Many people, such as entrepreneurs, professionals, pensioners and high net worth individuals, may organise their affairs so as to take advantage of the Portugal's non-habitual resident regime, thereby possibly enjoying a life free of income tax. This is in addition to the non-existence in Portugal of wealth tax or of inheritance/gift tax for close relatives.
Taxation of Non-Habitual Residents
Under this regime, the following taxation rules apply:
- Foreign-source self-employment or sole trader income derived from an eligible occupation (see below), royalties, capital gains and investment or rental income will be exempt from Portuguese tax as long as it may be taxed in the source country either under a double taxation treaty or under the OECD model tax convention, and it is deemed as not being Portuguese-source income under applicable Portuguese law and not sourced from a blacklisted tax haven not having a double tax treaty with Portugal.
- Foreign-source employment income will be exempt from Portuguese tax as long as it is liable to tax (at whatever rate) in the source country either under a double taxation treaty or under the OECD model tax convention, and it is deemed as not being Portuguese-source income under applicable Portuguese law.
- Occupational pension income will be exempt from Portuguese tax as long as it is liable to tax in the source country under a double taxation treaty or it is deemed as not being Portuguese-source income under applicable Portuguese law.
If your occupation is eligible (see below), Portuguese-source employment or self-employment / sole trader income will be taxed at a flat rate of 20%, while other Portuguese-source types of income will be taxed at the normal rates applicable to resident taxpayers, the calculation of the applicable marginal tax rate taking into account all income, including exempt income. A surcharge of 3.5% applies to the slice of the total taxable income (whether subject to progressive or flat rates) which exceeds for each taxpayer the minimum guaranteed wage of EUR 7,070 p.a.
In Portugal there is no wealth tax or capital duty, and an inheritance or a gift received by a spouse, descendant or ascendant is tax exempt. Inheritance or gifts received by other individuals will be either not taxable under territoriality rules, or else may be subject to a flat 10% stamp duty.
Applicability of Double Taxation Agreements
One interesting feature of this regime is that many double taxation treaties (of which Portugal signed 71) grant the source country the possibility of taxing income paid to residents of the other country, although in practice many countries abstain from using this possibility so as to attract foreign investment. This means that in practice most types of income will often be zero taxed in the hands of the “non-habitual resident”, since Portugal will not tax them merely on account that they may be taxed in the other country.
Taking the UK/Portugal treaty and 3 types of income as an example, if you are a resident of Portugal but receive income from the UK, then, in respect of such income, the UK has the power to:
- Tax dividends under article 10, although it does not if the recipient is not a UK resident
- Tax royalties under article 12, although it does not if the recipient is not a UK resident
- Tax income from professional services, but only in case you have "a fixed base regularly available" to you in the UK "for the purpose of performing (such) activities", as per article 14, although it does not if the recipient is not a UK resident
I.e. if you receive dividends, royalties or fees (subject to the availability of a "fixed base" in the UK in the latter case) from a UK company, such income may be subject to tax in the UK under the UK/Portugal agreement. As a consequence, although in practice it will not be taxed in the UK, it will not be taxed in Portugal either if you benefit from the "non-habitual resident" status.
Capital gains deserve careful consideration. Under article 13, they are treated differently according to whether they originate from the disposal of immovable or movable property. While capital gains from the alienation of real estate may under the double taxation treaty be taxed in the country in which the property is located and will therefore be exempt in Portugal, capital gains from the alienation of other types of property (notably securities) are taxable only in the beneficiary's country of residence. As such, capital gains from the sale of securities will be subject to tax in Portugal, currently at a flat rate of 28%. Before becoming a non-habitual resident of Portugal, tax planning advice should therefore be taken by anyone who anticipates significant capital gains from the sale of securities.
This is, of course, only a superficial initial approach and it is recommend that you take proper tax advice in order to make sure all your circumstances are taken into account.