The Portuguese non-habitual resident (“NHR”) tax regime
Partner Contribution - HVR Business Consulting
“The NHR regime essentially grants qualifying individuals the possibility of becoming tax residents of a white-listed jurisdiction whilst legally avoiding or minimising income tax on certain categories of income and capital gains for a period of 10 years.”
The non-habitual resident (“NHR”) tax regime came into force in Portugal in 2009 and is proving very successful at attracting individuals of independent means, pensioners and certain skilled professionals to establish residency in Portugal for tax purposes, while not being subject to minimum or maximum stay requirements.
In addition to the non-existence in Portugal of wealth tax, or of inheritance/gift tax for close relatives, the NHR regime essentially grants qualifying individuals the possibility of becoming tax residents of a white-listed jurisdiction whilst legally avoiding or reduce the income tax on certain categories of non-Portugal sourced income and capital gains for a period of 10 years.
A major feature of the NHR regime lies in its interaction with the double taxation agreements (DTAs) signed by Portugal, or with the OECD model tax convention in the absence of one. In effect, most DTAs (of which Portugal signed 79, grant the possibility to tax most categories of income to the country of source of such income, although in practice, so as to attract foreign investment, many countries will not make use of that possibility to tax non-residents. Since most such categories will not be taxed in Portugal in the hands of an NHR because they may be taxed abroad, in practice most foreign-source income types will be zero taxed in such hands.
Taking the UK/Portugal DTA as an example, if you are a resident of Portugal but receive dividends from the UK, then the UK has the power to tax them under article 10, although it does not if the recipient is not a UK resident. On the other hand, Portugal will not tax such dividends in the hands of an NHR either, because the UK may tax them under the DTA. This way, the non-habitual resident of Portugal may receive dividends from UK sources completely free of tax.
Under the NHR regime, the following categories of foreign-source income and capital gains (except if sourced from a blacklisted tax haven that does not have a double taxation agreement with Portugal, will be exempt from income tax in Portugal if they may be taxed in the source country, even though they will not often be taxed in the hands of non-residents in the latter country either:
- Dividends, interest and real estate income
- Capital gains from the disposal of real estate
- Royalties and associated income (but please note that under some conventions the source country is prevented from taxing this income, in which case it will be taxed in Portugal); b• Profits derived from eligible occupations; Capital gains from the alienation of movable property (other than shares deriving more than 50% of their value from real estate, or ships/aircraft operated in international traffic) will be tax-exempt if the relevant double taxation agreement states that they may be taxed in the source country, but this is not the case with the OECD model or with the generality of the conventions, and therefore some tax advice may be required.
It should be noted that several countries often deemed “offshore tax havens” do have double taxation agreements with Portugal and, strictly in accordance with the relevant legal provisions, are therefore white-listed for the purposes of the NHR regime. However, in practice, this is not always the case and blacklisted tax havens should preferably be avoided as income source countries by someone who wishes to avoid any confrontation with the tax authorities. In any case, all EU member states are white-listed, even though several such states may in many ways be used as “offshore tax havens”, especially by non-residents thereof.
Pensions will be liable to a 10% flat tax rate in Portugal provided they are not deemed sourced from Portugal.
Foreign-source income from employment (including fees of directors and entertainers or sportsmen) will not be taxed in Portugal if it is taxed (at whatever rate) in the source country in accordance with a double tax treaty.
Portuguese-source income depends on whether it is derived from eligible occupations
- Employment income (including fees of directors and entertainers/sportsmen), business or self-employment profits and royalties (including payments for know-how), if derived from eligible occupations will be subject to a 20% flat rate;
- Other Portuguese-source income will be taxed at the normal rates applicable to regular resident taxpayers;
- A surcharge of 2.5% is imposed on the slice of total taxable income between €80,640 and €250,000; and a surcharge of 5% on the slice of income that exceeds €250,000.
So as to maximise the advantages of the NHR regime, one has to take into account not only Portuguese tax law but also the tax law of the source country of the income, as well as the double taxation agreements (or the OECD model convention) applicable to the foreign-source income and gains one is to receive as an NHR.
- Residency of a white-listed, EU-member, country.
- No minimum stay requirements in Portugal (but care must be taken to avoid deemed tax residence in another country).
- Possibility of enjoying a tax-exemption on the following types of non-Portuguese source income for 10 years:
- Real estate income;
- Capital gains from the disposal of real estate, of shares deriving more than 50% of their value from real estate, and of ships/aircraft operated in international traffic;
- Royalties and other income from know-how (with some exceptions);
- Business and self-employment profits derived from eligible occupations (but do check the relevant double taxation agreement in this respect).
- Possibility of paying tax at a flat rate of 20% during at least 10 years on Portuguese-source employment income, fees, profits and royalties if derived from eligible occupations.
- Possibility of paying tax at a flat rate of 10% during at least 10 years on pensions and similar remuneration obtained abroad.
- Ability to pass on wealth to a spouse, life partner, and direct descendants or ascendants, without payment of inheritance or gift taxes.