STATUS OF NON-HABITUAL TAX RESIDENT IN PORTUGAL (RNH)

Here is the opportunity available to residents in Portugal to receive your pension and other types of income tax-free

ABOUT THE SCHEME IN BRIEF…

Portugal has recognised the status of non-habitual tax resident since the Decree-Law of 23 September 2009. This scheme allows those wishing to become residents in Portugal to benefit from favourable taxation of foreign-source income, with exemption from taxation in Portugal and the possibility of double exemption, both in Portugal and in the country where the income is paid, provided there is a Double Taxation Agreement.

This scheme represents a major step forward by offering Portugal a tax-free jurisdiction for individuals with income from a pension.

Non-retirees who declare their foreign income there may also benefit from this preferential scheme, such as business and professional income, investment gains, shareholdings, dividends, property income and capital gains.

This attractive scheme also covers income from high value-added activities, which benefit from a special tax rate of 20%.

The only requirement to benefit from this preferential treatment is to become a Portuguese tax resident, provided you have not been a tax resident in Portugal during the previous five years. This status can be maintained for 10 years.

WHY WAS THE SCHEME INTRODUCED?

The Non-Habitual Resident (NHR) scheme was introduced in Portugal in 2009. One of the main objectives of this scheme was to attract individuals and their families to Portugal by making it fiscally advantageous to become a tax resident in Portugal. Consequently, Portuguese NTRs are able to grow their wealth in a white-listed jurisdiction, manage their assets whilst potentially benefiting from tax exemptions, pass on their wealth without inheritance or gift tax, specifically to children or a spouse; and/or enjoy their retirement without tax on their pension.

WHO CAN APPLY FOR REGISTRATION AS A NON-HABITUAL TAX RESIDENT IN PORTUGAL?

Anyone who:

1) Is not considered a Portuguese resident in any of the five years preceding the year in which they wish to begin being taxed as a non-habitual resident;

2) During a calendar year, meets one of the following conditions:

• Staying in Portugal for more than 183 days (whether continuously or intermittently);
• Possession of a residential property on Portuguese territory as at 31 December, suggesting the intention to retain or use that property as a principal residence;
• Being, on 31 December, a member of the crew of a ship or aircraft in the service of an entity whose residence, registered office or effective management is located in Portugal;
• Being, on 31 December, the spouse of a Portuguese tax resident.

Circular 9/2012 of 3 August 2012 simplified the procedure by making registration as a non-habitual resident subject to the taxpayer’s declaration that they have not been a Portuguese tax resident during the last five years.

A taxpayer recognised as a non-habitual resident acquires the right to be taxed as such for a period of 10 consecutive years from the year, inclusive, of their registration as a resident on Portuguese territory.

To obtain RNH status, an application must be submitted to the Tax Authority, accompanied by a declaration certifying that the taxpayer has not been resident in Portugal during the five years prior to arriving in Portugal.

Should the Tax Authority have doubts regarding the accuracy of the information provided, additional evidence may be required (such as tax residence certificates or other documents capable of proving that the individual in question’s personal and economic ties were linked to another country during the five years prior to their arrival in Portugal).

Obtaining non-habitual tax resident status in Portugal entitles the beneficiary to tax benefits in respect of the following income:

• Income from employment or self-employment, earned in Portugal, where it arises from ‘high value-added’ activities in accordance with a list approved by Ordinance No. 12/2010 of 7 January;
• Income from employment or self-employment obtained abroad, where it arises from ‘high value-added’ activities in accordance with a list approved by Ordinance No. 12/2010 of 7 January.
• Passive income earned abroad;
• Retirement pensions received abroad.
• Income from employment or self-employment obtained in Portugal, where it arises from ‘high value-added’ activities, is subject to a specific reduced rate of 20%. Please note that a surcharge of 3.5% may be added to this specific rate of 20% (2013 and 2014).
• Income from employment arising from ‘high value-added’ activities received abroad is exempt from income tax (IRS in Portugal), provided that such income is effectively taxed in the source country in accordance with the rules laid down in the tax treaty between Portugal and the source country. If these salaries are not taxed in the source country, they will be subject to the preferential tax rate of 20%. Please note that a surcharge of 3.5% may be added to this specific rate of 20% (2013 and 2014).
• Income from self-employment may be exempt from income tax (IRS in Portugal) provided that such income arises from ‘high value-added’ activities and that it is subject to tax in the source country in accordance with the rules laid down in the tax treaty on the avoidance of double taxation concluded between Portugal and the source country. If no tax is levied in the source country, such income may nevertheless be subject to the preferential rate of 20%. It should be noted that a surcharge of 3.5% may be added to this specific rate of 20% (2013 and 2014).
• Passive income (interest, dividends, royalties, capital gains and other capital income, property income) of foreign source received by ‘non-habitual residents’ is exempt from income tax (IRS in Portugal), provided that such income may be taxed by the source country in accordance with the rules laid down in the double taxation agreement concluded between Portugal and the source country. It is not necessary for such income to be actually taxed abroad.

In accordance with the rules laid down in the tax treaty on the elimination of double taxation concluded between Portugal and the source country, foreign-sourced pensions received by non-habitual residents may be fully exempt from income tax (IRS in Portugal) if:

– These pensions are effectively taxed in the source country in accordance with the rules laid down in the tax treaty; or if,

– These pensions paid abroad are not of Portuguese source.

Please note that if the foreign paying institution has its registered office, effective management or a permanent establishment in Portugal, the pensions will be considered to be of Portuguese source.

Most tax treaties concluded by Portugal, based on the OECD model, provide for exclusive taxation by the taxpayer’s country of residence with regard to private pensions (whereas state pensions are taxed in the country of the paying authority).

The tax treaty between France and Portugal grants the exclusive right to tax private pensions to the State of residence.

This is a potential double exemption. Private pensions from Swiss and French sources would not be taxable in the country of origin and would also be exempt in Portugal.

CAN I RENT INSTEAD OF BUYING?

Yes. Renting is an option under non-habitual resident status. As is the case when you buy a property, if you rent a property, you may be required by the tax authorities to provide proof of your address in Portugal, which can be done by providing your tenancy agreement.

DO I NEED TO SUBMIT A DECLARATION OF ASSETS?

When applying for non-habitual resident status, you will not need to provide a declaration of assets. This will also not be required when you submit your first tax return. In each tax return, you will only be required to provide information on your annual income.

DO I HAVE TO PAY WITHHOLDING TAX ON MY INCOME AFTER REGISTRATION?

Once you have registered as a non-habitual resident in Portugal, you may apply for an international tax residence certificate from the Portuguese tax authorities. This document must then be sent to the tax authorities in the country where your income is sourced, which should enable you to be exempt from tax in that jurisdiction.

IS IT POSSIBLE TO BACKDATE MY REGISTRATION?

You can backdate your registration as a non-habitual resident in Portugal. If you register before 31 March of the tax year following your becoming a tax resident in Portugal, you will be able to file your tax return for the year in which you became a tax resident under the rules for non-habitual residents.

TAX RESIDENT IN PORTUGAL: WEALTH TAXES, WHAT YOU NEED TO KNOW

• There is no wealth tax in Portugal, so as a resident in Portugal, only local property taxes apply to the property you purchase.
• There is a municipal tax on the purchase of property, which can be up to 6%
• Property tax is also in place in Portugal; depending on the type of property, it ranges from 0.3% to 0.8%
• For indirect heirs, there is an inheritance and gift tax on property of 10.8%

INCOME FROM TRUSTS AND FAMILY FOUNDATIONS

With the exception of the island of Madeira, trusts are not recognised in Portugal, and the country has not signed the Hague Convention of 1 July 1985 on the law applicable to trusts and their recognition.

However, in the case of RNHs who are beneficiaries of a trust or foundation, the income paid to them should be exempt provided that the source country can tax such income under the rules set out in the DTA concluded between Portugal and that country, or, in the absence of a tax treaty, that such income can be taxed in the source country in accordance with the OECD Model Tax Convention on Income and Capital.

It goes without saying that this poses problems if the trustee is not subject to taxation in their country of residence, as is almost always the case. A detailed analysis of the treaties and the structure put in place is necessary (irrevocable trust, discretionary trust, etc.), but there is currently a great deal of uncertainty and caution is, in any event, advised.

For Portuguese residents taxed under the standard regime, trust distributions are taxed at a rate of 28%.

OTHER TAXES

Currently, there is no wealth tax in Portugal (there are, however, property taxes on buildings located in Portugal, see above).

Furthermore, with regard to inheritance and gift tax, transfers between spouses, to children or to the parents of the deceased/donor are exempt from stamp duty (‘Imposto do Selo’). In other cases, gifts and inheritances are subject to a 10% tax.

To become a non-habitual resident in Portugal, you must still comply with certain rules:

• You must stay in the country for a minimum of 183 days per year, whether consecutive or not.
• You will be required to open a bank account in Portugal and obtain a tax identification number
• Furthermore, to qualify for this status, you must not have been a tax resident for the previous five years.
• After 10 years as a non-habitual resident (RNH), you will have to leave Portugal... As once this period has elapsed, income tax based on the standard regime applies. Nevertheless, nothing prevents you from then taking up residence in Thailand (where an O visa also offers total tax exemption), waiting five years, and then, if you wish, returning to live in Portugal and once again benefiting from this advantageous RNH status.

BEFORE MAKING YOUR DECISION, THINK CAREFULLY!

A plan to move abroad must be carefully considered. You need to analyse and simulate your property investment and understand the tax benefits arising from this project.

Portugal has introduced this status to attract foreign investors and wealthy retirees.

Although all this is genuinely advantageous, it will change your life.

For more comprehensive information, following numerous visits and meetings, we have established close contacts with top-tier partners (speaking French, Italian, Portuguese and English)

These professionals will welcome you and advise you in your best interests