Non-Habitual Residents Regime
Europe's best kept secret. Portugal offers a avery 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 government has launched an economic strategy focused on boosting exports and foreign direct investment.
The launch of the 'Living in Portugal' site (www.livinginportugal.com), the Golden Visa programme (see page 33) and the
recent Corporate Income Tax and Personal Income Tax Reforms are examples of the Portuguese government's commitment to
attract foreign investment to Portugal. 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.
With free remittance of funds, a friendly residence permit regime allowing for free movement within the Schengen area and the possibility to apply for Portuguese nationality and consequently an EU passport,¬†the absence of wealth tax and gift and inheritance tax, it is clear why Portugal is a very attractive location.
The NHR tax regime, which is a beneficial personal tax 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 five years.¬†
The status is granted for a period of 10 years. The Portuguese tax authorities have simplified the procedures for registration under the NHR regime, which is also an evidence of Portugal's commitment to attract foreign talent, as well as High-Networth individuals (HNWIs) and their families.¬†
To be considered as tax resident in Portugal, and in accordance with the rules in force as from 1st January 2015, one of the following conditions should be 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 residence in Portugal during¬†any day of the period referred above.
Under certain circumstances, split-year residence may be 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. A surcharge up to 3.21% is currently also applicable, but will be progressively abolished during 2017.
As a result, multinational corporations will have a huge advantage in locating their Centres of Excellence /Shared Service Centres in
Portugal and Portuguese companies will have a significant stimulus to attract the best foreign talent.
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 or, if no double tax treaty 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 are exempt from PIT, provided such income could be taxed under an existing double tax treaty 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 conditions above are met.
Pensions paid from abroad to NHRs are also exempt from PIT, if such pensions are subject to tax under an existing double tax treaty 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 double tax treaties grant exclusive taxation rights to the country of residence (which would be Portugal), in practice this means that the pension income may end up not being taxed in Portugal or in the country of source.
Furthermore, by becoming a Portuguese NHR, HNWIs 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.
It is now almost eight years since the NHR regime was approved, and according to recent information released, from 2009 to 2016, there were around 10,000 applications for the NHR regime.
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;
- Companies licensed to operate in the Madeira International Business Center until 31 December 2020, including branches of nonresident entities, benefit from a 5% flat Corporate Income Tax (CIT) rate until 31 December 2027, applicable to income¬†derived from transactions with non-residents (or with other MIBC entities), limited to thresholds of taxable income, and depending¬†on the creation of jobs. Exemption from withholding tax applies on dividends, interest, royalties and services;
- Portuguese companies may take advantage of EU non-discrimination rules and EU Directives on mergers, dividends, interest and royalties, as well as Portuguese double tax treaties;
- Dividends and capital gains obtained by Portuguese companies can benefit from a participation exemption regime, which make Portugal interesting as a location for investments abroad, including investments in Brazil and the Portuguese speaking countries¬†in Africa.
Leendert Verschoor ‚Äď PwC Partner
Tel: + 351 213 599 631
Luis Filipe Sousa ‚Äď PwC Senior Manager
Tel: + 351 213 599 671