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.
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.
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.
To obtain the “residente nao habitual” (NHR) status in Portugal you will have to:
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:
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).
For income earned abroad, you have to distinguish between:
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:
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:
The application of the IRS exemption method to the above types of income, therefore, depends on different conditions:
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:
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 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:
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:
Under NHR rules, passive income earned abroad is exempt from personal income tax, provided that:
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:
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