Residente não habitual (NHR) Portugal

The tax program “residente não habitual” (NHR) in Portugal is a system introduced by the Portuguese tax law in 2009, created to increase international competitiveness. The NHR tax system has proven to be very successful in attracting individuals with independent capital, retirees, and qualified professionals to become tax residents in Portugal, with no minimum or maximum period of residence.

Over a 10-year period, it allows qualified individuals to benefit from a special tax status with tax exemptions and flat taxes on certain income and capital gains. A move to Portugal is particularly interesting for all self-employed persons, employees and sole proprietors. If the application is successful, the special status is granted for 10 years. For those with Portuguese NHR status, 0% flat tax rate on foreign income (income, interest, dividends, capital, or real estate income), 0% wealth tax, and 20% flat income tax on domestic income for professions with increased added value apply as long as they have no connection to Portugal.

What are the advantages of the “residente nao habitual” (NHR) status in Portugal?

The NHR status allows you to benefit from a special tax regime regarding Personal Income Tax (IRS) for 10 consecutive years on income obtained in the country and abroad.

However, in order to increase the advantages of the regime, it is necessary to take into account not only the Portuguese tax legislation but also the tax legislation of the country of origin of the income, as well as the double taxation agreements (or the OECD model convention) applicable to foreign-sourced income and gains.

  • Residence in an EU member white-list country
  • There are no minimum stay requirements in Portugal (but care should be taken to avoid deemed tax residence in another country).
  • Possibility to enjoy a tax exemption on the following types of non-Portuguese source income for 10 years:
    • Dividends;
    • Interest;
    • Real estate income;
    • Capital gains from the sale of real estate, shares that derive more than 50% of their value from real estate, and ships/aircraft operated in international traffic;
    • Royalties and other income from know-how (with some exceptions);
  • Business and self-employment profits derived from eligible occupations (but check the relevant double taxation agreement in this regard).
  • Ability to pay taxes at a flat rate of 20% for at least 10 years on Portuguese-source employment income, fees, profits, and royalties, if derived from qualifying occupations.
  • Possibility to pay tax at a flat rate of 10% for at least 10 years on pensions and similar remuneration earned abroad.
  • Possibility of passing on wealth to a spouse, life partner, and direct descendants or ascendants without paying inheritance or gift taxes.

Benefits: Inheritance Tax

In addition to the non-existence in Portugal of wealth tax, or inheritance/gift tax for close relatives, the NHR regime essentially grants qualified individuals the possibility to become tax residents of a whitelisted jurisdiction, avoiding or legally reducing income tax on certain categories of income and capital gains not originating from Portugal for a period of 10 years.

What are the conditions to obtain the non-habitual resident status?

To obtain the “residente nao habitual” (NHR) status in Portugal you will have to: 

  1. Become tax resident in the country, without ever having benefited from the NHR regime
  2. Not have been tax resident in Portugal in the previous five years

What are the steps to obtain NHR status?

  1. Obtain a Portuguese tax identification number and register as a tax resident 
  2. Apply for NHR status until March 31 of the year following the first year.

How is the income obtained in Portugal taxed?

The “residente nao habitual” (NHR) in Portugal will allow the person receiving income obtained in Portugal to benefit from the application of a reduced Personal Income Tax (PIT) rate of 20%. 

To benefit from this rate, this income must come from one of the high added value activities of a scientific, artistic, or technical nature which, as of January 1, 2020, are the following: 

  • General directors and executive managers of companies; 
  • Directors of commercial and administrative services; 
  • Directors of production and specialized services; 
  • Directors of hotels, restaurants, commerce, and other services; 
  • Doctors, dentists, and stomatologists; 
  • University and college professors 
  • Experts in physical sciences, mathematics, engineering, information and communication technologies (ICT), among others 
  • Authors, journalists, and linguists; 
  • Creative artists and performing artists; 
  • Science and engineering technicians and professionals (intermediate level), and technicians and professionals in information and communication technologies; 
  • Market-oriented farmers and skilled workers in agriculture and animal production, forestry, fishing, and hunting.
  • Skilled workers in the industry, construction, and crafts, including skilled workers in metalworking, metalworking, food processing, woodworking, garment production, crafts, printing, precision instrument manufacturing, jewelry making, craftsmen, electrical and electronic workers 
  • Plant and machine operators and assemblers. Workers in the above occupations must have at least a level 4 qualification under the European Qualifications Framework or level 35 of the International Standard Classification of Education, or have five years of proven work experience.

At the end of the 10-year period, they will be subject to and taxed under the general rules set out in the Personal Income Tax Code (IRS).

Income earned abroad under the “residente nao habitual” (NHR) in Portugal 

For income earned abroad, you have to distinguish between:

  • Professional income and royalties
  • Pension income
  • Passive income.

Under the NHR regime, the following categories of income and capital gains from foreign sources (unless from a blacklisted tax haven that does not have a double taxation agreement with Portugal), will be exempt from income tax in Portugal if they can be taxed in the source country, although they are often not taxed in the hands of non-residents in the latter country either:

  • Dividends, interest, and real estate income
  • Capital gains from the sale of real estate
  • Royalties and associated income (but note that under some conventions the source country is precluded from taxing this income, in which case it will be taxed in Portugal)
  • Profits derived from eligible occupations;

Capital gains from the disposal of movable property (other than shares deriving more than 50% of their value from immovable property, or ships/aircraft operated in international traffic) will be tax-exempt if the respective double taxation agreement provides that they may be taxed in the source country, but this is not the case with the OECD model or most conventions, so some tax advice may be needed.

2.1 Business Income and Royalties

Employment income obtained abroad is exempt from IRS as long as it is effectively taxed in the source state, in accordance with the double taxation agreement between Portugal and this state.

Alternatively, if there is no double taxation agreement, the income will be exempt if it is taxed in the State of source and cannot be considered as earned in Portugal, according to the rules established in the IRS Code.

In turn, income from self-employment providing high added value services of a scientific, artistic, or technical nature, and certain royalties, will be exempt from income tax, provided that one of the following conditions is met:

  • That the income may be taxed in the source state under a double taxation agreement concluded between Portugal and that state; or
  • Where no such double taxation agreement exists, the income in question may be taxed in the source state in accordance with the OECD Model Tax Convention on Income and Capital. In this case, the income must not be considered earned in Portugal and must not come from a country, territory, or region with a clearly more favorable privileged tax regime that appears on the list approved by Portuguese law.

The application of the IRS exemption method to the above types of income, therefore, depends on different conditions: 

  • The application of the IRS exemption method to foreign-source employment income does not depend on whether or not it comes from a high value-added activity. Rather, it depends on whether or not such income is actually taxed (for example, by applying a withholding tax rate) in the source state;
  • The application of the exemption method to self-employment income depends on whether the income is derived from the provision of services (thus excluding income from any commercial, industrial, agricultural, forestry, or livestock activity), and from a high value-added activity. However, for the exemption method to apply, it is sufficient that this income can be taxed by the source state, as described above. It is not necessary that the income is actually taxed.

When income from employment, self-employment, or royalties does not meet the conditions described above, it will be taxed according to the general PIT rules. This means that the income will be subject to the progressive PIT rates up to 48% and, where applicable, the additional solidarity rate mentioned above will be added.

In sum, the double tax treaties (DTAs) signed by Portugal, or with the OECD tax treaty model, grant the possibility to tax most categories of income to the country of origin of such income. However, in practice, in order to attract foreign investment, many countries do not make use of this possibility to tax non-residents.

Since most of these categories will not be taxed in Portugal, because they can be taxed abroad, in practice most types of foreign-source income will be zero-taxed.

Taking the UK-Portugal Double Taxation Agreement as an example, if you are resident in Portugal but receive dividends from the UK, then the UK may tax them under article 10, although it will not do so if the recipient is not a UK resident.

On the other hand, Portugal will also not tax such dividends in the hands of a DTA, because the UK can tax them under the DTA. Thus, the “residente nao habitual” (NHR)  in Portugal can receive dividends from UK sources completely exempt from tax.

2.2. Pension Income

Taxpayers who become tax residents in Portugal on or after April 1, 2020, and who meet the requirements to obtain NHR status are subject to a personal income tax (PIT) rate of 10% on pension income earned abroad.

However, if they prefer, they may choose to aggregate their income and eliminate international double taxation by applying the tax credit method.

In addition, the exemption method applies to taxpayers who obtained NHR status before April 1, 2020, and to those who were considered tax residents in Portugal by that date (who apply for NHR status within the legal time limits). However, they can only use this method if:

  • they are taxed in the source state in accordance with a double taxation agreement between Portugal and this state, or when, according to the criteria of the IRS Code, the income is not considered as having been obtained in Portugal.

However, taxpayers who have already benefited from the NHR regime or who enrolled in it before April 1, 2020, may choose between one or the other:

  • the old rules, under which they maintain the exemption from taxation of pensions earned abroad when they meet the conditions established by law for this purpose, or join the new regime under which their pensions will be subject to taxation at a 10% rate for as long as the regime is applicable.

The above-mentioned 10% rate, which was introduced by the 2020 State Budget Law, also applies, under the terms set out above, to the following income:

  • Income received in situations of early retirement, pre-retirement or reserve, whether you work or not, and any benefits granted, on whatever basis, before you meet the mandatory social security requirements to move into retirement status. Alternatively, even if the employment contract is not yet in effect, if the income is subject to the condition that it is payable until those requirements are met. This rate applies even if, in any of the cases provided above, the income is owned by pension funds or other entities that replace the original debtor;
  • Amounts spent, whether mandatory or discretionary, by the employer in life insurance and operations, contributions to pension funds, retirement savings funds, or any complementary social security regimes, provided that they constitute vested and individualized rights of their beneficiaries; and those that, although not constituting acquired and individualized rights of their beneficiaries, are subject to advance payments, redemption, or any form of anticipation of their availability; and the aforementioned contributions, not previously subject to taxation, when received as capital, even if they meet the requirements imposed by mandatory social security schemes applicable to retirement, or if the person has already retired.

As an alternative to the exemption method, the taxpayer can opt for the tax credit method and, in this case, the taxpayer will be subject to tax in Portugal.

2.3 Passive Income

Passive income is capital income:

  • Interest
  • Dividends
  • Royalties (certain types)
  • Property income (real estate)
  • Capital gains

Under NHR rules, passive income earned abroad is exempt from personal income tax, provided that:

  • They can be taxed in the source state under a double taxation agreement concluded between Portugal and that state; or
  • In cases where there is no such double taxation agreement, the income in question may be taxed by the source state in accordance with the OECD Model Tax Convention on Income and Capital.

In this case, the income must not be considered earned in Portugal and must not come from a country, territory, or region with a clearly more favorable privileged tax regime that appears on the list approved by Portuguese law.

To correctly frame the taxation of passive income earned abroad, it is important to bear in mind that many debt instruments are issued by entities located in countries, territories, and regions with clearly more favorable privileged tax regimes that appear on the list approved by Portuguese law.

When this happens, the passive income resulting from the holding, transfer, or redemption of the debt instruments in question does not, as a rule, benefit from the income tax exemption that applies under the NHR regime.

Similarly, there are cases where, although the income obtained abroad has the nature of capital income, it does not fall under the definition of “interest” or “dividends”, as these concepts are defined in the double taxation agreements entered into by Portugal, and interpreted in accordance with the OECD Model Tax Convention on Income and Capital (taking into consideration the observations and reservations expressed by Portugal). These cases require a case-by-case analysis.

Finally, it is important to note that income benefiting from the exemption is, as a rule, subject to mandatory aggregation for the purpose of determining the rate to be applied to the remaining income. Furthermore, as an alternative to the exemption method, the taxpayer may opt for the tax credit method. In this case, the taxpayer will be subject to tax in Portugal at a rate of 28%, being credited with the lower of the following amounts:

  • The tax paid in the country that constitutes the source of the income, or
  • The tax that would have been paid if this income had been earned in Portugal.

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