SPECIAL TAX REGIMES IN PORTUGAL: THE NON-HABITUAL TAX RESIDENT REGIME Introduction In recent years, Portugal introduced several measures that aim to promote foreign investment and the relocation of individuals to Portugal. In this context, a new program entered into force in 2009: the Non-Habitual Tax Resident ( NHTR ) regime, which is a special tax regime granted to individuals moving to Portugal. This special tax regime can be extremely attractive due to the possibility to benefit from a lower tax burden, provided certain conditions are met. As a result, the main purpose of this section is to address the special income tax regime in force in Portugal and to highlight the main planning opportunities that may arise for an individual wishing to become an NHTR. 1) What are the key features of the NHTR regime in Portugal? How is residency defined? As of when is someone considered to be a Portuguese tax resident? What is the key decisive factor to qualify for the NHTR regime? E.U. residents wishing to move to Portugal and non-e.u. residents having obtained a visa 1 can apply for the NHTR regime. The NHTR regime establishes favorable tax treatment for individuals wishing to move to Portugal, as it provides an exemption for foreign source income and lower flat rates on Portuguese source employment and self-employment income, provided the income arises from high value-added activities. To qualify for the NHTR status, an individual must meet the following criteria: The individual must become a Portuguese tax resident; The individual must not have been deemed a Portuguese tax resident under Portuguese domestic law and/or a double taxation treaty, if applicable, in the preceding five years. 1 A non-e.u. citizen may only change residence to Portugal if a resident permit (or visa) is obtained. There are several types of available visas such as student visas, entrepreneurs visas, or work visas. Furthermore, the Portuguese Government introduced the Golden Visa program, which grants a temporary residence permit to non-e.u. citizens making investments in eligible activity in Portugal. This Golden Visa Program will be address with further detail on question 2.
The main goal of this regime, introduced in 2009, by Decree-Law No. 249/2009, of September 23 rd, is to attract highly qualified individuals and wealthy individuals to Portugal and in recent years it has proven a success. When introduced, the NHTR regime required proof of residence outside of Portugal in the preceding five years through the presentation of residence certificates issued by the tax authorities of the country where the individual resided, which most of the time proved to be difficult. For that reason, the procedures were simplified and currently an individual wishing to apply for the NHTR regime only needs to present a sworn statement evidencing that he/she could not be deemed tax resident in Portugal in the preceding five years. Naturally, if the Tax Authorities question the veracity of the statement, the individual must demonstrate that during the entire five-year period he/she resided in another jurisdiction and, notably, that taxes were paid as a tax resident in that jurisdiction during the said period. 2) Which conditions need to be fulfilled for new arrivals to be entitled to the NHTR regime in Portugal? As mentioned, the two requirements that an individual must meet in order to apply for the NHTR are: (i) to become tax resident in Portugal; (ii) not to be deemed tax resident in Portugal in the preceding five years. Therefore, the term non-habitual resident can be misleading insofar as the NHTR regime requires that an individual effectively moves his tax residence to Portugal. Before taking a further look at the residence criteria established under Portuguese Law, it should be noted that in order to move to Portugal, an individual must check what procedural steps should be observed in order to register as resident, which may vary depending on the nationality of the individual, since different rules apply to EU nationals and non-eu national. EU citizens, and their family members, have the right to move and reside freely within the EU territory, pursuant to article 21 of the Treaty on the Functioning of the European Union. A non-e.u. citizen, on the other hand, may only change residence to Portugal if a resident permit (or visa) is obtained. There are several types of available visas such as student visas, entrepreneurs visas, or work visas. Notwithstanding, and since, in some cases, it may be difficult to obtain one of these visas, as the individual might not meet the underlying
requirements, the Portuguese Government introduced the Golden Visa 2 program, which grants a temporary residence permit to non-e.u. citizens making investments in eligible activity in Portugal. The law provides for several types of investment activities 3 : Transference of capital into Portugal, in an amount equal to or higher than 1 million, or Creation of, at least, 10 jobs, or Acquisition of real estate property in a minimum amount of 500,000.00. Recently, the list of investment activities was extended in order to also include the following situations: Transference of capital in an amount equal to or higher than 350.000,00 to be used in scientific research activities conducted by public or private institutions that are part of the national scientific system, or Transference of capital in an amount equal to or higher than 350.000,00 to be invested in or to support artistic productions or to maintain Portuguese cultural heritage; or Transference of capital in an amount equal to or higher than 500.000,00 to be used on the purchase of real estate that is part of urban reconstruction 4. The Golden Visa is granted for five years and gives its holder the right to enter, live and work in Portugal, provided that the stay in Portugal equals or exceeds seven days in the first year and fourteen days in subsequent years. It also allows the holder to move freely within the Schengen area. Once granted, a Golden Visa gives its holder s family the right to obtain a residence permit without making any further investment, provided that certain conditions are met. Family members include: (i) the spouse, (ii) minors and disabled children, (iii) economically dependent adults and, (iv) parents. In addition, the holder of a Golden Visa may obtain a permanent residence permit and may apply for Portuguese citizenship, provided that certain conditions are met. Having addressed the authorisation or visas that must be obtained, it is time to take a closer look at the residence criteria established under Portuguese Law. 2 Pursuant to article 90.º-A of Law No. 23/2007, of July 4 th (Immigration Law). 3 Investments may be made directly by an individual or through a company. 4 If the investment is conducted in places considered to be low-density areas, the minimum amount of required investment is reduced by 20%.
The Portuguese Individual Income Tax Code establishes different criteria in order to determine tax residence in Portugal. The general rule, following the Individual Income Tax reform 5, is that a person shall be deemed tax resident in Portugal if: he/she spends more than 183 days in a 12-month period, beginning or ending in a given year; or even if spending less time in Portugal, he/she has a house available to him/her that shows the intent to occupy it as a habitual abode in any day of the referred period 6. An individual moving to Portugal, and meeting the residence criteria described, will be deemed tax resident in this territory from the first day of the stay period (for example, an individual coming to Portugal on June 1 st, will be deemed tax resident from that day onwards). From a procedural perspective, the individual must observe some steps in order to conclude his registration as tax resident in Portugal, notably to obtain a taxpayer number before the Tax Authorities and to register as a Portuguese resident, by providing proof of an address in Portugal 7. After the completion of the above mentioned step moving to Portugal and becoming a Portuguese tax resident, and provided the other requirement is met not having resided in this territory in the preceding five years an individual could apply for the NHTR status. This request must be submitted upon the registration as a Portuguese resident or by March 31 of the year following the one when the individual becomes resident. This request must be accompanied of proof that the requirement legally established are met, notably of a sworn statement evidencing that a given individual did not meet the residence criteria in the previous five years. 5 In 2015, the Individual Income Tax was reviewed by Law No. 82-E/2014, December 31, and amendments were introduced to the residence criteria. 6 Furthermore, it will be deemed as residents, individuals who exercise a public service on behalf of the Portuguese Government abroad or individuals who, on December 31 of a given year, are members of the crew of a vessel or of an aircraft used for the service of Portuguese resident corporations. 7 For example, a deed proving the purchase of a property in Portugal with the intent to occupy it as a permanent abode or a lease agreement.
The granting of this NHTR status depends on a formal approval by the Tax Authorities; nevertheless, after it is granted, it is maintained for a period of ten consecutive years from the registry year onwards. Since 2009, this regime has successfully attracted individuals from different nationalities, mainly due to the special tax regime granted to individuals becoming NHTR. 3) What does the NHTR regime look like? The tax benefits established under the NHTR regime provide, on one hand, for the reduced taxation (20% flat rate) of Portuguese source employment / professional or business income that derive from high value added activities and, on the other hand, for a broad exemption applicable to several types of foreign source income (as established by law). To fully understand the scope and benefits of the NHTR regime, it is relevant to briefly examine how regular residents 8 (i.e., individual that do not benefit from the NHTR status) are taxed. The Portuguese Individual Income Tax Code establishes six categories of income: (i) employment income (Category A); (ii) business or professional income (Category B); (iii) investment income (Category E); (iv) rental income (Category F); (v) capital gains (Category G); and (vi) pension income (Category H). As a rule, the taxable income obtained by regular resident individuals in Portugal will be aggregated and subject to the progressive tax rates applicable, and that can range from 14,5% up to 48%, depending on the level of income. However, certain types of income, such as investment income or rental income, can be subject to flat rates. Currently, the tax rate applicable is of 28% (except in case of income paid by entities located in blacklisted jurisdictions as defined by law, in which case an aggravated tax rate of 35% applies). For 2016, there are also additional taxes: 8 Resident individuals, including NHTR, are taxed on their worldwide income.
a progressive surtax up to 3.5% 9 applicable to the income (regarding the aggregated income and some of the income subject to special rates) exceeding the annual value of the national minimum wage ( 7,420); and an additional solidarity charge ranging between 2.5% (on taxable income exceeding 80,000 up to 250,000, per individual) and of 5% (on taxable income exceeding 250,000 per individual). A. Portuguese Source Income In respect to NHTR, and as mentioned above, Portuguese source income from employment (category A) or business (Category B) that derives from high value added activities is taxed at a flat rate of 20%, instead of the progressive tax rates generally applicable to regular tax residents, which can go as high as 48%. The Portuguese Government has published a list of the activities 10 that qualify as high value added activities of a scientific, artistic or technical nature. Included on this list are, among others, activities of: Auditors, Medical doctors, Engineers, Teachers, Investors, Directors, and Managers. It is important to highlight that the flat rate of 20% only applies to employment or business income and, consequently, if an individual obtains, in Portugal, income from any other category pensions, rental income, capital gains or investment income it will be taxed according to the general tax rules applicable to any tax resident in Portugal. 9 This surtax was a temporary measure introduced by the Government in 2013. The current Government has already announced that this surtax will be abolished in 2017. 10 Ministerial Order No. 12/2010, January 7.
Furthermore, such employment or business income must be obtained in a high value added activity included on the list published by the Government. The Portuguese Tax Authorities tend to be extremely demanding in this matter, requiring proof of the type of activity performed, such as a statement from the employer, the appointment as director or manager, etc. B. Foreign Source Income As per foreign source income, the NHTR regime establishes that such income is exempt in Portugal provided it is or may be taxed in its State of Source, in accordance with a double tax treaty entered into between Portugal and the State of Source 11 (or the O.E.C.D. Model Convention). This exemption rule can represent attractive planning opportunities for individuals wishing to move to Portugal. In fact, and as it will be described further ahead, there are several instances where the exemption is allowed even though the income is not subject to tax abroad notably, one relates to pensions and the other relates to investment income. In what concerns foreign pension income, pensioners who move to Portugal may achieve a full exemption on foreign source pensions because Portuguese law currently establishes alternative criteria. In fact, this exemption is applicable whenever: (i) the income is subject to taxation in another country with which Portugal has entered into a double tax treaty, or (ii) the income is not deemed to be of Portuguese source in accordance with Portuguese internal law 12. Considering that Portuguese law does not deem as Portuguese source, the pension income paid by non-resident entities, as a rule such income is exempt in Portugal. Moreover, most double tax treaties executed by Portugal grant exclusive right to tax to the state of residency and, thus, the pension income may be received without any taxation at source. 11 Portugal has a broad network of Double Tax Treaties. To date, Portugal has concluded 71 Double Tax Treaties, of which 67 are already in force. 12 This regime is only applicable to the extent that the taxpayer has not deducted contributions made in Portugal to the social security system that produced the pension income
Regarding foreign source business income from high value-added activities, investment income, capital gains and rental income, the exemption is applicable whenever such income (i) may be subject to taxation in another country with which Portugal has entered into a double tax treaty, or (ii) in the absence of a double tax treaty, the income could be taxed in another country, region or territory under the terms of the OECD Model Convention on Income and Capital, construed in accordance with the observations and reservations made by Portugal, and is not deemed to be of Portuguese source in accordance with Portuguese internal law. It should be bore in mind that, in connection with the income listed on the previous paragraph, no effective taxation is required in the State of Source. Although a broad exemption is set forth under the NHTR regime, it should be noted that, in what concerns investment income, this benefit, as a general rule, only applies to income from traditional investments generating interest and dividends. It does not apply to other forms of investment income. In fact, Portuguese domestic legislation contains a broad definition of the term investment income, which includes, inter alia, income items arising from swaps, life assurance products, investment certificates, and trust distributions. Regarding these latter investments, the understanding is that the exemption does not apply, so it is fundamental that an individual evaluates and tailors an investment portfolio to become tax efficient under the NHTR regime or that an efficient ownership structure is put in place. The same concern over taxation exists for capital gains from the sale or exchange of movable assets. Most double tax treaties signed by Portugal provide that these gains can be taxed only in the residence State, which in this case is Portugal. The logical conclusion is that such gains cannot be exempt in Portugal under the NHTR. Again, careful planning is required prior to the establishment of tax residence. Foreign employment income is exempt in Portugal under the NHTR regime if (i) the income is subject to taxation in another country with which Portugal has entered into a double tax treaty, or (ii) in the absence of a double tax treaty, the income is taxed abroad and is not deemed to be of Portuguese source in accordance with Portuguese internal law. Therefore, foreign source employment income needs to be effectively taxed in the State of Source so as
to benefit from an exemption in Portugal and proof of such taxation must be provided to the Portuguese Tax Authorities. On a final note, it should be highlighted that Portugal has concluded a Double Tax Treaty with Belgium. Pursuant to such Treaty, dividends, interest and royalties can benefit from the exemption in Portugal; nevertheless capital gains arising from the sale of movable assets will not be exempt under the NHTR regime. 4) Are there any measures (pre-entry tax planning) that need to be taken before relocating to Portugal? Bearing in mind what was mentioned on the previous answer in respect to certain types of investment income, which may not be exempt under the NHTR regime in Portugal, it is recommendable that, prior to his/her displacement to Portugal, an individual evaluates his investment portfolio in order to optimize such investment under the NHTR. Such optimization could entail either a change on the assets composing the portfolio or the setting up of an efficient ownership structure. Furthermore, it should be noted that certain investment structures, such as trusts, may not be beneficial under this regime and, therefore, one should consider alternative options. Naturally, this requires a case-by-case analysis since the best alternative option may vary from individual to individual, as it depends on the type of structure or investment portfolio, of where such structure is located and on the revenues generated. An additional note to highlight that Portugal has implemented several anti-avoidance clauses that aim to tackle tax evasion and tax fraud. As a result of such provisions, the law sets forth an aggravated taxation 13 of income paid by entities located in a country, territory or region with a more favourable privileged tax regime 14, notably interest or dividends deemed obtained in such jurisdictions are taxed at a 35% tax rate (instead of 28% that generally apply in these cases). Needless to say in this respect that income from blacklisted jurisdictions cannot benefit from the tax benefits granted under the NHTR regime, and, as a result, an individual 13 Additionally, there is a risk of application of Controlled Foreign Corporations (CFC) rules, which will be addressed below. 14 The Portuguese Government published a list of the countries, territories or regions which have a more favorable tax regime. Among such blacklisted jurisdictions are jurisdictions such as the Cayman Islands, Monaco, Hong Kong, etc.
wishing to become NHTR should, prior to his relocation, evaluate the risks associated with entities located in blacklisted jurisdictions. 5) Is a fiscal step-up being granted as to value of the assets of new arrivals? Does it apply for both income as gift and inheritance taxes? Does Portugal currently impose an exit tax when NHTR leave again? On a preliminary note, it should be stressed that there is no wealth tax in Portugal and, as such, only the income received is subject to taxation. The only exception to this rule refers to bank accounts held abroad, which must be identified on the tax return annually submitted by Portuguese tax residents, including NHTR. Notwithstanding, there is only a duty to identify the IBAN and BIC number and not to disclose any additional information regarding the bank balance or the underlying investments. Given the above, and when relocating to Portugal, an individual does not have to report the assets held abroad to the Tax Authorities but only to declare the income obtained. Portugal does not impose an exit tax on individuals who terminate their residency in Portugal (including NHTR). Notwithstanding, Portuguese resident nationals mooving to a black listed jurisdiction shall continue to be deemed Portuguese residents in the said year and in the following four years unless evidence is placed before the Tax Authorities showing that there are reasonable motives for moving to the jurisdiction. 6) How are trusts, foundations and/or offshore arrangements treated fiscally in your country on behalf of NHTR? Portugal does not recognize the concept of trusts, save in the context of the Madeira Free Trade Zone, which raises some uncertainties as to their tax and legal treatment. In view of this, and under Portuguese Law, we tend to consider that a trust should be viewed as a contract and, as such, all transactions involving a trust will be deemed to be made with the trustees, as legal owners of the trust assets, rather than with the beneficiaries of such trust. From a tax perspective, the Individual Income Tax Reform introduced significant amendments to the taxation of these structures. Trust related income is to be taxed as follows:
(i) Income which, during the life of the trust, is paid to, or placed at the disposal of, a beneficiary who is resident in Portugal will characterize as investment income and taxed at a rate of 28% (this tax rate is aggravated to 35% if such income is paid by an entity which is resident of a black listed jurisdiction); (ii) Income derived from the liquidation, revocation or extinction of the Trust will: Characterize as capital gains 15 if the beneficiary, being resident in Portugal, is the settlor of such trust, and taxed at a rate of 28% (this tax rate is aggravated to 35% if such income is paid by an entity which is resident of a black listed jurisdiction); Characterize as a free transfer if the beneficiary, being resident in Portugal, is not the settlor of the trust, and taxed at a 10% rate. As per foundations, there is no tax planning benefit, aside from charitable deductions, for a family to create an association or a foundation in Portugal, as the capital transferred to structures such as associations or foundations, and income generated at the level of these structures, cannot be used for the private benefit of the family. Under the NHTR regime, and bearing in mind what was mentioned in respect to the taxation of certain types of income, note that these structures do not present an advantage, since the exemption does not apply. Furthermore, and in the event an individual holds an offshore structure, he/she should avoid the contingencies associated with locating such structure in a blacklisted jurisdiction, which could entail not only the application of an aggravated tax rate of 35% to income paid, but also of CFC rules. In Portugal, CFC rules apply: (i) to legal entities subject to Portuguese Corporate Tax and to resident individuals; (ii) who, generally speaking, hold at least 25% of the shares, voting rights, rights over the income or over the assets of an entity established outside of Portugal; (iii) which is subject to a favorable tax regime. A non-resident entity is deemed to be subject to a more favorable tax regime if it s located in a territory which is included in the blacklist provided in a Ministerial Order of the Finance Minister, when it is 15 The capital gains correspond to the difference between the value of the assets supplied by the settlor of the Trust at the time of the constitution of the Trust and the amount derived from the liquidation, revocation or extinction of the Trust.
exempted or excluded from a tax similar to corporate income tax, or the effective tax burden of the foreign company is lower than 60% of the corporate income tax that would have been levied on that company were it established and taxed in Portugal. The consequences of the application of the Portuguese CFC rules are the following: income of the foreign corporation is allocated to the Portuguese resident shareholder in proportion to his shareholding and is added to his taxable income, regardless of whether this income has actually been distributed to the shareholder; and; when income is actually distributed, they will be reduced by the amount previously taxed under Portuguese CFC rules. 7) Are the applicable gift and inheritance tax rates advantageous as well for NHTR? Currently, there is no inheritance tax in Portugal. Instead, gifts, donations or transfers causa mortis made to individuals are subject to the Stamp Duty. Stamp Duty is due on a territorial basis, so only the free transfer of assets deemed located in Portugal is subject to taxation. At present, all lifetime and inheritance gratuitous transfers to individuals are subject to Stamp Duty at a rate of 10%, except where the beneficiary is the deceased s spouse, civil partner, ascendant or descendant. However, recently the Portuguese Government announced that an inheritance tax will be introduced in 2017 for inheritances with a global value of above 1 million, although no further information was disclosed on the taxable basis of this tax. Conclusion The NHTR regime, together with the Golden Visa program, are excellent opportunities and incentives for nonresidents wishing to move to Portugal. For these reasons, Portugal has received in the recent years a significant number of NHTR applicants and wishes to continue increasing such number by every year.