction with a friendly residence permit regime (allowing free movement within the Schengen zone), earn income in a tax friendly environment, dispose of their assets and benefit from tax exemptions, pass on their wealth without inheritance or gift taxes, namely for children or spouse and to enjoy their retirement without tax on their pensions.
Additionally, Portugal maintains very close links with the rest of the world, including Africa (Angola, Mozambique and Cape Verde) and South America (Brazil), all ex colonies of Portugal, and Asia (China, including Macao).
What is a Non-Habitual Resident (NHR)?
One of the principal objectives of this regime was to attract individuals and their families to Portugal by making it beneficial from a tax perspective to become tax resident in Portugal.
The NHR regime previews a flat income tax rate of 20% for certain Portuguese employment and self-employment sourced income. A NHR will also be exempt from personal income tax on certain types of qualifying income if this income is subject to tax in the country of source under an existing double taxation treaty that allows for this or, if no Tax Treaty exists, were subject to tax in another jurisdiction and are not considered Portuguese sourced income under domestic rules.
Duration of the special tax regime
Non-habitual resident status applies for a consecutive 10-year period. It is worth noting that this period can be interrupted for one or more years and the individual can still benefit from the regime for the remaining period provided that the conditions for being a tax resident of Portugal in each year of election are met.
How do I qualify to NHR?
To qualify as a NHR, an individual must meet the following requirements:
- be tax resident under Portuguese domestic legislation and
- not have been taxed as a Portuguese resident in the five years prior to taking up residence in Portugal.
An individual is tax resident in Portugal for any year in which:
- he stays in Portugal for more than 183 days (continuously or not) during a 12 month period which begins or ends in that tax year or
- he has a residential accommodation available in Portugal in any day of that 12 month period which is used as the individual’s habitual abode.
Any day (or part of a day) spent in Portugal will count as one day if the individual stays overnight in Portugal. Residency is established as of the first day of permanence in the country.
Note that EU, EEA and Swiss citizens have an automatic right to live in Portugal, while individuals of other nationalities must obtain a residence permit. Recognition of non-habitual resident status is not automatic and is granted for a period of 10 years upon successful application to the Portuguese tax authorities, up until March 31st of the year following official residency taking place.
In order to apply, a request and a statement must be filled to state that the applicant was not resident for tax purposes in Portugal during the 5 years preceding their arrival in Portugal.
If the tax authorities have doubts concerning the truth of what is stated they will request additional documentation, this can include a tax residence certificate from the previous country and/or a document proving that the vital and economic interests of the applicant were centered in another country during the previous 5 years.
How will I be taxed according the NHR?
According to this regime, employment and business or professional income arising in Portugal from “high added-value” activities of a scientific, artistic or technical nature is taxed at a flat rate of 20% with no limit.
To clarify, according to the Ministry of Finance the concept of “high added-value” activity includes architects, engineers, artists, auditors, tax advisors, physicians, teachers, doctors, dentists, board members of certain companies and senior executive employees.
In some cases non-Portuguese employment income, qualifies for an exemption, provided it is effectively taxed in a country with a tax treaty in accordance with the treaty provisions, or, if no tax treaty, then the income is effectively taxed abroad and does not arise from Portuguese sources based on Portuguese law.
In addition and equally important, foreign sourced pension income may qualify for an exemption under the same conditions as employment income.
Foreign sourced income such as, income from copyrights, industrial property rights, transfer of know-how, investment income, rental income and capital gains may benefit from an exemption whenever taxed in a country with which Portugal has a double tax treaty, or in a country with which Portugal has not signed a double tax treaty. This is in accordance with the OECD Model Tax Convention (reference for all double tax treaties), and is provided that it is not in a territory considered to be a tax haven and that the income does not arise from Portuguese sources based on Portuguese law.
Applicability of double taxation agreements
One interesting feature of this administration is that while many double taxation treaties (of which Portugal signed 77!) grant the source country the possibility of taxing income paid to residents of another nation, many countries refrain from this practice so as to attract foreign investment.
This means that in practice many types of income will often be zero-taxed in the hands of the “non-habitual resident”, since Portugal will not tax them merely on account that they may be taxed in another country.
Taking the example of the French - Portuguese treaty and 2 types of income as an example, if you are a resident of Portugal but receive income from the France, then, in respect of such income, French tax authorities may:
- Tax dividends, under article 11, although it does not if the recipient is not a resident of France.
- Tax royalties, under article 13, although it does not if the recipient is not a resident of France.
i.e. if you receive dividends or royalties from a French company, such income may be subject to tax in France under the French/Portuguese agreement. Consequently, it will not be taxed in France or Portugal if you benefit from "non-habitual resident" status.
Pierre, French citizen, whose only income is his retirement pension, which he earned as an Architect in France. He decided to move to Portugal two months ago, where he acquired a house for permanent residence. He applied to NHR, and fulfilled the conditions to be granted it.
There is no taxation in France, as the ADT between PT and FR provides that pensions (from private sector) paid to a resident are taxed only in the country of the residence.
John, Swiss citizen, whose income is dividends obtained in Switzerland, is a NHR in Portugal, and works as a painter, in a studio in Lisbon.
TAXATION IN THE STATE OF RESIDENCE (PORTUGAL)
Dividends - Exemption (NHR)
Independent work - 20% + up to 3.5% (2016)
THE TAXATION IN THE STATE OF SOURCE (SWITZERLAND)
Dividends - Taxation subject to a limit of 15%
Independent work - no subjects
The information provided in this article is an introduction to possible tax consequences of a move to Portugal. It is intended only to be summary and simplifications have therefore been made. Individual advice must be obtained before acting on any of the matters covered herein. There may be tax implications in other countries as well. Tax Treaties concluded by Portugal may also be relevant to some of the above taxes.
Sérgio RamosPontes, Baptista & Associados, Lisbon, Portugal
T: +351 213 479 397
Sérgio Ramos Partner of Pontes, Baptista & Associados holds a degree in Auditing, a postgraduate degree in Management and Taxation, is an auditor and tax consultant at various audit firms and an author and speaker for accounting, tax and auditing matters.
Pontes, Baptista & Associados is a vehicle for the development of their audit activities and other related services. Right from the start, the firm’s focus and ongoing priority has been ensuring quality, competence and independence. In order to continually improve the quality of its services and access international knowledge databases and shares experiences with colleagues from all around the world, the society integrated as independent member the Geneva Group International. Growth and improvement represent a daily motivation as the firm conducts audits to uphold the credibility of their clients’ financial information.
Published: May 2017 l Photo: Colourbox.de