Regime for Non-Habitual Residents
The tax regime for non-habitual residents is intended to attract to Portugal certain qualified individuals and investments which may give rise to tax-saving opportunities for expatriates. The Non-Habitual Residence special tax regime has the following exemptions and benefits:
A) Professional income from Portugal
Income generated in Portugal classified under the IRS code as derived from categories A (employment) and B (self-employment, royalties), linked with “high value-added activities” of a scientific, artistic or technical nature, as defined by the Portaria no. 12/2010 of January 7 will be taxed at a special flat rate of 20%.
B) Salary from abroad
Income generated outside Portugal from category A (employment) will be exempt in Portugal if such income is taxed in the source jurisdiction and it is possible to establish a tax credit under an existing tax treaty for the elimination of double taxation or in the absence of such treaty, if taxed in the source jurisdiction and such income cannot be considered as taxable in Portugal under the IRS Code’s rules.
C) Other income
Income generated outside Portugal from category B (within high-value-added activities, as mentioned above) or categories E (capital income), F (letting income) or G (capital gains) will be exempt in Portugal if this income may be taxed in the source jurisdiction and it is possible to establish a tax credit under an existing tax treaty for the elimination of double taxation or equivalent provided that such source jurisdiction is not included on the tax havens’ black-list (Ministerial Decree no./Portaria n.º 150/2004 of February 13).
Income generated outside Portugal, classified under the IRS code as derived from category H (pensions), will be exempt in Portugal if this income is, alternatively:
■ Taxable in the source jurisdiction whereby a tax treaty for the elimination of double taxation is in vigour and allows for such tax credit;
■ Under the criteria of article 18th of the IRS Code, this income cannot be considered as arising in Portugal.
Because residency is broadly defined, most double taxation agreements recognise that a person could meet the definition of residency in more than one jurisdiction – dual residency – and provide a “tie breaker” clause. Such clauses typically have a hierarchy of three to five tests for resolving multiple residency, typically including permanent abode as the major factor.
Tax residency rarely impacts citizenship, although a given country’s immigration laws may influence the definition of tax residency.
Nearly all tax treaties provide some mechanism under which taxpayers and the jurisdictions can resolve disputes. Generally speaking, the government agency responsible for conducting dispute resolution procedures under the treaty is referred to as the competent authority who generally have the power to bind their governments in specific cases.
Individuals who could be caught in the trap of dual residency and double taxation are retirees with a second home in another state; taxpayers who live in one state but have business activities or interests in another; individuals who have relocated to another state but return after a number of years; individuals who temporarily relocate overseas for a job assignment, and individuals who have severed all ties with a state but fail to establish residency in another.
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By Dennis Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.