Portugal: The Best Destination To Retire In The Sun!

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The Portuguese Non-Habitual Resident (“NHR”) Tax Regime

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Portugal Can Attract Foreign Retirees With A High Buying Power By Providing One Of The Most Beneficial Tax Regimes

The memorandum issued on 3 August 2012 aiming to facilitate the recognition of the status of NHR in Portugal has now been implemented. It should encourage foreigners to settle in Portugal as owners or tenants. Indeed, in Portugal foreign pensions received by tax residents are exempt from income tax since the 1st of January 2013.

Moreover, the European Union tax agreement assigns the exclusive right to tax private pensions in the Country of residence. Therefore, if an individual moves to Portugal and lives there more than 183 days and has not been a tax resident there in the previous five years, he/she can benefit from the Portuguese non-habitual resident* status. Subject to the residency being undisputed, private pensions are therefore not taxable in the individual’s own country and are also tax-free in Portugal.

This results in a double exemption for private pensions!

* Please note that the registration as a non-habitual resident has been simplified by the memorandum from 3 August 2012. This registration now only requires a simple declaration from the taxpayer confirming that they have not been a Portuguese tax resident over the last five years.

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Introduction to the non-habitual resident regime (NHR) in Portugal

The non-habitual resident regime (NHR) can apply to natural persons transferring their tax residence to the Portuguese territory, if they have not been a tax resident in Portugal any time during the 5 years preceding the transfer.

As part of the NHR regime, most of the revenues from foreign sources are not taxable in Portugal. In addition, the income generated in Portugal from activities considered as added value can benefit from a fixed tax rate of 20%.

Duration of the NHR regime

Once registered with the register of taxpayers at the department of finance (Autoridade tributária or AT), taxpayers in these circumstances obtain the right to be taxed as NHR for a duration of 10 consecutive years, if they are considered to be tax resident in Portugal each year of the period in question. At the end of this 10-year period, they will revert to taxation under general rules.

There is no “renewal” procedure for the NHR regime, so it remains in place until the department of finance (AT) refuses to apply it.

Requirements to join the NHR regime

Tax residency in Portugal can be acquired at any time once a person meets one of the following requirements:

• to have lived in Portugal for more than 183 days, consecutive or not, over a period of 12 months beginning or ending in the year in question;
• otherwise, to always have access to accommodation on the Portuguese territory during the period referred to in the preceding paragraph, under conditions suggesting an intention to keep this accommodation and occupy it as habitual residence (particularly by buying or renting a property for housing);

To be taxable as NHR each year during the 10-year period, it is necessary for the taxpayer to be considered as resident for the purposes of the IRS. If the taxpayer cannot benefit from the NHR taxation right at any stage during the 10 years, he can benefit from it again for any remaining year in the period, provided he is again considered as a resident for purposes of the IRS.

Please note that these requirements were changed on January 1, 2015.

The NHR registration request must be submitted after the registration as Portuguese fiscal resident and until and including the 31st of March of the following year.

Benefits of the NHR regime

The NHR regime provides two sets of benefits depending on the source (national or foreign) and the nature of the income received.

Generally, these benefits are as follows:

• Exemption – Foreign-source Income:

Interest, dividends and other income from capital, capital gains, income from salaries and from self-employment, income from property and income from state or private pensions;

Capital gains from the sale of shares are generally not exempt.

• Fixed rate tax – Portuguese-source income:

Income from salaries and self-employment.

Conditions for exemption / reduction of taxation

Foreign-source income received by the NHR and listed below are exempt, subject to compliance to the following requirements:

• Wages/ Salaries: If they are taxable in the source Country, in application of the tax agreement between Portugal and this Country, or, in the absence of such an agreement, if they are taxable in the source Country, provided the income is not considered as having been obtained on the Portuguese territory;
• Income from self-employment: If the income is considered as added value (see below) and if it can be taxed in the other Country, in application of the tax agreement between Portugal and this Country, or, in the absence of such an agreement, if it can be taxed in the other Country in application of the OCDE tax agreement model, provided it does not appear on the blacklist of offshore countries. In fact, it is not mandatory that for this income to actually be taxed in the source Country.
• Income from capital, capital gains, income from properties: If the income can be taxed in the other Country, in application of the tax agreement between Portugal and this Country, or, in the absence of such an agreement, if it can be taxed in the other Country in application of the OCDE tax agreement model, as long as it does not appear on the blacklist of offshore countries. In fact, it is not mandatory that for this income to actually be taxed in the source Country.
• Pensions: If this income can be taxed in the other Country, in application of the tax agreement between Portugal and this Country, or if it is not considered as having been obtained on the Portuguese territory, i.e. If it is being paid by organizations based in Portugal. For pensions, and provided that certain conditions to be analyzed on a case-by-case basis are met, there may be a situation of double non-taxation: exclusion from taxation in the source Country and in Portugal.

French, British, Scandinavian citizens among others are eligible for this regime.

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Portuguese-sourced income received by the NHR and listed below is exempt, subject to compliance to the following requirements:

• Wages / Salaries: If the income is issued from an “added value activity”, a fixed tax rate of 20% will apply, subject to taxation at source. This rate may in increased by a variable rate surcharge, set between 0 and 3.21% in 2017, depending on the range of the taxable income.
• Income from self-employment: If the income is issued from an “added value activity”, a fixed tax rate of 20% will apply, subject to taxation at source. This rate may in increased by a variable rate surcharge, set between 0 and 3.21% in 2017, depending on the range of the taxable income.

Value-added activities

Order No. 12/2010 from June 7th 2010 defines the activities considered as high added value, including:

1. Architects, engineers and similar technicians;
2. Artists, actors and musicians;
3. Auditors;
4. Doctors and dentists;
5. Teachers;
6. Psychologists;
7. Self-employed professional, technicians and similar;
8. Investors, directors and managers of productive investment businesses, provided they are assigned to eligible projects and have been awarded contracts for tax benefits concluded in respect of the investment tax code (Código Fiscal do investment);
9. Business executives (i.e., people in management functions who are granted the decision-making powers by the moral person).

Examples:

Here are a couple of examples of situations we are regularly approached for:

João, Brazilian citizen, applies for the NHR status.

His income from Brazil as taxed as follows:

• Property income (rent) – Income from properties in Brazil is not taxable in Portugal.
• Dividends or profit shares – Dividends paid out by a Brazilian company to an associate with the NHR status are not taxable in Portugal.
• Pensions – Pensions paid by the Brazilian social security are not taxed in Portugal.
• Wages / services provided in Portugal – Salaries or income from services provided in Portugal are taxed at the rates normally applicable to other tax residents on the national territory, unless they come from a value-added activity, in which case they will be taxed at a fixed rate 20% *.

* In 2017, this additional tax varies between 0 and 3.21%, depending on the range of the taxable income.

Whatever the case may be, the resident will be liable to pay contributions to social security, at the rate normally applicable in Portugal, except in exceptional situations.

Jean, a French national, applies for the RNH status.

His French income will be taxed in Portugal as follows:

• Property income (rent) – Income from properties in France is not taxable in Portugal.
• Dividends or profit shares – Dividends paid out by a French company to an associate with the NHR status are not taxable in Portugal.
• Pensions – The French pension paid to a beneficiary with RNH status is not taxable in Portugal.
• Wages / services provided in Portugal – Salaries or income from services provided in Portugal are taxed at the rates normally applicable to other tax residents on the national territory, unless they come from a value-added activity, in which case they will be taxed at a fixed rate 20% *.

Whatever the case may be, the resident will be liable to pay contributions to social security, at the rate normally applicable in Portugal, except in exceptional situations.

* An additional tax may apply. The rate varies between 0 and 3.21% in 2017, depending on the range of the taxable income.

Latest developments
The NHR – Non-Habitual Residency Programme, and its application to UK nationals, should be unaffected by Brexit due to the fact that the domestic NHR legislation is complemented by the bilateral tax agreement that Portugal has signed with a series of countries, including the UK (double taxation agreement between Portugal and the uk, 1968).

However what will be affected in a no deal scenario is the residency rights of British citizens as third country nationals. Clearly the position of uk nationals who will be resident in Portugal prior to 29th march 2019 and those who wish to become resident in Portugal after 29th march 2019 will be determined by the deal which the UK is able to negotiate with the eu. In circumstances where there is no deal, which is at least a possibility at this stage, then those uk nationals who has already established residency rights in Portugal would be in a stronger position.

This is due to the fact that these rights should be guaranteed according to the agreement reached between the UK and the eu on rights granted after the triggering of article 50 and 29th march 2019, together with the latest guarantees issued by the Portuguese government.

From the date of the referendum result, the Portuguese authorities, including the Portuguese prime minister António Costa, have consistently spoken of guaranteeing the rights of uk nationals living in Portugal, provided that there is reciprocity. In addition, the Portuguese institutions are strongly encouraging all uk nationals living in Portugal to register themselves properly with the local authorities. Whilst there are no absolute guarantees until legislation is published, there are very positive signs that uk nationals currently registered as resident in Portugal will continue to be able to exercise those rights freely after 29th march.

These signs include the exemption of British citizens from holding a visa and the guarantee stated in the British government white paper of 6th December 2018 that eu citizens resident in the uk by 29th march 2019 will be able to stay.

As a result, for those UK nationals interested in applying for the NHR programme in 2019, consideration should be given to establishing residency rights in Portugal prior to 29th march 2019.

The portuguese non-habitual residency status enables those who become tax resident in portugal, and are accepted as NHR, the opportunity to receive qualifying income tax free both in portugal and in the country of source of the income.

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