Non-Habitual Tax Residency
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.
Portugal¬†Ranked 38 out of 140 ¬†2015-2016 World Economic Forums'¬†Global Competitiveness Report
Portugal Ranked 23 out of 189 ¬†¬†2016 World Bank Doing Business Report
The Portuguese economy has become¬†increasingly diversified and service-based¬†since the country joined the European Union¬†(EU) in 1986. Portugal ranks 38 out of 140¬†countries in the 2015-2016 World Economic¬†Forums' Global Competitiveness Report and¬†23 out of 189 countries in the 2016 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 to apply 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.¬†The launch of the 'Living in Portugal' site¬†(http://www.livinginportugal.com/pt/), the¬†Golden Visa programme (see page 24) 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.
Portuguese Tax Regime for Non-Habitual Residents
The NHR 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 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‚Äôs commitment to attract foreign talents, as well as High Net Worth Individuals (HNWIs) and their families.
To be considered as a tax resident in Portugal, and in accordance with the rules in force as from 1 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% PIT rate on salaries as well as on business and professional income, of a Portuguese source arising from ‚Äúhigh value-added activities of a scientific, artistic or technical nature‚ÄĚ, as per a list published by the Portuguese tax authorities. A surcharge up to 3.5% is currently also applicable, but will be abolished as from 2017.
As a result, multinational corporations will have a huge advantage in locating their Centres of Excellence/Shared Services 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 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 ‚Äúhigh value-added activities of a scientific, artistic or technical nature‚ÄĚ, as well as from intellectual or industrial property or ‚Äėknow-how‚Äô, 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 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 Portuguese NHRs, 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.
Why live and invest in Portugal
- A A 20% flat rate for Portuguese (self)¬†employment income from qualifying¬†activities and exemption for almost all¬†foreign source income is available for NHRs;
- A tax exemption for gifts and inheritance tax to spouse, descendants or ascendants. Inheritances or gifts to other individuals will be either not taxable, due to generous territoriality rules, or 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 non-resident 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.
Portugal has signed 71 double tax treaties, 64 of which are in force, more than 50 investment protection agreements, 15 tax information exchange agreements, most of which are already in force (e.g. Bermuda, Cayman and Gibraltar) and several social security agreements.
Leendert Verschoor ‚Äď PwC Partner
Tel: + 351 213 599 631
Luis Filipe Sousa ‚Äď PwC
Tel: + 351 213 599 671