Non Habitual Residents Tax Regime

The Non Habitual Resident Tax Regime

 

Introduction

The non habitual resident regime is special personal income tax regime for new residents in Portugal that offers excellent tax opportunities for passive income, foreign pensioners, employment and independent personnel services (Self-employed).

The non habitual resident can benefit from the regime for a period of 10 years.

It is an extremely completive regime, when compared internationally with other favorable tax regimes.

It not only beneficial for wealthy individuals, but also for pensioners and high qualified workers.

The Regime

1.      Pensions

         A foreign- source occupation pension is fully exempt from tax. In addition, the tax treaty celebrated between the source country and Portugal usually precludes that country from taxing the pension, resulting in a double non-taxation. Generally only pensions of retired civil servants are allocated by treaties to the source country (some treaties that follow the UN model allow the source country to tax pensions paid bypublic entities).

2.      Passive income: dividends interests, royalties rents and capital gains

Passive income from foreign source is exempt from tax in Portugal (state of residence) if::

·         “Can be” subject to tax in the state of source in the terms of the convention celebrated between Portugal and the source country. They don’t need to be taxed, the only requirement is that the convention includes the possibility of being taxed in the source state.

·         In case there is no convention between Portugal and the state of source, the income “can be” subject to tax in the state of source in the terms of the OECD model tax convention. The Portuguese Tax authorities reserve themselves the right to make its own interpretation of the OECD model taxconvention (and is not sourced from a tax haven, according to Portuguese black list)

The conventions celebrated between Portugal and other countries allow the source countries to tax the passive income. The OECD model also allows the source counties to tax the passive income (except capital gains in most cases).

The law doesn´t require effective taxation in the source country, so it is possible with a well structured tax planning to obtain a double non-taxation. 

Passive income from Portuguese source is subject to tax, generally by a flat tax rate of 28% (depends on the kind of income).

3.      Employment

Employment income from a foreign-source is exempt from tax, if they have been taxed in the source country. The law requires effective taxation, but does not establish a minimum requirement. There are no restrictions about employment income thatis sourced in blacklisted countries.

Income form Portuguese source are subject to a flat tax of 20%, if they are considered to have high value added – the list of the professions is large, includes tax advisors but doesn’t include sportsmen.

 

4.      Independent Personnel Service

Income from foreign source is exempt from tax in Portugal (sate of residence) if:

·         It results from an high value added activity, and

·         “Can be” subject to tax in the state of source in the terms of the convention celebrated between Portugal and the source country. They don’t need to be taxed, the only requirement is that the convention includes the possibility of being taxed in the source state.

In case there is no convention between Portugal and the state of source, the income “can be” subject to tax in the state of source in the terms of the OECD model tax convention.

Income from personnel service from Portuguese source is subject to flat tax of 20%, if the service are considered to have value added (the list of professions is the same of the employment situations).

Foreign income from professional services that would not meet the criteria of “value added”, would be taxed under the same rules of the normal residents in Portugal. 

 

Requirements

To qualify as a non habitual resident, an individual must:

·         Become a tax resident under Portuguese domestic legislation; and

·         Not have been taxed as a Portuguese resident in the five years prior to taking up residence in Portugal.

To become a tax resident in Portugal

·         Stay in Portugal for more than 183 in a calendar year; or

·         On December 31 of the relevant tax year, he has available accommodation in conditions that is supposed that he will move his residence to Portugal. It is not necessary to buy a property, but only to rent one.

 

 

 

Other advantages of Portugal as residency

·         There is no wealth tax in Portugal and there is noobligation of declaring any assets for the Portuguese tax authorities (only income);

·         Inheritance and gifts, between ascendants and descendants (ex: father to son, or grandfather to grandson, or soon to mother) and husband and wife, are exempt from tax;

·         Other inheritances and gifts(like uncle to a nephew or unrelated persons) are taxed at a flat rate of 10% on the assets located in Portugal (other assets will be non-subject to taxes);

·         Portugal is part of the UE and the Schengen area;

·         For citizens of countries that are not members of EU or Schengen are, Portugal approved in 2012 the “Golden Visa Program” (although to become a Portuguese resident for tax purposes and benefit from the NHR regime a residency authorization is not required);

·         The Portuguese nationals may benefit from the regime, what makes the regime extremely attractive for emigrants that want to return;

 

 

 

NON-HABITUAL TAX REGIME FOR NON-HABITUAL RESIDENTS – A Technical Aproach

 

Introduction:

The Investment Tax Code, created by Decree-Law n.249/2009, approved on September 23rd, implementeda Personal Income tax system for the non-habitual resident, with the purpose of attracting to Portugal nonresident professionals qualified for activities with highadded value intellectual or industrial propriety or knowhow,as well as beneficiaries of pension schemes grantedabroad.

The regime is applicable for a 10 years period, from the year that the tax payer becomes resident in Portugal, since he maintains the residence in the Portuguese territory.

No investment or property acquisition is necessary to benefit from the regime – just need to become a resident under Portuguese legislation.

 

Conditions to benefit from the non-habitual resident tax regime:

To benefit the regime, the tax payer shall:

·        Deemed resident on Portuguese territory for tax purposes, according to any of the criteria defined[1], in the year to be taxed as a non-habitual resident AND

·        Has not been deemed resident on Portuguese territory during the five years priorto the year pretended to be taxed as a non-habitual resident.

 

Requirements to be consider resident on Portuguese territory for tax purposes[2]:

·                       Stay in Portugal for more than 183 in a calendar year; OR

·                       On December 31^st of the relevant tax year, have available accommodation in conditions that is supposed to move residence to Portugal.

 

TAXATION OF INCOME OBTAINED BY NON-HABITUAL RESIDENTS:

A - PORTUGUESE SOURCE INCOME

Net income of employment (category A) and self-employment (category B)  obtained from thehigh added value activities, of scientific, artistic or technical nature mentioned above,by non-habitual residents on Portuguese territory are taxed at the special rate of20%, in case the aggregation option is not exercised[3].

In Annex I are presented all thehigh added value activities, of scientific, artistic or technical nature.

Regarding the remaining income of employment and self-employment (not considered of high addedvalue) and income of the remaining categories, obtained from non-habitual residents,these shall be aggregated and taxed according to the general rules of the CIRS.

B - FOREIGN SOURCE INCOME

The non-habitual resident tax regime predicts the elimination of international juridical double taxation using the exemptionmethod. However, this elimination of double taxation results, in major times, in a double exemption, as we will see bellow.

 

1 - EmploymentIncome (category A)[4]

The exemption method is applied to income of employment obtained from abroadby non-habitual residents on Portuguese territory, if one of the conditionsdescribed in the following subparagraphs is satisfied:

·                       Income taxed by the source State (Nation), according to the convention to eliminate double taxation entered into by Portugal and the source State (Nation); OR

·                       Income taxed in another country, in cases where the convention to eliminate double taxation has not been held, as long as the income obtained is not considered to have been obtained in Portuguese territory[5].

 

 

2- Self EmploymentIncome, Capital Income, Real Estate Income and Increase in Wealth[6]

·        Self Employment Income, obtained through high added value (see annex I),

·        Rendering of services of a scientific, artistic or technical nature, or from intellectual or industrial property, as well as, from providing information regarding an experiment carried out in the commercial, industrial or scientific areas, and

·        Capital Income, Real Estate Income and Increase in Wealth

are exempt if alternatively:

·        They can be taxed by the source State/nation, according to the convention to terminate double taxation entered into by Portugal and the source State; OR

·        They can be taxed in another country, in cases where the convention to terminate double taxation has not been held into under the terms defined by the OECD Model Tax Convention on Income and Capital, as long as it is not a territory subject to privileged tax systems[7] and, as long as the corresponding income, cannot be considered to have been obtained on Portuguese territory[8].

The taxation of these incomes in the source state is not one of the requirements to allow the exemption. The requirement is that they can be taxed according to conventions.

If the convention into by Portugal and the income source State, or if OECD Model Tax Convention (in cases where the convention to terminate double taxation has not been held into) allows the source State to tax the income the regime results in a double exemption of these incomes (as long as the source income State also doesn’t tax it).

 

3 - Pensions[9]

Portuguese non-habitual residents that obtain pension incomes from foreign countries, have exemption if these incomes are from contributions that have not been deducted under Art. n. 2 of Art. 25. of CIRS and if the conditions below are met:

·        They are taxed by the source State/nation, according to the convention to eliminate double taxation held by Portugal and the source State; OR

·        They cannot be considered to have been obtained on Portuguese territory[10].

 

4 - Other income obtained abroad

Any other type of income obtained abroad, as business or professional income, not covered by this tax regime for non-habitual residents, will betaxed on Portuguese territory according to Art. 15, paragraph 1 of the CIRS:

•         according to the convention to eliminate double taxation held by Portugal and the source State, in case there is one; or

•         in case there is no Convention, apply the unilateral standard to eliminateinternational juridical double taxation.

 

 

 

 

ANNEX I

 

According to Ordinance n. 12/2010, January 7, table of the mentioned activities:

Table of activities considered of high added value according to the provisions of Art. 72, n. 6 and Art. 81, n. 4 of the Personal Income Tax Code (CIRS):

1 - Architects, engineers and similar:

101 - Architects

102 - Engineers

103 - Geologists

2 - Visual artists, actors and musicians:

201 - Theater, ballet, cinema, radio and television artists

202 - Singers

203 - Sculptors

204 - Musicians

205 - Painters

3 - Auditors:

301 - Auditors

302 – Tax Consultants

4 - Doctors and dentists:

401 - Dentists

402 - Medical Analysts

403 - Clinical Surgeons

404 - Ship’s doctor

405 - General Practitioners

406 - Dentists

407 - Clinical dentists

408 - Medical physiatrists

409 - Gastroenterologists

410 - Ophthalmologists

411 – Orthopedic Surgeon

412 - ENT(Ear Nose and Throat) specialists

413 -Pediatricians

414 - Radiologists

415 - Doctors from other specialties

5 - Teachers:

501 - Professors

6 - Psychologists:

601 - Psychologists

7 - Liberal Professionals, technicians and alike:

701 - Archaeologists

702 - Biologists and life sciences experts

703 - Computer Programmers

704 - Software consultant and activities related to information technology and computing

705 – Computer programming activities

706 - Computer consultancy activities

707 - Management and operation of computer equipment

708 – Data services

709 - Data processing, hosting and related activities; Web portals

710 - Data processing, hosting and related activities

711 - Other data service activities

712 – News agencies

713 - Other information service activities

714 - Scientific research and development

715 - Research and experimental development on natural sciences and engineering

716 - Research and development in biotechnology

717 - Designers

8 - Investors, Managers and Directors:

801 - Investors[11], Directors and managers[12] of companies that promote productiveinvestment, as long as they are connected to projects and concession contracts that areeligible for tax benefits per the Investment Tax Code

802 - Upper Management[13]

 

 

 

ANNEX II

1. Andorra

2. Anguilla

3. Antigua and Barbuda

4. Netherlands Antilles

5. Aruba

6. Ascension

7. Bahamas

8. Bahrain

9. Barbados

10. Belize

11. The Bermudas

12. Bolivia

13. Brunei

14. Channel Islands (Alderney, Guernsey, Jersey, Great Stark, Herm, Little Sark, BrechouJethou and Lihou)

15. Cayman Islands

16. Territory of the Cocos (Keeling) Islands

17. Cook Islands

18. Costa Rica

19. Djibouti

20. Dominica

21. United Arab Emirates

22. Falkland Islands

23. Republicof Fiji

24. Gambia

25. Grenada

26. Gibraltar

27. Guam

28. Guiana

29. Honduras

30. Hong Kong

31. Jamaica

32. Jordan

33. QeshmIslands

34. Kiribati Island

35. Kuwait

36. Labuan

37. Lebanon

38. Liberia

39. Liechtenstein

40. The Maldives

41. Isle of Man

42. The Northern Mariana Islands

43. The Marshall Islands

44. Mauritius

45. Monaco

46. Montserrat

47. Nauru

48. Christmas Island

49. Niue Island

50. Norfolk Island

51. Sultanate of Oman

52. Pacific islands not mentioned specifically

53. Republic of Palau

54. Panama

55. The Pitcairn Islands

56. French Polynesia

57. Porto Rico

58. Qatar

59. Solomon Islands

60. American Samoa

61. Independent State of Samoa

62. Saint Helena

63. Saint Lucia

64. Saint Kitts and Nevis

65. San Marino

66. Saint Pierre and Miquelon

67. Saint Vincent and the Grenadines

68. Seychelles

69. Swaziland

70. Svalbard (Spitsbergen archipelago and

Bear Island)

71. Tokelau

72. Tonga

73. Trinidad and Tobago

74. Tristan da Cunha

75. Turks and Caicos Islands

76. Tuvalu

77. Uruguay

78. Republic of Vanuatu

79. British Virgin Islands

80. American Virgin Islands

81. Republic of Yemen

 

 

 

 

FREQUENTLY ASKED QUESTIONS

1.     When should the citizen apply for the non-habitual resident status?

Before being deemed non-habitual resident, a registration as resident on Portuguesenational territory should be made at a local Tax office or Loja do Cidadão.

The application for a registration as non-habitual resident should be submitted at themoment of the registration as a resident on Portuguese territory or later until March31^st, of the year following the year in which one became resident on Portugueseterritory.

2.     How can a citizen register as a non-habitual resident?

Request the registration by submitting an application to the Director of the TaxablePersons Registration Service (Serviços de Registo de Contribuintes), meeting thedelays mentioned above.

This application should be presented together with the statement mentioned hereafterand any accompanying documents to any Tax Office, any Loja do Cidadão, or sentby normal mail to the tax registration services at the following address: Direcção deServiços de Registo de Contribuintes, Avenida João XXI, n.º 76, 6.º, 1049-065 Lisboa.

3.     What rights are granted to the non-habitual resident?

A citizen deemed non-habitual resident has the right to be taxed according to the non-habitual resident tax scheme during a period of 10 consecutive years, from the yearof the registration as a resident on Portuguese territory, as long as continues to bedeemed resident in each of the 10 years.

This period of 10 years is not extendable.

Please note that the right to be taxed according to the non-habitual resident taxregime in each year of the above mentioned period depends on the fulfillment of thecondition of being deemed resident on Portuguese territory.

Whenever the citizen has not benefited from right to be taxed according to thetax regime defined for non-habitual residents in one or more years of that 10 yearsperiod, still may benefit again from that same right in any of the remaining years ofthat period, provided the citizen still has a resident status for income tax purposes.

4.     Are remunerations of statutory bodies of a legal person always eligible forspecial tax rate of 20%?

The remunerations of the legal person’s statutory bodies classified as income fromemployment (category A), according to Art. 2, paragraph 3a) of the Personal IncomeTax Code (CIRS), are only eligible for the special tax rate of 20% as long asthe exercise of these functions is under the scope of code 801 of the abovementioned Ordinance(????).

5.     What withholding tax rate is to apply by the entities paying or providingcategory A income to non-habitual residents?

Entities paying or providing income of category A to non-habitual residents, resultingfrom activities of high added value, of scientific, artistic or technical nature, listed onthe mentioned Ordinance n. 12/2010, January 7, shall apply a withholding tax of20%, according to Art. 3, paragraph 6 of Decree-Law n. 42/91, January 22.

6.     And what about category B income?

Category B income, resulting from activities of high added value, of scientific,artistic or technical nature, listed in the mentioned ordinance, shall be subject to awithholding tax of 20%, according to Art. 101, paragraph 1d) of the CIRS, and Art. 8,paragraph 1 of Decree-Law n. 42/91, January 22.

7.     Is the above mentioned income obtained abroad totally exempted?

Yes. Nevertheless this income (category A, B, E, F, G and H) is compulsorily includedfor determining the tax rate applying to the remaining income, except for incomeprovided for under Art. 72, paragraph 4, 5 and 6 of the CIRS, according to Art. 81 ofn. 6 of the CIRS.

8.     Instead of the exemption regime, may the citizens opt for the tax credit method?

Yes, the holders of the above mentioned exempted income obtained abroad mayopt for tax credit method provided for by the international double taxation referredto in Art. 81, paragraph 1 of the CIRS, and in this case the income is compulsorilyincluded for the purposes of taxation, except for income provided under Art. 72,paragraph 3, 4, 5 and 6 of the CIRS.

Please note:

Income of category A and B obtained abroad, not covered by the exemption method, oncethe requirements described in Art. 81, paragraph 3 and 4 a (and b) of the CIRS, is taxed tothe special tax rate of 20%, if obtained form any of the high added value activities mentionedbefore.

9.     How to contact the Tax and Customs Authority?

In order to contact the AT, through webportal Portal das Finanças, it is possibleto request the correspondent access password on www.portaldasfinancas.gov.pton the option Novo utilizador, on the right and fill in the application form with therequested personal data.

It is also possible to authorize the AT to send optional and voluntary compliancesupport messages by SMS and e-mail. This is a free personal and confidentialservice, nevertheless you will have to ensure the reliability of e-mail and mobilephone.

As soon as the password application is sent two codes are automatically madeavailable:

•         to ensure mobile phone reliability, by SMS;

•         to ensure e-mail reliability, by e-mail.

These codes can only be confirmed on the website Portal das Finanças on Cidadãos> Outros Serviços>Confirmação de Contactos after having received the accesspassword for Portal das Finanças, which is sent by mail to the fiscal residence.