Portugal is one of the most popular European countries for expats. Reasons for this include its warm climate, reputation for great safety, fascinating history, and stunning beaches.
Foreign residents in Portugal increased by 40% from 2011 to 2021 and it remains a very popular choice for non-nationals to choose for their permanent home.
Thousands of European and American citizens have chosen Portugal to live over recent years, and benefiting from this tax regime was an important factor in their decision.
Besides all these attributes, Portugal has a very competitive tax regime for physical persons (when compared internationally with others), particularly if they have high passive income: the Non Habitual Resident Regime.
We talked to Ana Aroso and Isabel Pinto Leite, partners at real estate agency Residents – Real Estate, about the benefits Portugal’s tax regime has for well-heeled property buyers. One of the agency’s key specialisations is international tax advisory and dealing with all sorts of tax issues.
With their help, we will try to outline this tax regime.
1. Am I eligible for the Non-Habitual Resident Regime?
To qualify as a non-habitual resident, an individual must:
- Become a tax resident under Portuguese domestic legislation.
- Not have been taxed as a Portuguese resident in the five years prior to taking up residence in Portugal.
After registration, the non-habitual residents can benefit from the regime for a period of ten years.
Portuguese nationals may also benefit from the regime, and this makes the regime extremely attractive for emigrants that want to return.
To become a tax resident in Portugal, an individual must:
- Stay in Portugal for more than 183 days in a calendar year; or
- On December 31 of the relevant tax year, have available accommodation in conditions that one would assume that he will move his residence to Portugal.
2. How does the Non Habitual Resident Regime apply for 4 key income sources
1) Passive income: dividends, interests, royalties’ rents and capital gains
Passive income from foreign sources is exempt from tax in Portugal (state of residence) if:
- This income “Can be” subject to tax in the state of source, in the terms of the convention celebrated between Portugal and the source country. They don’t need to be taxed. The only requirement is that the convention includes the possibility of being taxed in the source state.
- In cases where there is no convention between Portugal and the source state, the income “can be” subject to tax in the source state in the terms of the OECD model tax convention. The Portuguese Tax authorities reserve the right to make their own interpretation of the OECD model tax convention (and is not sourced from a tax haven, according to the Portuguese blacklist).
The conventions celebrated between Portugal and other countries allow the source countries to tax passive income. The OECD model also allows the source countries to tax passive income (except capital gains in most cases).
The law doesn’t require effective taxation in the source country, so it is possible to obtain a double non-taxation.
Passive income from a Portuguese source is subject to tax, generally by a flat tax rate of 28% (depending on the kind of income).
2) Independent Personnel Service
Income from a foreign source is exempt from tax in Portugal (state of residence) if:
- It results from high value-added activity, and
- “Can be” subject to tax in the state of source in the terms of the convention celebrated between Portugal and the source country. They don’t need to be taxed. The only requirement is that the convention includes the possibility of being taxed in the source state.
In cases where there is no convention between Portugal and the source state, the income “can be” subject to tax in the source state in the terms of the OECD model tax convention.
Income from personnel services from Portuguese sources is subject to a flat tax of 20%, if the services are considered to have value-added (the list of professions is the same as the employment situations).
Foreign income from professional services that would not meet the criteria of “value-added”, are taxed under the same rules as the normal residents in Portugal.
Foreign-sourced pensions (and other similar income) are subject to a special rate of 10%.
In addition, the tax treaty celebrated between the source country and Portugal usually precludes that country from taxing the pension, resulting in flat taxation of 10%. Generally, only pensions of retired civil servants are allocated by treaties to the source country (some treaties that follow the UN model allow the source country to tax pensions paid by public entities).
Employment income from a foreign source is exempt from tax if they have been taxed in the source country. The law requires effective taxation but does not establish a minimum requirement. There are no restrictions onemployment income that is sourced in blacklisted countries.
Income from Portuguese sources is subject to a flat tax of 20%, if they are considered to have high value added – and now there are 2 lists of professions:
- Old list (Ordinance 12/2010), in force until 12.31.2019 and which continues to apply to taxpayers registered under the regime until 2019.
- New list (Ordinance 230/2019), in accordance with the codes of the Portuguese classification of professions, which entered into force on 1.1.2020 and is applicable to taxpayers registered since January 1, 2020 (and to those previously registered by option).
Since October 2019, there is no need to obtain prior recognition of high added value activity by the Tax Authorities. The taxpayer must only demonstrate that his activity is classified as High Value Added if Tax Authorities ask for it.
3. Other advantages of Portugal as a tax resident
- There is no wealth tax in Portugal and there is no obligation to declare any assets tothe Portuguese tax authorities (only income);
- Inheritance and gifts, between ascendants and descendants (ex: father to son, or grandfather to grandson, or son to mother) and husband and wife, are exempt from tax;
- Other inheritances and gifts (like an uncle to a nephew or unrelated persons) are taxed at a flat rate of 10% on the assets located in Portugal (other assets will be non-subject to taxes);
- Portugal is part of the EU and the Schengen area and
- For citizens of countries that are not members of the EU or Schengen, in 2012 Portugal approved the “Golden Visa Program” (although to become a Portuguese resident for tax purposes and benefit from the NHR regime, a residency authorization is not required).
4. How does the Non-Habitual Resident Regime compare with other regimes around Europe that grant similar benefits
People looking to find a permanent home in Europe will be concerned with the different regimes available to them. Portugal is just one and many other nations have similar and comparable schemes.
Below, we’ve highlighted the regimes in Spain, the Netherlands, Belgium, Switzerland, the United Kingdom, Malta, Greece and Italy.
Territorial based taxation system, with the exception of employment income. Employment income will be taxed at the flat rate of 24% until the limit of 600,000 euros. The regime has a duration of 6 years.
Requirements: You must not have been a tax resident in Spain in the previous 10 years and must have an employment agreement or be a manager of a company in Spain.
Disadvantages when compared with the NHR: Limited to people that come to work in Spain, not accessible to investors, wealthy people that don’t work for a company or retired people. Potential inheritance tax in Spain. Difficulties in obtaining a tax resident certificate and therefore be entitled to benefit from tax treaties.
Territorial based taxation for some types of income, treated as non-residents: 30% of the salary is tax free. The regime has a duration of 5 years.
Requirements: To transfer the residency to the Netherlands due to an employment agreement, you must not have lived in the country for at least 2/3 of the last 24 months and have skills or knowledge that are lacking in the Netherlands.
Disadvantages when compared with the NHR: Limited to people working in the Netherlands with relevant knowledge or skills.
This regime no longer treats non-habitual residents and non-residents and worldwide taxation applies. 30% of income is untaxed, to a maximum of 90,000 euros and some allowances such as housing costs are not taxed. The regime has a duration of 5 years
Belgium also has a second, older regime, limited to specific employees.
Requirements: You must not be a Belgian citizen and must never have been a resident in Belgium. You must be employed temporarily in specific activities with required knowledge or skills. You must also have the continued interests in other countries as well as Belgium.
Disadvantages when compared with the NHR: Limited to people working in Belgium with relevant knowledge or skills and the issue of worldwide taxation.
This regime relies upon an income based on wealth and lifestyle for example, 7x annual rent and this wealth is also presumed for purposes of wealth tax (based on the presumed income). The duration of this regime is undetermined.
Requirements: You must not be a Swiss citizen and must not have been a resident of Switzerland in the past 10 years. You also must not work in Switzerland.
Disadvantages when compared with the NHR: The cost of living in Switzerland and minimum tax thresholds may be considered quite high, as well as the lump sum required. This does not make it inaccessible to all.
Territorial taxation with remittance basis only on the income in the UK. A minimum tax of £30,000 if resident for at least seven of the previous nine tax years or £60,000 for at least 12 of the previous 14 tax years
Requirements: You must not have been a UK resident for at least 15 of the past 20 years or have not been born in the UK or a domicile of origin in the UK. You must have been resident in the UK for at least a year since 2017
Disadvantages compared with the NHR: The UK is not a EU member or a Schengen area member. Residents may require some type of permanent visa and the cost of living is high.
Territorial taxation with remittance basis, only on the income remitted to Malta. Capital gains from outside of Malta are not subject to tax, even if remitted. Malta also has a special scheme for high-net-worth individuals that limits the remitted income to a flat rate of 15%, but they must meet additional requirements.
Requirements: You must be a resident, but not domiciled, in Malta. Domicile status does not depend on nationality, but the ties are stronger than ordinary residency.
Disadvantages compared with the NHR: Becoming a resident in Malta means living in the country for more than 183 days per year. Being a small island, with few infrastructures, few flight connections might be limiting for individuals used to living in more connected and larger countries.
Territorial basis taxation after a lump sum payment of 100,000 euros (plus 20,000 for family members). Only income that arises from Greece will be additionally taxed. The regime duration in 15 years.
You must not be a tax resident in Greece for 7 of the previous 8 years. You must make an investment of 500,000 euros or more in property, business, bonds or shares in Greek companies
Disadvantages when compared with the NHR: The initial lump sum payment of 100,000 euros is very high.
There are three special tax regimes in Italy, but the most relevant is the “opzionale di imposizione sostitutiva per I nuovi resident”. This works on a territorial basis of taxation after the option of a lump sum payment of 100,000 euros (plus 25,000 for family members). Some capital gains will still be taxed and there are also limited territorial inheritance and wealth taxes. The duration of this regime is 15 years.
Requirements: You must have been a tax resident in Italy for 9 out of the previous 10 years.
Disadvantages when compared with the NHR: The initial lump sum payment of 100,000 euros is very high.