Are you planning to move to Portugal, or thinking about it? Have you been resident here at any time in the last five years?
If you answered ‘yes’ to the first question and ‘no’ the second, I have good news. A scheme for new residents can provide substantial tax benefits, so much so you may discover that Portugal is a tax haven for you.
The Government introduced the Non-Habitual Resident (NHR) regime in 2009 to encourage wealthy individuals and families to move to Portugal to live and work. It provides beneficial tax treatment for the first 10 years of residence, and is open to those in employment, as well as retirees who could potentially find their foreign pension income is tax free.
To qualify as a non-habitual resident:
▪ You must not have been tax resident in Portugal for any of the previous five tax (calendar) years.
▪ You must meet the criteria to be tax resident here in the year of application, as well as every year for the 10 year period. So you need to spend more than 183 days a year in Portugal, or have a habitual residence here.
▪ You need to submit an application to the Portuguese Tax Authorities and be approved.
Employment income earned in Portugal
If your employment or self-employment income is derived from a “high value added” activity, the tax rate for this income is 20%. This compares very well to the current top rate of income tax, which is 48%.
The following activities are regarded as “high value added”: architects, engineers and similar technicians; fine artists, actors and musicians; auditors; doctors and dentists; professors; psychologists; liberal professions, technicians and similar; investors, and directors and managers. The list could change later to allow more activities.
Income arising outside Portugal
The regime provides for tax exemptions for foreign source income, provided certain conditions are met.
Employment income from a foreign source may be exempt from tax in Portugal if it is taxed in the state of source under the rules of a double tax treaty, or, if no tax treaty exists, under domestic legislation and is not regarded as arising from a Portuguese source.
Foreign pension income, for example from UK pension funds, is exempt from Portuguese tax provided it is taxed in another country under the terms of the tax treaty, or is not regarded as Portuguese source income under domestic legislation. In practice, it may be excluded from taxation in both Portugal and the source country.
(dividends, interest, capital gains), rental income, royalties, etc.
In general, other types of income earned outside Portugal are exempt from tax here, provided it may be taxed in the state of source under a tax treaty, or it may be taxed under the terms of the OECD Model Tax Convention and is not regarded as arising in Portugal.
If we look at UK dividends for example, they will be tax free in Portugal under the NHR regime since the UK/Portugal treaty provides that they may be taxed in the UK (even though in practice they may not actually be under the disregarded income rules).
With regards to disposals of UK real estate, the UK/Portugal treaty provides that the gains are taxed in the country where the property is located. The UK therefore has taxation rights, and though it currently does not tax long-term non-residents, the gains are exempt in Portugal under the regime. However, from April 2015 the UK will start to tax gains made on residential property by non-residents.
Note that this tax-free income option does not apply to income generated in a blacklisted tax haven (including Isle of Man, Channel Islands and Gibraltar). If you have funds in these jurisdictions you should look to move the capital to a more tax efficient location.
Other tax benefits to living in Portugal
Outside of the NHR regime, Portugal can still provide tax advantages. Unlike countries like Spain and France, there is no wealth tax here and the inheritance tax regime is benign (it only applies to Portugal assets; the tax rate is 10% and spouses and children are exempt). Also, there are arrangements available here which allow you to enjoy extremely favourable tax treatment on your capital investments and pension income.
Indeed, if you are eligible for the NHR regime, often combining these structures with the regime rules produces the best results.
While the non-habitual residents regime can offer significant tax benefits, it is complex and has pros and cons. This is only a summary and it is important to take professional personalised advice to establish what would be most advantageous for you.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com