Here at Tax Free Today, we have already talked about many countries that you can emigrate to so that you either pay no taxes at all or a smaller amount than in your country of origin. Those with territorial taxation systems like Panama, the non-dom countries of the UK, Ireland and Malta, or the particularly advantageous non-dom special taxation regime in Cyprus.
However, the world is much larger than this and the rest of the countries do not want to be left behind. These other countries also want to attract successful entrepreneurs and skilled or wealthy immigrants who bring money to the country and contribute to the Social Security system (a system that, as I am sure you are aware, is drawing closer and closer to total bankruptcy).
Today, we are going to talk about the interesting NHR programme for non-habitual residents in Portugal.
Few have in-depth knowledge of the fiscal advantages that make this country one of the most appealing for some who want to emigrate to a country with a Western culture which is geographically close to Spain and with a language similar to Spanish. It is very different from the typical tax havens lost on small and secluded islands or in countries with very different cultures to those in the West.
And, unlike the majority of programmes, which are designed for digital entrepreneurs selling abroad, residency in Portugal also has advantages for entrepreneurs with businesses that physically tie them down somewhere.
Portugal is a high-taxation country as well as a popular holiday destination. How could it possibly be a tax haven? No doubt, this will baffle more than one, which has its advantages since the tax office will also not disapprove of this relocation.
Just like Spain (see the special tax regime for impatriate workers), Portugal can also be a tax haven for foreign nationals.
The advantage, of course, is that you won’t find Portugal on any blacklist, despite allowing you to live there without paying taxes or, in certain cases, paying very little. In other words, they do not raise any type of suspicion regarding income and asset optimisation.
The Portuguese programme has been around since 2009 and is somewhat more difficult to understand than the others that we have spoken about in this blog.
Although difficult to understand, it is not all that hard to implement if you follow certain steps. Emigration to Portugal is very easy for any EU citizen. But let’s start at the beginning.
Portugal is one of the few countries in the world where you can maintain fiscal residence without having to spend a minimum of 6 months there.
In other words, you do not really have to live there, you simply have to rent or own a home.
However, you have to avoid spending too much time in any other country, since this could make you a fiscal resident there.
However, this is not the only advantage of the NHR programme in Portugal, which is limited to a maximum period of 10 years. Here is a summary of the advantages of this tax regime:
- Residency in a European Union member state with a good reputation (your country’s tax office will not cause you problems)
- Modern and liberal country with a high quality of life
- No minimum stay is required to maintain residency
- No minimum requirements for renting or owning property
- Easy to emigrate and apply for the NHR programme
- Possibility of obtaining a Portuguese passport after 6 years
- Possibility of tax exemption on dividends, interests, rental incomes, property returns, royalties and pensions (provided that there are not public) on income from abroad
- Possibility of tax exemption on foreign income for certain professions (see below)
- Possibility of a fixed tax rate of 20% on domestic income from the eligible professions
- Tax-free inheritances and gifts
Of course, this sounds very good at first, but when we take a closer look, things become complicated. This is because all tax exemptions are only a possibility and depend on each specific case, meaning that there is a requirement for the non-habitual resident to pursue one of the stated professions, among other things.
Instead of simply granting tax exemptions per se, the Government has wisely followed the OECD’s guidelines and created a tax optimization system that is difficult to understand and requires careful consideration and guidance. The strict Portuguese CFC rules further complicate this situation.
The key: possibility of taxation in other states allows you to enjoy tax exemption in Portugal
Ultimately, tax exemption arises from the interaction of the NHR tax regime with Portugal’s double taxation agreements made with other countries or, if one does not exist, with the standard OECD model tax convention.
Double taxation agreements often allow different types of income to be taxed in the country of origin, a possibility that is often overlooked for non-residents so as to be more attractive as a place of investment.
This is what happens with the NHR regime in Portugal. Much of the income that falls into this category and could be taxed in the country of origin (without actually being taxed in most cases) is not taxed in Portugal either.
In other words, because the income, in theory, could be taxed in the country of origin (although in reality, this is not the case), it is also not taxed in Portugal.
Ultimately, this means that a large part of the NHR’s foreign income could be tax-exempt.
In practice, this possibility of taxation in other states is very common. Although it is something that should be reviewed in the double taxation agreement for each specific case.
So far, Portugal has signed an individual DTA with almost 80 countries. The EU member states, for the most part, follow the OECD model.
For example, take the double taxation agreement between the UK and Portugal.
If you reside as an NHR in Portugal but you receive dividends from the UK, according to Article 10 of the DTA, the English government is able to tax those dividends, but in reality, they do not do this if you are not a resident there. Therefore, in Portugal, you will not be taxed on your English dividends as an NHR, since the UK would theoretically have the right to do so.
Therefore, as a non-habitual resident in Portugal, you can receive tax-free dividends from England.
However, there is an important limitation that we have yet to come across. Foreign income from tax havens on Portugal’s blacklist is subject to taxes.
Portugal’s blacklist is very extensive and includes almost all the world’s tax havens. However, a great exception is those tax havens that, although on the blacklist, Portugal has signed a double taxation agreement with.
Ultimately, the following jurisdictions, despite being on the blacklist, are valid, i.e. as an NHR resident you do not pay taxes in Portugal for the dividends coming from them:
- Hong Kong
- San Marino
- The United Arab Emirates
Foreign income from these countries generally has the possibility of not being taxed in its country of origin and, therefore, is also not taxed in Portugal.
Nevertheless, each double taxation agreement (DTA) must be looked at in detail in order to avoid surprises.
The blacklist is not the only problem, the Portuguese CFC rules also have to be taken into account, which complicate the management and recognition of foreign companies by residents in Portugal (we will speak about this in more detail later).
Tax-exemption in Portugal in detail
Following on from this introduction to tax optimisation in Portugal, we are going to take a look at the types of income from abroad that generally have the possibility of being tax-free.
Before going into details, let’s look at a summary. The following types of income from abroad could be exempt from taxes in Portugal:
- Dividends, revenues and income from the renting of property
- Income from the sales of property, boats and aircrafts
- Royalties (often not able to be taxed in the country of origin)
- Income from certain professions (also often not able to be taxed in the country of origin)
For domestic income, there are also certain fiscal advantages for an NHR, provided that those earnings come from one of the eligible professions.
Regardless of whether these incomes are earned as a self-employed person or as an employee, they are subject to a fixed tax rate of 20%.
The following professionals can benefit from the fixed rate of 20% on domestic income or tax-exemption on foreign income:
- Data processing specialists
- IT consultants
- IT experts and specialists
- Theatre, radio, ballet and TV performers
- Life science professionals
- Medical practitioners
- News agencies and other reporting personnel
- Scientific research and development professionals
- Senior executives, except for directors
- Tax consultants
- University professors
- Web developers and designers
- Tax auditors
Emigrating to Portugal can be worthwhile for professionals in the eligible fields, particularly if they are often able to earn income from abroad.
About the general taxation system and Social Security contributions in Portugal
As an NHR, it is possible that there are certain types of income that you have to tax like any other resident in Portugal and, of course, you cannot get out of contributing to Social Security.
Whatever your case, either with the fixed tax rate of 20% or the general tax rate, you will have to add an extra 3.5% as soon as you exceed the annual minimum wage of €7,070.
The minimum wage also has to be taken into account for all those that do not earn direct income in Portugal. These people’s Social Security contributions are calculated according to the minimum wage amount.
34.75% of the minimum wage of €7,070 per year equals around €2,300 in social security contributions, 11% of which can be deducted from possible taxes.
The Portuguese progressive taxation system is quite repressive. There are the following five tax brackets and relatively few deductions. From the second bracket onwards, an extra 3.5% is added.
€0-14,000: 28.5% – €980
€20,000-40,000: 37.5% – €2,680
€40,000-80,000: 45% – €5,880
Over €80,000: 48% – €8,280
Up to €250,000: 2.5% surcharge
Over €250,000: 5% surcharge
Therefore, the maximum tax liability in Portugal can reach 56.5% of income, even without Social Security.
There is no doubt that, for “normal” residents in Portugal, the country looks nothing like a tax haven.
There is an important exception for income from intellectual property. The first €10,000 of this is exempt from taxes and only 50% of the income resulting from own creations is taxed.
In cases where income does not fall under the NHR tax regime, capital gains will be taxed at a rate of 28.5%. This, for example, refers to speculative gains from the sale and purchase of shares that, unless you have a complicated business structure, will not be exempt from taxes under the NHR regime.
At least in Portugal, there aren’t any capital or equity taxes, nor any taxes on inheritances or gifts made within the family.
There are taxes on the purchase of land and real estate, but we will not go into those in depth in this article.
Now, let’s thoroughly analyze how we can avoid taxes in their entirety as an NHR.
Tax-free foreign income in detail
Once again, as a reminder:
Tax-free income in Portugal is income earned outside of the country that, according to the DTA, could have been taxed in the country of origin but, in practice, is not.
This means that income from certain professions, royalties and income from intellectual property, investment income and capital contributions, and non-governmental pensions are all tax-free in Portugal. This is the case as long as these revenues do not come from a tax haven on Portugal’s blacklist with which there is also no double taxation agreement.
Next, we will go into more details of the different types of income. We will use the standard OECD model DTA as a reference.
Income from certain professions
Foreign income from trade and self-employed work in the eligible professions (see the list above) is exempt from taxes in Portugal, provided that there is a possibility of taxing the income in its country of origin.
According to the standard OECD model tax convention, the earnings should be taxed only in their country of origin as long as they cannot be allocated to other income categories.
In practice, this means that foreign income from these professions is usually completely tax-free in Portugal (but don’t forget the Social Security contribution). However, in certain cases, there may be a limited tax liability in the country of origin, so taxes would have to be paid there. This is the case if, for example, you have a company or office in the respective country.
Foreign income from dividends, interests, rentals and the sale of property, boats and aircrafts is tax-free, provided that it is able to be taxed in its country of origin.
This taxation possibility exists in the standard OECD model tax convention and contains the following terms:
- Dividends cannot be subject to a tax rate of more than 15%
- Interests cannot be subject to a tax rate of more than 10%
- Real estate income includes income from forestry and agriculture
- Capital gains from the sale of property include shares that derive more than 50% of their value from real estate.
It is important to note that withholding tax has been abolished in the EU, but the possibility of taxation in the source state still exists. For all investment income abroad, you should consult the relevant double taxation agreements, which also include withholding tax on investment income.
Generally, however, in the EU, capital gains can flow tax-free to an NHR in Portugal.
Pensions for private sector workers
The pensions of people who have not been civil servants are subject to taxes in their country of residence according to the OECD model DTA (unlike those of civil servants, which are taxed in the country that pays them). Given that Portugal does not tax these pensions for non-habitual residents, this type of pensioners does not pay taxes on their pensions in Portugal.
Income from foreign employment
Tax-exemption on income earned from work abroad depends on the country of origin, whether or not it is taxed there or if the employment is in the eligible professions.
Only income that has already been taxed abroad is tax-exempt. If it has not been taxed at all, it is considered Portuguese income and falls under the fixed tax rate of 20% if derived from an eligible profession.
However, the OECD model tax convention says income from employment could, in theory, be taxed in the country of origin. Therefore, if you live in Portugal as an NHR and you are in this situation, you can generally choose the country in which you prefer to be taxed.
Foreign income that requires tax planning
As we have seen, foreign income is tax-exempt if the possibility of taxation in other states is established in the relevant DTA. Unfortunately, this is not usually the case for some types of income. This is mainly for royalties and speculative gains.
According to the OECD model DTA, these incomes are only subject to taxes in the country of residence, meaning that, as a rule, they are not taxed in the country of origin.
This means that a resident in Portugal under this special regime has to pay taxes on royalties and stock market profits at the normal rates in Portugal.
Specifically, a capital return tax of 28.5% on speculative gains, and a progressive tax on royalties. If you yourself manage intellectual property, this tax falls by half.
For this type of income, it is generally worth carrying out some tax planning.
This could be achieved through the establishment of a foreign company that received this income with certain tax privileges or even tax-free. The profits of the foreign company could be distributed tax-free in the form of dividends, a type of income that, as we said before, could be taxed in the country of origin.
What sounds easy in practice is, unfortunately, complicated by the strict Portuguese CFC rules.
Foreign companies managed by residents in Portugal are often subject to corporation tax there.
Portugal, like almost all other OECD countries, enforces the effective management rule, i.e. it takes into account where the company is actually being administered or managed from.
Specifically, this means that if the company is being managed from Portugal, it will also be subject to taxes there.
This is something that we must not confuse with the laws for preventing international tax avoidance, laws that are already enabled by the simple participation of Portuguese residents in foreign companies based in countries with low-taxation.
We are not going to go into the complicated Portuguese laws for preventing international tax avoidance here; it is enough to know that this Portuguese law has one crucial exception:
The law does not apply to companies in the EU, neither to those based in low-taxation countries, such as Cyprus, Malta or Bulgaria.
In practice, however, effective management is still a problem. To avoid paying taxes on a foreign company that you run as an NHR, the company needs at least 2 foreign managers.
They must be actual managers rather than fiduciaries so as to be able to withstand possible audits. Furthermore, board meetings must be held in Portugal and, generally, doing business with Portuguese companies should be avoided.
As long as these terms are upheld, you can receive your income in the form of tax-free dividends.
For example, take an NHR with a Cypriot company. It is a good option because all sales and purchases of shares and returns on stock exchange investments of Cypriot companies are tax-free.
Since Cyprus is in the EU, the Portuguese CFC rules are not enabled. Furthermore, if the majority of managers (i.e. 2) are not residents of Portugal, the company will not have to pay taxes there.
Dividends distributed from Cyprus could be taxed in the country of origin according to the relevant DTA (but they are not), and are exempt from taxes when distributed to a non-habitual resident in Portugal because they come from a company in the EU.
Of course, if this applies to you, you may be wondering why you are not emigrating directly to Cyprus to simplify everything. The requirements for tax-exemption on domestic and foreign income are much simpler and the exemption is also valid for 20 years, instead of 10.
As you may have noticed, the NHR regime in Portugal is relatively complicated. You must pay special attention to the following factors to be able to be exempt from taxes.
- Foreign income
- Possibility of taxation in other states under the double taxation agreement
- Income cannot come from tax havens with no DTA
This means that if you can live on your returns and capital gains as a private investor or if you are a pensioner (not valid if you have a state pension, as a public servant), then the NHR regime to live in Portugal is a good option.
However, if you still have an active business or income from stock exchange investments, you must watch out for the tax avoidance prevention laws and the effective management regulations.
In order to make the most of being an NHR in Portugal and not pay taxes on your foreign company you need:
- A company in the European Union
- The majority of managers (2) to be non-Portuguese
- Non-Portuguese clients
- The DTA must state that there is a possibility of taxation on dividends in the country of origin
Another alternative to be able to enjoy the advantages of the regime for non-habitual residents is being lucky enough to belong to one of the eligible professions (see above).
If this is the case, as a freelancer or entrepreneur you will pay a tax rate of 20% + 3.5% on your domestic income and you can, under certain circumstances, remain free from tax on your foreign income.
How to become an NHR: requirements
Obtaining tax-exemption in Portugal is difficult, however, by emigrating to Portugal and applying for NHR status, it can become very easy.
In other words, if you qualify for obtaining tax-exemption, then emigrating to Portugal is the least of your problems.
Generally, you should only pay attention to these 3 aspects in order to become a resident in Portugal and enjoy NHR status:
- Residency permit in Portugal. You can get this as a citizen of the EU/EEA or, if you do not have an EU passport, with the so-called “Golden Visa” for investors.
- Fiscal residency. You cannot have been taxed in Portugal during the last 5 years.
- Application for non-habitual residence status. Once you have moved to your new residence or, at the very latest, before the 31st of March of the following year, you have to apply for NHR status.
The granting of NHR status is not automatic, but you will not be denied it if you meet all the conditions.
In order to be considered a fiscal resident in Portugal, there are some clear rules, which can be particularly beneficial for digital nomads and people that travel often.
You only have to meet one of the following requirements:
- Stay for a minimum of 183 days in the country, whether interrupted or continuous
- Have a house available and have “intention” to live there
- Be a member of a Portuguese ship or aircraft crew
- Have a spouse or children in the country
- Be employed overseas by the Portuguese state
In particular, the option of simply renting a house is very attractive. Keeping in mind that there are no minimum requirements in terms of rental or purchase price of the property, it can be a great solution. Even a cheap room in Portugal for €150 per month would be enough, if it is understood that you intend to live there.
In practice, you should visit this house at least once a year and perhaps use it as storage or as a postal address.
Be aware, however, that the address of your tax advisor or another acquaintance will not be sufficient since the authorities generally ask for documentation when you register for the first time.
If you are an NHR in Portugal but you prefer not to live there, the best thing is to buy a house and rent it out through an agency. If your contract allows it, you could also sublet your rented home.
Depending on the house’s location, it is possible that, given the large number of tourists in Portugal, you could even make a profit.
Emigration and Portuguese citizenship as an NHR
If you meet all the requirements and are an EU citizen, in principle you can emigrate to Portugal right away. Below is some additional information that could be useful for you:
If you are in Portugal, you can easily register as an EU citizen at the municipality of your new residence. If you do not have an EU passport, you must go to Immigration and Borders Service (SEF) to get one.
You must register in Portugal before the end of the fourth month of your stay in the country, at the very latest.
You must provide the municipality with the documentation of a suitable residence and of sources of income and proof that you have sufficient financial resources (a bank statement is usually enough).
For non-EU citizens that cannot emigrate to the country using the “Golden Visa” for investors (the investment must be between €300,000 and €500,000), the only remaining option is finding long-term employment in the country.
After 5 years, a permanent residency permit can be applied for. Citizenship can be obtained after 6 years.
6 years is the minimum requirement within EU member states to obtain citizenship. This also applies to non-habitual residents, who should actually spend at least a few months per year in Portugal to achieve naturalisation. The disadvantage is that NHR status is lost once you have obtained Portuguese citizenship.
The Portuguese passport offers excellent freedom of travel to more than 165 countries and, because of Portugal’s colonial past, it can also provide additional benefits in its old colonies, like Brazil, São Tomé and Príncipe, Mozambique or Macao.
If housing and registration in Portugal have been confirmed, the application for NHR status must be submitted before the 31st of March of the following year at the very latest. Until its approval, you will remain a “normal” taxpayer.
You must also keep in mind that the processing time for the NHR status application can take several months. If you exceed the regular tax payment period in April/May of the following year without being an NHR, you will have to pay taxes normally, although you may be able to claim a refund once you are an NHR.
From the day your application is approved, you will probably be exempt from taxes on foreign income for the next 10 years.
In order to apply for NHR status, you must go to the Citizenship Advice Bureau or to the tax office and, in case of doubt, show that you have not been to Portugal during the last 5 years.
When applying, you have to do the following:
- Show or apply for a Portuguese tax identification number
- Show your passport or national identity card
- Prove that you have housing available in Portugal
- You may have to show the residency permit granted by the municipality
In principle, once you have the necessary certifications, you can authorize a third party to request and process your NHR status with general power of attorney.
Is living in Portugal as an NHR worth it?
The NHR tax regime in Portugal is more complicated than the programmes in other countries. You also have to keep in mind that you can only enjoy these tax benefits for 10 years. Anyone who wants to continue living tax-free after this period of time will have to relocate their residence once again.
However, there are many cases in which settling down in Portugal can be worthwhile.
NHR status does not appear on the Portuguese residency permit and, in the eyes of your country of origin; you live in a Western country with high-taxation. In other words, there is certainly no tax inspector who will find fault with you emigrating there.
Furthermore, the country is extremely diverse and attractive. Portugal is a modern country where you will find everything you need. It also has one of the most advanced personal freedom policies in the world. For example, activities such as prostitution and drug use are legal and there are hardly any arbitrary restrictions on alcohol, homosexuality, etc.
Even as an emergency refuge, if there are wars, crises or large-scale conflicts, Portugal and especially its islands, the isolated Azores or Madeira, not only offer warm weather throughout the entire year, but are also isolated, and have incredible nature and the ability to survive self-sufficiently.
It is worth mentioning that it is possible to relocate companies to Madeira in a very tax-beneficial way (5% corporation tax).
Those able to meet the requirements for tax-exemption have a very good option in Portugal, although from a practical point of view, Malta, Ireland, the UK and above all Cyprus are usually more attractive alternatives.
The tax exemptions are more extensive, easier to understand and do not pose as many problems for the management of foreign companies.
Do you need help becoming an NHR?
The Tax Free Today consultations can help you if you are not sure whether the NHR regime is the most suitable for you.
You can go over the programme with us in a consultation session and, in doing so, clarify the more suitable alternatives for tax-exemption. In addition to Portugal, there are many other interesting countries.
But if you have your mind set on Portugal, we can put you in touch with our associate lawyer in Lisbon. Mediation without consultation costs €100.
In principle, you can do this yourself but you can rely on an experienced tax lawyer, if you prefer and want assurance, who will help you to analyse the double taxation agreements relevant for your foreign income.
Nevertheless, we do not advise you to try to submit tax returns in Portugal by yourself, but look for a tax advisor with experience in the NHR regime.
Regardless of what you decide, we hope we have been able to show you the interesting opportunities that this country offers which you probably know as a holiday destination but certainly not as a tax haven.
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Because your life is yours!