Tax residency in Portugal - Guide for Non-habitual residents in 2023
The deadline for filing annual income tax returns for individuals with tax residency in Portugal is approaching.
Although they benefit from various tax advantages, non-habitual residents (NHRs) in Portugal must submit their annual tax declarations. NHRs are obliged to declare all their income, whether obtained in Portugal or abroad.
NEWCO can help you meet your tax obligations in Portugal. We are a one-stop shop for investors and companies in Portugal and Malta, with 30 years of experience and a wide range of corporate, relocation, real estate, and consulting services.
The special tax regime for non-habitual residents in Portugal
Portugal's fantastic natural landscapes, mild climate, and tasty gastronomy would be reasons enough to justify a new life in this country. Still, the advantages for tax residents are the cherry on top for those meaning to invest and live in Portugal.
The Tax Regime for Non-Habitual Residents (NHR) in Portugal was created in 2009. It promotes foreign investment in Portugal by creating special conditions and tax exemptions for expatriates who want to live part or all their time in Portugal.
How to become a Non-Habitual Resident in Portugal in 2023
A Non-Habitual Resident in Portugal is any individual who becomes a tax resident in Portugal, while not having been a tax resident in any of the 5 years prior to moving to this country.
As a general rule, anyone who stays 183 days (consecutive or not) in Portuguese territory during a 12-month period is considered a tax resident in Portugal. Similarly, anyone who owns a house in Portugal under such conditions as they intend to keep it and occupy it as their usual residence can also be considered a tax resident. Tax residents in Portugal can access the Non-Habitual Resident (NHR) special regime if they have not been a personal income (IRS) taxpayer in Portugal in any of the five years before moving to this country.
Mandatory requirements to become an NHR in Portugal
- Be over 18 years of age
- Acquire tax residency in Portugal
- Not have had tax residency in Portugal in any of the previous 5 years
Taxes for Non-habitual residents in Portugal
Any non-habitual resident (NHR) is subject to Personal Income Tax in Portugal. Nonetheless, NHRs in Portugal have several tax benefits.
To analyze the framework of non-habitual residents in terms of income tax (IRS), we must distinguish between income obtained in Portugal and income obtained abroad.
Income obtained in Portugal is taxed at a flat rate of 20%; if it is obtained from activities considered of high added value with scientific, artistic and technical character. This is true for dependent and independent work. This is a substantial reduction from the progressive rate applicable to the remaining Portuguese residents, reaching 53%.
Employment income obtained abroad is exempt from taxation in Portugal whenever it is taxed in another country with which Portugal has entered into a double taxation agreement. Self-employment income obtained abroad is also exempt from taxation in Portugal if it derives from activities considered of high added value with scientific, artistic, and technical character and if the source country has the right to tax that income, under a double taxation agreement. Otherwise, Portugal will tax it at a flat rate of 20%.
It should be noted that, in practice, this is the most frequent situation as most of the double tax conventions agreed by Portugal only give other countries the right to tax when the professional in question has a permanent establishment in that country or the work is carried out in that country.
List of high value-added activities with scientific, artistic or technical character
NHRs in the following professional categories may benefit from the exemption or reduced taxation of 20% on the income obtained:
- Managing director and executive manager of companies
- Directors of hotels, restaurants, commerce, and other services
- Directors of administrative services
- Physicians, dentists and stomatologists
- Physical and mathematical science, technical engineering, and related specialists
- ICT specialists
- Authors, journalists and linguists
- University professors
- Creative and performing artists
- Among others
Capital gains, dividends, and other passive income
Capital gains, income from intellectual property, interest, dividends, and other forms of passive income are exempt from taxation in Portugal as long as they are obtained and may be taxed in the other country with which Portugal has a double taxation treaty.
If this income is obtained in a country with which Portugal has not entered into a double taxation treaty, it may still be exempt, provided it can be taxed in the other country, territory, or region, according to the OECD Model Tax Convention on income and capital, interpreted according to the observations and reservations made by Portugal; and provided that such country is not on the Portuguese list of "tax havens".
If the income is considered by Portuguese law to have been obtained in a "tax haven", an aggravated tax rate (35%) applies.
Regarding the taxation of financial capital gains, it is important to note that most Double Taxation Agreements concluded by Portugal confer exclusive competence to tax to the State of residence. This means that this type of income does not meet the requirements to benefit from the exemption under the NHR regime and is consequently subject to taxation at a rate of 28% or even 35% (in case the source of the income is a jurisdiction considered a tax haven).
The same regime also applies, as a rule, to capital income that does not qualify as interest or dividends (as is the case of swaps, life insurance income, distributed income from pension funds, etc.).
In the case of capital gains arising from the sale of shares/securities, in order to determine the source of the income, it must be observed where the entity issuing the security is domiciled, as this will define which double taxation agreement is applicable (if any), whether the income may or may not benefit from exemption under the NHR regime and whether the aggravated tax rate of 35% will be applicable (in the case of tax havens). The clarification of this question is crucial as it is very common for companies or legal entities to issue shares, bonds, or units in funds through group entities based in tax havens, with the result that the income deriving from these products no longer benefits from the exemption of taxation under the NHR regime.
Net pension income earned abroad by non-habitual residents is taxed at 10%.
International Business Center of Madeira - Advantages for NHRs
Madeira is a Portuguese autonomous region that combines a unique quality of life, a very competitive cost of living, and a favorable tax regime for expatriates and investors. Madeira offers the possibility of taking advantage of one of the most favorable tax regimes in Europe, within the framework of the International Business Centre of Madeira (IBCM).
This is a preferential tax regime approved by the European Union (EU), in full compliance with all EU treaties and laws. Among its features, we can highlight the 5% corporate tax rate applicable to income generated outside Portugal. Madeiran companies may be used in a wide variety of activities: trading, consultancy, shipping activities, technical and professional services, holding companies, telecommunications, e-commerce, and any other services of an international nature.
Non-habitual residents who choose to live and work in Madeira may set up a company in the IBCM and enjoy the following advantages, among others:
- Reduced 5% corporate tax rate for income obtained outside Portugal.
- Reduced flat rate of 20% for salaries of workers with activities considered of high added value (see above)
- Exemption from withholding tax on the payment of royalties, services, and interest to non-resident shareholders and on other forms of remuneration such as shareholder loans, allowances, or capital advances
- Reduced rates of stamp duty, property taxes (IMI and IMT), municipal taxes, autonomous taxation, and other fees and costs