The “Non-Habitual Resident Tax Regime” benefits

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

 

The “Non-Habitual Resident Tax Regime” (NHR) offers tax benefits to eligible individuals who become tax residents in Portugal. The NHR is a tax status valid for 10 years, offering special tax conditions for specific types of income, with the aiming to attract high skilled professionals, pensioners and wealthy individuals to reside in the country.

In Portugal, the tax regime for individuals is progressive, which means that individuals with higher incomes pay a higher percentage of their income in taxes than individuals with lower incomes. In some cases, there are optional fixed rates for specific types of income. It is important to notice that individuals qualifying as tax residents in Portugal are potentially liable to taxation on their worldwide income.

Here are some key points about the tax regime for individuals in Portugal:

  1. Income tax: Portugal has a personal income tax system that ranges from 14.5% to 48% depending on the level of income. Individuals are required to file an annual tax return between April and June of the following year.
  2. Social security contributions: All employees in Portugal are required to pay social security contributions, which are deducted directly from their salaries. The contribution rate is in general: 11% (employee) and 75% (employers). Freelancers are also subject to social security contributions at a rate of 21,4% on 70% of their revenue.
  3. Property taxes: Property owners in Portugal are subject to property taxes, which are based on the value of the property. The tax rate varies depending on the type of property and its location.
  4. Value-added tax (VAT): VAT is a tax on the consumption of goods and services and is charged at different rates depending on the type of product or service. The standard VAT rate in Portugal is 23%.

However, the The “Non-Habitual Resident Tax Regime” (NHR) offers tax benefits to eligible individuals who become tax residents in Portugal.

 

The Non-Habitual Resident (NHR) tax regime is a tax incentive program aimed at attracting foreign investors, highly skilled professionals, and retirees to live in Portugal. This regime offers tax benefits to eligible individuals who become tax residents in Portugal. 

 

 

NHR Eligibility requirements

 

In order to qualify to the NHR tax regime, you must meet the following requirements:

  1. To be a legal resident in Portugal, either under a Registration as EU/EEA/Swiss citizen, or under a Residence Permit;
  2. Qualify as a resident for tax purposes in Portugal and not have been deemed such as during the previous 5 years;
  3. Apply for the NHR status until March 31st of the year following that in which Portugal residence was taken up.

The NHR tax regime lies in the interaction between the Portuguese tax legislation, double taxation agreements (DTAs) signed by Portugal, the OECD model tax convention and tax rules of the country of source of the income, if necessary.

The first step to access the specific benefit of the NHR status in your case is analysing if the income obtained by you shall fall under the eligible categories of income.

Particular cases require special attention when assessing the NHR tax regime coverage, mostly when there is a lack of similarly in the Portuguese law, when legal qualification under the applicable rules vary from country to country and when benefits in the country of origin may be potentially in risk. We refer per instance to income distributed by trusts, pension schemes and pension plans, income deriving from partnerships and stock option plans, or income obtained by tax transparent entities.

The nature of the income, and its qualification under both residence and source domestic law as well as double tax agreement or OCDE model tax convention, will be crucial to determine the applicability of the following NHR benefits:

 

  • Employment income

Tax-exemption in Portugal should apply on foreign-sourced and effectively taxed at source income, no matter at what rate and independently of whether the source country is a blacklisted tax haven when the work is considered obtained outside of Portugal, according to the Portuguese legislation.

In some cases, employment income deemed as foreign income or employment income obtained in Portugal may be taxed at the flat rate of 20% in the case of an eligible professional occupation.

Social Security analyses may be required, namely when remote work and assignments are involved.

  • Self-employment income

Tax-exemption in Portugal should apply on income deemed as foreign sources according to the Portuguese legislation, provided that related to a high added value activity and provided it may be taxed at source under a double taxation agreement or, in the latter’s absence, under the OECD model tax convention, namely for being obtained through the individual’s fixed base or permanent establishment in the other country.

In some cases, self-employment income may be taxed at the flat rate of 20% in the case of an eligible professional occupation.

When the country of source is included in the Portuguese list of countries, territories, or regions with privileged and more favourable tax regime, the NHR tax benefits won’t apply.

 

  • Royalties, Dividends and Interests

Tax-exemption should apply income deemed as foreign-sourced and it may be taxed at source under a DTA or under the OECD model tax convention rules.

When the country of source is included in the Portuguese list of countries, territories or regions with privileged and more favourable tax regime, the NHR tax benefits won’t apply, being the income subject to an increase tax rate in Portugal.

  • Real Estate Income and Capital Gains

Tax-exemption should apply if the income is foreign-sourced and it may be taxed at source under a DTA or under the OECD model tax convention, provided the source country is not listed as a country, territory or region with privileged and more favourable tax regime.

 

  • Capital gains from the disposal of securities

Tax-exemption should apply income deemed as foreign-sourced and it may be taxed at source under a DTA or under the OECD model tax convention rules, which in most cases is not the case.

When the country of source is included in the Portuguese list of countries, territories or regions with privileged and more favourable tax regime, the NHR tax benefits won’t apply, being the income potentially subject to an increase tax rate in Portugal.

 

  • Pension income

Taxation at a reduced tax rate of 10% should apply on foreign-sourced pension income. The same taxation rules may apply to pre-retirement income, pension funds and retirement saving funds income, advance payments or capital receipts.

 

Important topics that should be addressed when considering applying for the NHR:
  • Tax Residency in Portugal: an individual deemed as a tax resident in Portugal is liable to taxation on his/her worldwide income. It is important to understand the extend of such tax liability and international rules applicable to the avoidance of double taxation, mostly when combined to the exemption method applicable under the NHR tax regime.
  • Tax Residency registration: becoming a tax resident in Portugal may conduce to a non-desirable dual residency situation depending on if the country of origin accepts partial year tax residency or not.
  • Applicability of CFCs and Place of Effective Management rules.

In addition to the NHR benefits, in Portugal there is no wealth tax, or inheritance/gift tax for close relatives.

 

NHR Steps:
  1. Tax analysis prior to making a decision.
  2. Obtain a tax number.
  3. Immigration: if you are a non EU citizen make sure you obtain the correct type of residence permit in Portugal.
  4. Secure accommodation in Portugal.
  5. Register as a resident for tax purposes in Portugal on the correct timing.
  6. Apply for the NHR status within the legal deadline.
  7. Submit annual tax returns.

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