Portuguese non habitual tax regime

VERDADES DOS SANTOS JOÃO

Avocat /Advogado /European Lawyer

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LUXEMBOURG Barreau de Luxembourg - Avocat exerçant sous leur titre professionnel d’origine

14, rue des Bains, L-1212 Luxembourg (Main Office) Tel. +352-27858688 • Fax +352-462181 • [email protected] SKYPE : dr :verdades_dos_santos

PORTUGAL Ordem dos Advogados de Portugal – Cédula n.º 44260L Avenida António Augusto de Aguiar, 55- 2º Dt.º- 1050-017-Lisboa Tel.+ 351 213188020 • Fax+ 351 213188029 • [email protected]

THE PORTUGUESE TAX SYSTEM FOR NON-‐HABITUAL RESIDENTS

General framework The Decree-‐law of 23 September 2009 created the status of non-‐habitual tax resident both for non-‐residents who plan on establishing permanent residency in Portugal, and for temporary residents.

(i) Beneficiaries: Persons who become tax resident in Portugal and who, in the previous 5 years, have not resided in Portugal.

(ii) Advantages: Those enjoying non-‐habitual resident status benefit from a special 20% tax rate on certain Portuguese income and a tax exemption on foreign income.

(iii) Temporal application: A taxpayer who is deemed to be non-‐habitually resident acquires the right to be taxed as such for a period of 10 years consecutively starting from the year of registration as a resident in Portugal (since he is deemed, over this period, as residing in Portugal). At the end of this 10-‐year period, the taxpayer will be subject to tax in line with the traditional income tax rules applicable to Portuguese individuals ("Imposto sobre o Rendimento das pessoas Singulares"; "IRS").

Qualifying conditions To benefit from the scheme applicable to non-‐habitual residents, the taxpayer must cumulatively meet the following conditions:

(i) he becomes resident for tax purposes in Portugal, in accordance with the criteria laid down in the IRS Code;

(ii) he has not resided in Portugal in the 5 years before registering with this scheme;

(iii) when registering as a resident in Portugal, he requests to be

registered (with the tax authorities) as a non-‐habitual resident.



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Residency for tax purposes in Portugal A person is regarded as being resident for tax purposes in Portugal where, over the course of a calendar year, he meets one of the following conditions:

(i) he has stayed in Portugal for more than 183 days, whether consecutively or not, or

(ii) on 31 December of that year, he has a home in Portugal under conditions which demonstrate his intention to maintain it and reside in it as his place of habitual residency; or

(iii) he is part of a household one member of which is resident for tax purposes in Portugal.

Registration

(i) At the time of registration, taxpayers will be required to declare that, in the previous five years, they did not satisfy the conditions to become resident in Portugal (according to Circular No. 9/2012, a simple declaration to that effect is sufficient).

(ii) If there is any doubt or evidence that that declaration is not truthful, the tax authority may request additional evidence.

(iii) In that case, the tax authority may request a foreign residency certificate or documents attesting to the existence of close personal and economic ties to another state.

Taxation Income earned in Portugal

(i) Income in Category A (income from employment) and B (income from entrepreneurial and professional work) of the IRS are subject to a special tax rate of 20%, provided that it comes from high added value activities -‐ activities which are defined in Order No. 12/2010 of 7 January (see Annex).



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(ii) Other income (included in other categories of the IRS) are subject to tax

in accordance with the general taxation rules applicable to habitual residents and, therefore, subject to the progressive tax rates applicable to Portuguese income (up to a maximum rate of 46.5%, in addition to which, on any taxable income exceeding €153,300, a supplementary tax of 2.5% will be imposed).

Income earned abroad

(i) Elimination of international double taxation through the application of the exemption method: if certain conditions are met, income earned abroad will not be taxed in Portugal (it will however be counted for accounting purposes together with income earned in Portugal which does not qualify for the special 20% rate in order to determine which of the progressive tax rates applies to the total income).

(ii) Circular No. 2/2010 provides that income in categories A and B earned abroad, to which the exemption method does not apply (because they do not meet the qualifying conditions) are to be taxed at the special rate of 20% where this income is derived from a high added value activity.

1. Conditions governing the application of the exemption in respect of Category A income (paid work)

It is sufficient that one of the following conditions is met:

(i) such income is, in effect, subject to tax in the other Contracting State in accordance with the Convention for the elimination of double taxation entered into by Portugal with that state, or

(ii) where no such convention exists, the income is, in effect, taxed in the other country, territory or region, provided it is not considered as having being earned in Portugal

If such income is not taxed in the source State, it will benefit from the preferential 20% tax rate.



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Note: a non-‐habitual resident can always opt for the tax credit method to be applied, in which case he is obliged to include his income for tax purposes.

2. Conditions governing the application of the exemption in respect of category B, E, F or G income, (professional income, entrepreneurial income, income from land, capital income and capital gains)


(i) such income is liable to be taxed in another Contracting State in accordance with the Convention for the avoidance of double taxation entered into by Portugal with that state;

(ii) where no such convention exists, it is liable to be taxed in the other

country, territory or region, according to the OECD Model Tax Convention on Income and on Capital, provided that such income does not come from a territory classified as a tax haven by Portugal and is not considered as having been earned in Portugal.

It is not necessary, in this scenario, that such income is actually subject to tax abroad, but they could potentially be. Where income is not taxed by the source State, it will be able, however, to benefit from the preferential tax rate of 20%.

3. Conditions governing the application of the exemption in respect of category H income (pensions): the special case of foreign retirees


(i) such income is taxed in the other Contracting State in accordance with the Convention for the avoidance of double taxation entered into by Portugal with that state, or

(ii) it is not considered as having been earned in Portugal. IMPORTANT: This scheme appears to be very attractive for foreign retirees whose pensions are from States which, under the Convention for the avoidance of double taxation entered into between Portugal and the state, grant the



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exclusive right to tax pensions to the state in which the pension recipient resides (e.g. United States, Switzerland, Luxembourg, Malta, Spain, etc.) → Double non-‐taxation, namely, the income is not subject to tax in the source state and is exempt in the state of residency. In practice, this device can often result in the income not being subject to tax in either the source state or Portugal, since the majority of tax treaties entered into by Portugal, based on the OECD model, provide that, in respect of private pensions, the taxpayer may be subject to tax only in the state where he resides. Only public pensions are, in principle, subject to tax exclusively in the state of the paying agency. Example: The tax convention between France and Portugal grants the exclusive right to tax private pensions to the state of residency. Persons resident for more than 183 days in Portugal who were not resident for tax purposes in Portugal in the previous 5 years may therefore benefit from being non-‐habitual resident in Portugal. In these circumstances, private pensions from France will not be subject to tax in France and will, moreover, be exempt from taxation in Portugal. ANNEX Order No. 12/2010 high added value activities 1 -‐ Architects, engineers and similar technicians 101 – Architects; 102 – Engineers; 103 – Geologists. 2 – Artists, actors and musicians: 201 – Theatre, ballet, cinema, radio and television performers; 202 – Singers; 203 – Sculptors; 204 – Musicians; 205 – Painters. 3 -‐ Auditors: 301 – Auditors; 302 – Tax Consultants. 4 -‐ Doctors and dentists: 401 – Dentists; 402 – Analysts;



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403 – Surgeons; 404 – Ship's doctors; 405 – GPs; 406 – Dentists; 407 – Stomatologists; 408 – Medical physiotherapists; 409 – Gastroenterologists; 410 – Ophthalmologists; 411 – Orthopaedists; 412 – Otolaryngologists (ENT); 413 – Paediatricians; 414 – Radiologists; 415 – Doctors specialised in other areas. 5 – Teachers: 501 – University professors. 6 – Psychologists: 601 – Psychologists. 7 – Liberal, technical and related professions: 701 – Archaeologists; 702 – Biologists and experts in life sciences; 703 – Computer programmers; 704 – Computer consultancy and programming activities related to information and computer technology; 705 – Computer programming activities; 706 – Information technology consultancy; 707 – Management and operation of computer hardware; 708 – Information services activities; 709 – Data processing, hosting and related activities; web portals; 710 – Data processing, hosting and related activities; 711 – Other information service activities; 712 – Media activities; 713 – Other information service activities; 714 – Scientific research and development; 715 – Research and development related to natural and physical sciences; 716 – Biotechnology research and development; 717 – Designers.



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8 – Investors, Managers and Administrators: 801 – Investors, administrators and managers who foster productive investment, where they are attached to projects which are eligible, and employed under contracts which confer tax benefits entered into in accordance with the General Tax Code, approved by Decree-‐Law No. 249/2009 of 23 September; 802 – Senior business executives. Warning: The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although I endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate advice after a thorough examination of the particular situation. Therefore, VERDADES DOS SANTOS (Lawyer) cannot accept any liability for any errors, omissions or opinions contained herein and for the implementation of the principles set out without its active involvement.

Portuguese non habitual tax regime

Economy & Finance

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