Tax residence
The characteristics of Portugal and its various regions are reason enough to justify a new life in this country, but the tax advantages on offer are the icing on the cake for anyone who wishes to invest and live in Portugal.
In 2009, in order to attract high net worth individuals to Portugal, a new and more favourable personal income tax regime (IRS), applicable for a period of 10 consecutive years, was created for non-habitual residents.
Who is deemed to be non-habitual resident in Portugal?
Expatriates, who establish their tax residence in Portugal but have not had resident status during any of the previous five years, are not considered to have habitual residence in Portugal.
Where Portugal is concerned, as a general rule, Portuguese residents are those persons who remained in the country for more than 183 consecutive or non-consecutive days, out of any period of 12 months that starts or ends during the year in question, or if the person remained for fewer days, has a domicile on any given day of that period, exhibiting conditions that lead one to believe that there is an intention to maintain and occupy it as an habitual residence. However, it is important to analyse the double taxation agreements that may exist between Portugal and the non-habitual resident’s home country, in order to avoid possible conflicts between the two places of residence.
The taxpayer must register as a non-habitual resident at the taxpayer registry of the Tax and Customs Authority upon registering as a resident of Portugal or subsequently up until 31 March, inclusive, of the year that follows the year in which the taxpayer becomes a resident of Portugal.
Accordingly, the non-habitual resident acquires the right to be taxed as such for a period of ten consecutive years. Each year, the the taxpayer must be considered a tax resident for income tax purposes.
What are the advantages of the special tax regime for non habitual residents?
Non-habitual tax residents benefit from a more competitive tax regime that functions on two levels:
Income obtained in Portugal
Income of a scientific, artistic and technical nature (salaried and independent workers) obtained in Portugal will be taxed at a fixed rate of 20%, rather than the progressive rate, applicable to normal tax residents, which can be as high as 48%.
Income from Foreign Sources
As regards income from “non-Portuguese” resources, the non-habitual resident tax regime implements a flat tax rate or an exemption mechanism as long as certain conditions have been met. These conditions can vary according to the type of income in question:
Income from Work – This exemption applies whenever income is subject to taxation in another country with which Portugal has signed a double taxation treaty; if there is no double taxation treaty, the exemption will also apply as long as the income is taxed abroad and the source is not considered to be Portuguese as per Portuguese domestic law.
Professional income, capital income, capital gains and rental income – In such cases (excepting professional income), the exemption applies whenever income is taxable in another country with which Portugal has signed a double taxation treaty; or, in the absence of a double taxation treaty, the income is taxable in another country, region or territory in accordance with the OECD Model Tax Convention on Income and on Capital, interpreted in accordance with the observations and reservations made by Portugal, and the income is not considered to be from a Portuguese source, in accordance with Portuguese domestic legislation. In relation to professional income, the exemption shall only apply in the above-mentioned conditions to services that are considered to be of added value of a scientific, artistic and technical nature, or intellectual property and transfer of know-how.
Income from Pensions – Regarding pensions, income obtained by non-habitual residents abroad, which is, for the same portion which was considered taxable, not considered tax deductible in Portugal, is taxed at a 10% rate.
