Individuals who become resident in Portugal can benefit from a particularly favourable tax regime known as the 'Non Habitual Resident (NHR) Regime', provided they have not been resident in Portugal in any of the previous five tax years.
Under the NHR regime, substantial tax exemptions can apply for the first ten years of residence in Portugal.
If you are moving from the UK to Portugal, certain sources of income may escape taxation in both the UK and Portugal.
Tax Benefits of the NHR regime
If you work in Portugal and your activity is included on the official list of 'high value activities' published by the Portuguese government, your earnings (from both employment and self-employment) will be subject to tax in Portugal at a flat rate of 20%.
This flat 20% rate compares favourably to the standard scale rates of income tax in Portugal that currently go up to 48%, plus a surcharge that applies to income over €80,000.
If you work outside of Portugal, the earnings from your overseas employment may be tax free in Portugal, provided certain conditions are met, however, you are likely to find that those earnings are taxable in the source country, and professional advice should be taken to determine the extent of taxation in the source country.
Note that you are not required to have a 'high value activity' in order to access the NHR regime. The only test of eligibility for the NHR regime is that a person must not have been a resident in Portugal in any of the five previous tax years.
The tax treatment in Portugal of pension income depends on the nature of the pension. Most double tax treaties (DTTs) allocate sole taxing rights to the country of residence and this treatment would normally apply to employment pensions, personal pensions and state pensions.
However, there is an exception where the pension is a government service pension. For this type of pension, most DTTs allocate sole taxing rights to the country of source.
Where Portugal has sole taxing rights and the individual qualifies for the NHR regime, pension income is taxable at a flat rate of 10% in Portugal. The 10% rate was introduced on 31st March 2020.
For individuals who were already registered under the NHR regime before 31st March 2020, overseas pension income continues to be exempt from tax in Portugal.
In general, other types of income, such as dividends, interest, royalties, rental income, capital gains etc, from a foreign source will be exempt from taxation in Portugal, under the NHR regime provided:
- Such income may be taxed in the source country under the terms of a Double Tax Treaty (DTT); or
- If no DTT exists, such income may be taxed in the source country under the rules of the OECD Model Tax Convention on Income and on Capital, the source country is not a blacklisted tax haven, and the income is not regarded as arising from a Portuguese source under Portuguese tax rules.
Non-habitual residents in receipt of UK dividends, for example, can avoid tax on those dividends in Portugal, since the UK/Portugal treaty provides that they may be taxed in the UK. The dividend income may also be tax free in the UK under the UK's 'disregarded' income rules. It may therefore be possible for individuals resident in Portugal under the NHR regime to avoid tax in both the UK and Portugal on UK source dividend income.
The NHR regime can be particularly favourable, therefore, for UK business owners who receive remuneration primarily by way of dividend income.
Under the NHR regime, a capital gain is exempt in Portugal if it may be taxed (under tax treaty rules) in the country of source.
Under many DTTs, capital gains on the disposal of real estate are taxable in the country where the real estate is situated. In such cases, Portugal would not tax the gain. However, the tax position in the country where the property is situated would need to be considered.
Most DTTs provide that capital gains on shares are taxable only in the country of residence, so share gains are likely to be taxable in Portugal only.
Gains are taxed at a flat rate of 28% in Portugal (35% if the asset is located in a tax haven), and therefore it may be more tax efficient to dispose of shareholdings before moving to Portugal, if your country of residence taxes them at a more favourable rate.
Specific advice would need to be taken.
Exemption with Progression
For all types of income which qualify for exemption in Portugal under the NHR regime, whilst the income itself is not taxed in Portugal, it is nevertheless taken into account for the purposes of determining the rate of tax that applies to any other income taxable in Portugal under the normal scale rates (for example, Portuguese rental income or Portuguese earnings that do not qualify as high value activities). This has the effect of increasing the effective tax rate applying to any non-exempt income (exemption with progression).
Registration for NHR Regime
Individuals must be formally registered as a Non-Habitual Resident in order to benefit from the favourable tax regime. The application to register for the NHR regime must be submitted by 31st March following the first year of residence in Portugal. The application must include a statement that the individual has not been resident in Portugal in any of the previous five years.
If you cease to be Portuguese resident but you return to Portugal within the initial ten year period, you can be taxed under the NHR for the remaining number of qualifying years.
The NHR regime makes Portugal a particularly attractive country for many individuals who are looking to move overseas.
Certain types of foreign income and gains can be exempt from tax in Portugal, although you will always need to consider the tax treatment in the country of source.
The tax treatment in both countries will depend on the nature of the income and gains, the country of source, and the terms of the double tax treaty between that country and Portugal, if there is one.
In some circumstances, where income and gains do not qualify for tax exemption in Portugal, a higher rate of tax may be payable in Portugal compared to the individual's former country of residence, and other tax planning opportunities may need to be considered.
It is therefore essential to seek professional advice if you are considering moving to Portugal as a Non-Habitual Resident.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.