Non-habitual Residency in Portugal
By Maria Thermann

Non-habitual Residency in Portugal

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Portugal introduced the Non Habitual Resident (NHR) regime in 2009 and become fully operational in 2010. One of the principal aims 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. Although there were rumours at the end of 2017 that this regime was to end, at the time of writing the NHR programme remains unchanged and in place. Portugal's NHR programme represents a major step forward in making the country a tax free jurisdiction for individuals in receipt of qualifying non-resident income. Qualifying income includes pension, dividend, royalty and interest income.

This attractive Non-habitual Residency scheme also covers professional income from high value-added activities, which benefit from a special flat tax rate of 20%.

Applicants can already benefit from the NHR status in 2018 by applying now, provided they meet the residency requirements. Successful non-habitual residents will have access to all the benefits of an ordinary Portuguese tax resident including healthcare.

What are the benefits of NHR?

Portuguese NHRs are able to grow their wealth in a white listed jurisdiction and earn income in a tax friendly environment. They can dispose of their assets and benefit from tax exemptions, s well as pass on their wealth without inheritance or gift taxes, namely for children or spouse. They can also enjoy their retirement without tax on their pensions, something that will particularly affect Brits retiring to Portugal in post-Brexit, when Pound Sterling may be worth still less against the Euro as it is now.

In short, Portuguese NHR status enables those who become tax resident in Portugal, and are accepted as NHR, to receive qualifying income tax free both in Portugal and in the country of source of the income. As NHR one can accrue wealth in a white listed friendly tax environment, dispose of one's assets while benefiting from tax exemptions, pass on one's wealth or estate without paying inheritance tax or gift taxes either and / or enjoy retirement without tax leakage on pensions.

Personal Income Tax (PIT) for People relocating to work or run a Business in Portugal

In 2009 Portugal introduced a beneficial voluntary Personal Income Tax (PIT) regime for non habitual residents aiming to attract talent in high value added activities and Ultra and High Net Worth Individuals (UHNWI’s) and their families to Portugal. This regime aims to boost Portuguese competitiveness both in R&D and new technologies and other listed high value added sectors. UHNWI’s and their families may also benefit, as it is often more advantageous than other similar regimes.

This new regime became available to all individuals becoming tax resident in Portugal (if they were not Portuguese tax residents in the previous 5 years), and the status is granted for a period of 10 consecutive years. To qualify as a tax resident, a person should stay for more than 183 days in Portugal during the relevant fiscal year or have a dwelling in Portugal at 31 December of that year with the intention to hold it as his or her habitual residence. Non habitual residents will be subject to a reduced 20% PIT rate both on salaries and business and professional income of a Portuguese source arising from high added value activities of a scientific, artistic or technical nature.

Non habitual residents 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 (meaning an income sourced in their original home country or third country) or, if no Tax Treaty exists, were subject to tax in another jurisdiction and are not considered as Portuguese source income under domestic rules.

Rental income, investment income and capital gains of a non Portuguese source obtained by non habitual residents are also PIT exempt, provided the above mentioned conditions are met. Pensions paid abroad to non habitual residents are also PIT exempt if such pensions were subject to tax under an existing Double Tax Treaty or if the pension should not be considered as obtained in Portugal and related contributions did not allow a PIT deduction in Portugal.

What are the requirements?

The sole requirement to benefit from this preferential tax treatment is to become a Portuguese tax resident, not having been a tax resident in Portugal in the previous five years. This status is granted for 10 years. Any individual who becomes a Portuguese tax resident in accordance with Portuguese Law, i.e. who has his habitual residence in Portugal or who spends more than 183 days in Portugal in the tax year, or has a dwelling in Portugal at 31st December of that year with the intention to hold it as his habitual residence, and has not been taxed in Portugal, as tax resident, in the previous five years, is eligible. The tax year runs from 1st January to 31st December.

How to apply

Applicants can submit their application when they have become a Portuguese tax resident or before 31st March of the following tax year. If you wish to apply for the NHR regime a specialist taxation lawyer can guarantee a prompt consideration of your application.

How long do applications take to be processed?

It takes roughly 7 days for the application to be processed with the help of a specialist law firm. The applicant's NHR status will be backdated to the date of becoming Portuguese tax resident. It should be noted, however, that the deadline for making an NHR application is 31st March of the tax year after an applicant became tax resident in Portugal.

How much does it cost?

Typically, the law firm you appoint will do a due diligence on your income and, where found appropriate, will suggest restructuring your finances in order to maximise the benefit under the NHR programme. Fees for this and the application process itself are assessed on a case-by-case basis, but tend to be very competitive.

Other considerations

It is usual to invest in real estate in Portugal prior to making an application for NHR status.

Can you rent instead of buying Portuguese real estate?

Yes, it is permitted as an option under the NHR scheme. Just as you would as a home owner, if you are renting a property you may be required by the Tax Department to provide evidence of your address in Portugal, which can be done through providing a copy of your rental agreement.

Do you have to provide a statement of assets?

No, you will not need to make any statement of your assets. This will also not be required when filing your first tax return. In each tax return you make you will only be required to provide information on the value of each category of your actual annual income.

Do you have to be a tax resident outside Portugal under the NHR regime?

No, you do not. The term “non-habitual” is often misinterpreted. Under the NHR regime you are required to have your tax residency, and are habitually resident, in Portugal. As this regime is valid for each applicant for a period of 10 years tax authorities used the term “non-habitual”.

Do you have to pay tax in the source of income country after your registration as NHR?

After your registration as a Portuguese NHR you are able to request an international certificate of residence to the tax authorities in Portugal. This document then has to be sent to the tax authorities in the country from where you sourced income and that should enable you to be exempt of tax in that jurisdiction, unless a withholding tax applies.

To sum up the benefits of Non habitual residency:

Under the NHR regime pensions, dividends, interest from non-Portuguese sourced income and royalties are exempt from personal income tax in Portugal. Certain types of salaries, provided they are paid from a non-Portuguese source, can also be exempt from tax. A Non-Habitual Resident will 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 Tax Treaty that allows for this or, if no such Tax Treaty exists, were subject to tax in another jurisdiction and are not considered as Portuguese source income under domestic rules.

Certain types of qualifying income under the regime will also benefit from a double tax exemption, i.e. an exemption in Portugal and in the source jurisdiction. A special flat rate of 20% has also been applicable since 2009 for certain types of income arising from employment and self-employment activities and an exemption of nearly all foreign source income has been available to non habitual residents.

In addition, a tax exemption for gifts of inheritances to spouses, descendants or ascendants has also been available. This means that inheritance or gifts to other individuals will be either not taxable, because of to the generous territoriality rules, or subject to a flat 10% stamp tax rate.

NHR also enjoy being exempt from wealth tax and have free remittance of funds either to Portugal or abroad. Nil taxation on dividends with proper planning is applicable or otherwise a 28% flat tax rate will apply. Tax credit for international double taxation may also be available.

Non habitual residents also enjoy beneficial tax treatment for pensions and other life insurance products (including unit linked) may further significantly reduce the effective tax burden on capital invested.

If you own a Portuguese business, you should take advantage of the following: Companies licensed to operate in the Madeira International Centre (MIBC), including branches of non-resident entities, with a licensed issued until 31 December 2014, benefit from a 5% CIT rate until 31 December 2020.

This reduced CIT rate applies on income derived from transactions with non-residents (or with MIBC entities), but is limited to thresholds of taxable income and depends on the creation of jobs. The MIBC special tax regime also provides for generous benefits concerning withholding taxes on interest, royalties and services, the latter being of special interest to self-employed persons.

Portuguese companies may also take advantage of EU non-discrimination rules and EU Directives on mergers, dividends, interest and royalties, as well of Portuguese double tax treaties. It should be noted that Portugal has signed more than 60 double tax treaties, including with Malta, Macao and Hong Kong, as well as having more than 50 investment protection agreements in place. Portugal also signed more than 15 tax information exchange agreements (most of which are already in force) e.g. Bermudas, Cayman and Guernsey, and several social security agreements, offering interesting opportunities in a tax friendly environment for anyone wishing to start their own business or wishing to relocate to work in Portugal for a number of years.

Can your NHR application fail?

There are no guarantees that applications will be successful. However, as long as the NHR applicant fulfils all the legal requirements of Portuguese tax residency and the specific requirements to become a NHR, there is no reason for the registration to be rejected.

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