Portugal’s Non Habitual Residency Scheme

Tax planning using tax havens has been frowned upon in recent years because that planning is contrived and lacks transparency. However, there is nothing wrong with running off to live in another country.

For those meeting the criteria and willing to move to Portugal, the non-habitual residency (NHR) scheme has plenty of tax advantages. It was introduced in 2009 to attract ‘high value’ industries and individuals. The regime offers a tax holiday for your first ten years living in Portugal. 

An individual can qualify as an non-habitual residency if they are a tax resident and have not been taxed as a Portuguese resident in the previous five years.  

Tax Residency

To be a tax resident of Portugal an individual must:

  1. Stay in Portugal for more than 183 days within a tax year; or
  2. Have residential accommodation available in Portugal in any day of that tax year, which is used as the individual’s habitual abode.

The tax year runs from 1 January to 31 December. A day spent in Portugal is one where the individual stays overnight. i.e. Pedro flies into Lisbon at 5pm and stays the night at his habitual abode before flying out to London. Pedro has incurred one day towards his 183 days in that tax year.  

You may also be a Portuguese tax resident if you are a member of a household and one of the spouses is a Portuguese tax resident on the 31 December .

How To Become A Non-Habitual Resident

Being a NHR is not automatic. If you desire the non-habitual residency status you need to apply for a taxpayer number, register as tax resident and apply for the NHR status. The application for non-habitual residency may be made up to the 31 March following the year you take up residency.

Following an application, the tax authorities may wish to check your application before granting the NHR status. Such a check is likely to require the provision of documents to demonstrate your personal economic interests before arriving in Portugal.

Tax Advantages Of Non-Habitual Residency

The advantages depend on whether your income is foreign sourced passive income or active income.  

Foreign sourced passive income derived by a NHR in Portugal will be exempt from tax, provided that:

  1. It may be taxed at source under the rules of a tax treaty with Portugal or
  2. If no treaty exists:
    1. It may be taxed at source according to the rules of the OECD Model Tax Convention on Income and on Capital
    2. It is not considered to arise from a Portuguese source and
    3. The source state, region or territory is not included in tax havens blacklist

The regime requires only a potential liability to taxation at source under the rules of a tax treaty or of the OECD Model Tax Convention. It is not necessary to have actual taxation.

For pension income to be exempt, the regime requires:

  • Actual taxation under the rules of a tax treaty or
  • The income has no connection Portugal

Active income is that derived from employment, independent personal services and royalties.

If foreign source employment income may be taxed at source according to the rules of a tax treaty or where no treaty, taxed at source and it is not considered to arise from a Portuguese source, it will be exempt.

If a NRH receives employment income and business or professional income in Portugal derived from ‘high added value activities’ it is taxed at a flat rate of 20% applicable to the net amount of income earned. High added value activities are of a scientific, artistic, or technical nature and includes:

  1. Architects, engineers and similar technicians
  2. Plastic artists, actors and musicians
  3. Auditors and tax consultants
  4. Doctors and dentists
  5. University professors
  6. Psychologists
  7. Liberal professionals, technicians and assimilated and
  8. Investors, administrators and company managers

Similarly, income from independent personal services and royalties will be exempt if it may be taxed at source according to the rules of a tax treaty. If no treaty is in place, it will be exempt if:

  1. It may be taxed at source according to the rules of the OECD Model Tax Convention on Income and on Capital
  2. It is not considered to arise from a Portuguese source and
  3. The source State, region or territory is not included in the Portuguese tax havens’ blacklist

The independent personal services exemption is only available for income derived from certain ‘high value added’ activities of a scientific, artistic or technical nature, as defined.  

If independent personal services fall under eligible NHR professions and are from a Portuguese source, an optional tax rate of 20% is applicable, although the usual progressive tax rates can be applied if preferred.

Conclusions

From a tax perspective, relocating to Portugal is attractive. Not only can you have a ten-year period tax free on foreign source income, you could also have low tax on income derived from personal services. In addition, Portugal does not have wealth taxes and only local taxes on real estate. The acquisition of real estate attracts municipal tax between 0% and 6% and stamp tax duty at 0.8%. There are annual property taxes on properties with value below €600,000 between 0.3% and 0.45%. For properties valued above €600,000 the tax is between 0.75 and 1%.