Sara Teixeria provides a detailed examination of Portugal’s income tax regime for non-habitual residents.
Part of the global tax strategy of the Portuguese Government is the Decree-Law nr. 249/2009, of September 23, which approved the Tax Code of Investment (“Código Fiscal do Investimento”). The objective of the Code was to improve Portuguese international competitiveness, and, among other measures, it created a new Personal Income Tax regime for non-habitual resident individuals.
This new non-habitual residents’ personal income tax regime aims to attract to Portugal qualified foreign residents engaged in high added value activities and also other high net worth individual investors by establishing a favourable tax regime for those who choose to take up Portuguese tax residency. It is particularly interesting when compared with similar regimes adopted in countries such as the United Kingdom, France or Spain.
According to the new regime, the status of non-habitual resident individuals will be granted to individuals who become resident for tax purposes in Portugal starting from January 1, 2009 without having had this status in the preceding five years.
For these purposes, it is important to bear in mind that a tax resident in Portuguese territory is, in general terms:
This being said, individuals may voluntarily register as a non-habitual residents in Portugal provided that they qualify as a Portuguese tax resident (in the terms described above) and that they have not been taxed as a resident in the Portuguese territory in the five years prior to their qualification as such.
It is also worth highlighting the regime’s flexibility, since it targets individuals who take up either a permanent or temporary residence in Portugal and also because the entitlement to be taxed as a non-habitual resident is not lost even if the individual fails to qualify as a Portuguese resident in any of the years during the 10-year period, provided that he again qualifies as Portuguese resident for tax purposes in any of the following years until the 10-year period elapses.
The main feature of this non-habitual resident regime is the possibility of benefitting from the application of a special flat rate on Portuguese-source employment and business income and also to benefit from the application of the exemption method (with progression) on foreign-source income.
An individual under this non-habitual resident regime will be liable to autonomous taxation at a special flat rate of 20 per cent on his Portuguese-source employment and business or professional income. In the latter case, income must arise from high added value activities that are of a scientific, artistic, or technical nature. These high added value activities have been defined by an order of the Portuguese Ministry of Finance and include a broad range of activities, as follows:
Despite being eligible to the application of the 20 per cent flat tax rate, it may prove to be more tax efficient if the non-habitual resident opts to aggregate this income to his taxable income and be subject to the general regime of progressive rates. The advice on whether or not to take this option would depend on the specific situation of each taxpayer.
With regard to foreign-source income, the regime establishes two sets of rules depending on the type of income to consider.
In respect to foreign-source income comprising income from employment and from pensions, the exemption method (with progression) will be applicable, provided such income is subject to effective taxation in the source State, according to the rules of a double tax treaty entered into by Portugal and such State or, if no treaty is in place, that the income is subject to effective taxation in the source State and that it is not considered to arise from a Portuguese source under the Portuguese territoriality rules.
With regard to foreign-source pension income specifically, it includes benefits due to retirement pensions, old age, invalidity, survival, and maintenance, benefits payable by insurance companies, pension funds, or other entities, under a supplementary social security system due to the employer’s contributions – although not considered as employment income – and other pensions and allowances and temporary or life annuities. Whenever this income is based on contributions, the application of the exemption method will be limited to the portion of the income that has not led to a specific deduction in accordance to the Portuguese personal income tax rules.
In respect to foreign-source income, comprising passive income – such as interest, dividends, capital gains and other income from capital, income from immovable property – and income deriving from independent personal services or from intellectual or industrial property, or yet from the provision of information relating to an experience gained in the industrial, commercial, or scientific areas, the exemption method (with progression) will also be applicable, although under different conditions. In these cases, in order for the exemption method to be applicable, it is required that such income may be taxed in the source State under the rules of a double tax treaty entered into by Portugal and the source State.
Further, in case there is no double tax treaty between Portugal and the source State, the exemption method will be applicable if the income may be taxed in the source State according to the rules of the OECD Model Tax Convention on Income and on Capital – as interpreted according to the Portuguese reservations on its articles and observations on its commentary – and also if it is not considered to arise from a Portuguese source under the Portuguese territoriality rules nor from a region or territory included in the Portuguese tax haven black list.
It is important to highlight that, regarding both foreign-source passive income and income deriving from independent personal services the regime requires only the potential liability to taxation in the source State under the rules of a tax treaty or of the OECD Model Tax Convention, and therefore no effective taxation is required.
The non-habitual tax resident regime appears to be quite attractive and competitive, especially when compared with similar regimes established in other EU jurisdictions.
Its flexibility and wide scope prove to be quite interesting both for (i) the straight forward taxation of domestic source income at the flat rate of 20 per cent – most likely a lower rate than the ones applicable to other Portuguese tax residents in the same income ceiling – and for (ii) the elimination of double taxation of foreign source income through the exemption method – differently from the general rule in Portugal, which is the credit method – benefiting from the Portuguese wide treaty network of more than 50 double tax treaties, in some cases requiring only the potential taxation in the source State.
The regime also proves to be interesting within the scope of the new regime of Madeira International Business Center, since its attractive features may smooth the fulfillment of the employment eligibility criteria by drawing qualified foreign residents engaged in high added value activities and other high net worth individual investors involved with companies established therein to take up Portuguese tax residency.
The complexity of the legal and tax terms of the non-habitual resident tax regime recommends, however, to take proper legal advice on the qualification for the application of this regime before any decision is taken in this regard.
Sara Teixeira, MLGT Madeira – Management and Investment, S.A., Madeira