By Dr. Eduardo Serra Jorge
Decree-Law 249/2009, dated September 23, approved the Investment Tax Code, outlining several measures with the purpose of attracting foreign investment to Portugal. One of the measures was the creation of a favourable tax regime for non-residents’ income taxation.
1. Attribution of non-habitual resident status
The non-habitual resident status can be attributed to:
(i) all non-residents wishing to establish permanent residence in Portugal
(ii) non-residents who, being independent or dependent workers, or members of statutory legal entities, just want to establish a temporary residence in Portugal as a result of expatriation or labour secondment.
Requirements
• to obtain that status you must acquire Portuguese residence, according to the criteria stated in article 16th of the IRS Code. This scheme is applied to those who gain residence in Portugal from the year 2009 onwards.
• the non-resident must not have been taxed in Portugal, as a resident, on any of the five years prior to the application of the scheme.
Once attributed with the status of non-habitual resident, the taxpayer enjoys favourable taxation relating to income tax (IRS) for a period of 10 years, not necessarily consecutive, with the only requirement being that the criteria of residence is filed in line with article 16th of the IRS Code.
2. Income covered
The system includes two separate sets of rules: the income of non-habitual residents obtained in Portugal and the income obtained abroad (example: pensions).
These must be recognised in two categories:
a) liabilities income, including interest, dividends, capital gains and other income on capital, income on property and pensions;
b) income which corresponds to the income of dependent and independent labour and royalties.
2.1. Liabilities income of foreign source
This type of income is progressively exempt from IRS, since it can be taxed at source in the state where the income is achieved and in accordance with the Convention for the Elimination of Double Taxation that has been agreed between Portugal and that State.
The system only requires that such liabilities income may be taxed in the payment source state in accordance with the rules of a convention to eliminate double taxation, but does not require the effective taxation.
The only exception relates to pensions’ income from a foreign source. In this regard, the income will only be exempted if it is actually taxed by the state in which the pension payment is made, in accordance with the rules of the convention to eliminate double taxation concluded between Portugal and that state, or if it is not considered income obtained in the Portuguese territory.
2.2. Income of foreign source
Category A: income obtained abroad by non-habitual residents will be exempt of IRS (with progression) if it is actually taxed in the other contracting state in accordance with the convention for the elimination of double taxation signed between Portugal and that State.
Category B: income and royalties are exempt (with progression) of IRS, since they may be taxed in the state which is the source of the income and/or royalty, in accordance with the convention for the elimination of double taxation concluded between Portugal and that State.
It is required that the economic activities concerned are of high added value and are included in the Administrative Rule 12/2010, January 7.
The dependent and independent labour income obtained either in Portugal or abroad will be taxed at a special rate of 20%.
Non-habitual residents who obtain foreign source income exemption, as mentioned above, instead of tax exemption may choose to apply the tax credit. However, if the taxpayer chooses this option, the income will be taxed at progressive and general rates of IRS.
Non-habitual residents who opt for taxation in accordance with the general scheme of IRS, if at the same time gaining exemption of foreign source income, will all be taxed in accordance with the general and progressive rates of IRS (cease the use of the rate of 20%).
Dr Eduardo Serra Jorge is founding member, senior partner and CEO of lawyers firm Eduardo Serra Jorge & Maria José Garcia – Sociedade de Advogados, R.L., created in 1987. In his column, he addresses legal issues affecting foreign residents in Portugal. Faro office at Gaveto das Ruas Pedro Nunes e José de Matos, 5 R/C
289 829 326 | www.esjmjgadvogados.com
