Nhr - exempt from taxes in Portugal.

These types of income from abroad commonly could be exempt from taxes in Portugal:

For domestic income, there are also special fiscal advantages for an NHR, provided that those earnings come from one of the eligible professions, regardless of whether self-employed or an employee. Emigrating to Portugal can be worthwhile for professionals in the eligible fields, particularly if they are able to earn income from abroad. The following professionals can benefit from the fixed rate of 20% on domestic income or tax-exemption on foreign income. See list below.

An NHR cannot get out of contributing to Social Security, so an extra 3.5% is to be added on as soon as they exceed the annual minimum wage of €7,070. The minimum salary also has to be taken into account for all those who don't earn direct income in Portugal. These contributions are calculated according to the minimum wage amount. 
34.75% of the minimum salary per year equals around €2,300 in social security contributions, 11% of which can be deducted from possible taxes. 

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Types of income exempt from taxes in Portugal:

  • Dividends, revenues and income from the renting of property
  • Income from the sales of property, boats and aircrafts
  • Royalties (often not able to be taxed in the country of origin)
  • Income from specific professions (also often not able to be taxed in the country of origin)

The Portuguese progressive taxation scheme:

The Portuguese progressive taxation scheme is quite restrictive. Therefore, the maximum tax liability in Portugal can reach 56.5% of revenue, even without Social Security. Obviously,  the  Portuguese don't consider their country to be a tax haven. 

 

€0-7,000: 14.5%

€0-14,000: 28.5% – €980

€20,000-40,000: 37.5% – €2,680

€40,000-80,000: 45% – €5,880

Over €80,000: 48% – €8,280

Up to €250,000: 2.5% surcharge

Over €250,000: 5% surcharge

The first €10,000 of intellectual property, on the other hand, is exempt from taxes. And alone 50% of the income resulting from own creations is taxed. In situations where revenue does not fall under the NHR tax regime, capital gains will be taxed at a rate of 28.5%. This, for instance, refers to speculative earnings from the sale and purchase of shares that, unless you have a complex business structure, will not be exempt from taxes under the NHR regime. There aren’t any capital or equity taxes, nor any taxes on inheritances or gifts made within the family. There are taxes on the purchase of land and real estate.

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Professions benefitting from the fixed tax rate of 20%:

  • Archaeologists
  • Architects
  • Sculptors
  • Biologists
  • Programmers
  • Data processing specialists
  • Designers
  • Geologists
  • Engineers
  • IT consultants
  • IT experts and specialists
  • Theatre, radio, ballet and TV performers
  • Life science professionals
  • Medical practitioners
  • Painters
  • Musicians
  • News agencies and other reporting personnel
  • Psychologists
  • Scientific research and development professionals
  • Senior executives, except for directors
  • Singers
  • Tax consultants
  • University professors
  • Web developers and designers
  • Tax auditors
  • Dentists

HOW TO AVOID TAXES IN THEIR ENTIRETY AS AN NHR

- Tax-free earnings in Portugal are income earned outside of the country that, according to the DTA, could have been taxed in the country of origin but, in practice, are not. 

- This implies that earnings from certain professions, royalties and income from intellectual property, investment earnings and capital contributions, and non-governmental pensions are all tax-free in Portugal. 

- This is the case as long as these funds do not come from a tax haven on Portugal’s blacklist with which there is also no double taxation agreement. 

- Income from certain professions, foreign income from trade and self-employed work in the eligible professions are exempt from taxes in Portugal, provided that there is a possibility of taxing the income in its country of origin. According to the standard OECD model tax convention, the earnings should be taxed only in their country of origin as long as they cannot be allocated to other income categories. In practice, this means that foreign income from these professions is usually tax-free in Portugal (deducting Social Security fees). 

- However, in certain cases, there may be a limited tax liability in the country of origin, so taxes would have to be paid there. This is the case if, for example, you have a company or office in the respective country. 

- It is important to note that the withholding tax has been abolished in the EU, but the possibility of taxation in the source state still exists. For all investment income abroad, you should consult the relevant double taxation agreements, which also include withholding tax on investment income. Generally, however, in the EU, capital gains can flow tax-free to an NHR in Portugal. 

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Taxation possibility  in the standard OECD model tax conventions:

  • Dividends cannot be subject to a tax rate of more than 15%
  • Interests cannot be subject to a tax rate of more than 10%
  • Real estate income includes income from forestry and agriculture
  • Capital gains from the sale of a property include shares that derive more than 50% of their value from real estate.

Pensions tax-free

- Pensions for people who have not been in civil service are subject to taxes in their country of residence according to the OECD model DTA. Provided that Portugal does not tax these pensions for non-habitual residents, this type of pensioners does not pay taxes on their pensions in Portugal. 

- Revenue from international employment depends on the country of origin, whether or not it is taxed there, given the employment is in the eligible professions.

- The only income that has previously been taxed abroad is tax-exempt. If it has not been taxed at all, it is recognised Portuguese income and falls under the fixed tax rate of 20% if originated from an eligible profession. Nonetheless, the OECD standard tax code states revenue from employment could, in theory, be taxed in the country of origin. Therefore, if you live in Portugal as an NHR and you are in this position, you can generally pick the country in which you prefer to be taxed. 

- Foreign earnings are tax-free if the option of taxation in other countries is established in the applicable DTA. Yet, this is not customarily the case for some types of revenue. This is mainly for royalties and speculative gains. According to the OECD model DTA, these incomes are only subject to taxes in the country of residence and not taxed in the country of origin. This implies that a resident in Portugal under this special regime has to pay taxes on royalties and stock market profits at the normal rates in Portugal.

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Pay special attention to the following factors to be able to be exempt from taxes.

  • Foreign income
  • The possibility of taxation in other states under the double taxation agreement
  • Income cannot come from tax havens with no DTA

Creating a foreign company  

- Particularly, a capital return tax of 28.5% on speculative gains, and a progressive tax on royalties, but if you manage intellectual property, this tax lower by half. 

. This could be achieved by the founding of a foreign company that gained this income with certain tax privileges or even tax-free. The profits of the foreign corporation could be distributed tax-free in the form of dividends, a type of benefits that could be taxed in the country of origin.

- The law does not concern companies in the EU, neither those based in low-taxation countries, such as Cyprus, Malta or Bulgaria. In reality, however, active management is still a problem. To avoid paying taxes on a foreign company that you control as an NHR, the corporation needs at least 2 foreign managers. They must be genuine managers rather than fiduciaries so as to be able to withstand possible inspections. Moreover, board meetings must not be held in Portugal and, usually, doing business with Portuguese firms should be avoided. As long as these terms are upheld, you can get your income in the form of tax-free dividends.

For instance, take an NHR with a Malta company. It is a good option because all sales and purchases of shares and returns on stock exchange investments of Malta companies are tax-free. Since Malta is in the EU, the Portuguese CFC rules are not enabled. Besides, if the majority of managers are not residents of Portugal, the organisation will not have to pay taxes there. Dividends distributed from Malta could be taxed in the country of origin according to the relevant DTA (but they are not), and are exempt from taxes when distributed to an NHR in Portugal because they come from a corporation in the EU. Obviously,  if this applies to you, you may be wondering why you are not emigrating directly to Malta to simplify everything. The requirements for tax-exemption on domestic and foreign income are much simpler and the exemption is also valid for 20 years, instead of 10. 

As you may have noticed, the NHR regime in Portugal is relatively complicated. You must pay special attention to the following factors to be able to be exempt from taxes.

  • Foreign income
  • The possibility of taxation in other states under the double taxation agreement
  • Income cannot come from tax havens with no DTA

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- For instance, take an NHR with a Malta company. It is a good option because all sales and purchases of shares and returns on stock exchange investments of Malta companies are tax-free. Since Malta is in the EU, the Portuguese CFC rules are not enabled -


The NHR regime in Portugal is relatively complex

This means that if you can live on your returns and capital gains as a private investor or if you are a pensioner (not valid if you have a state pension, as a public servant), then the NHR regime to live in Portugal is a good option. However, if you still have an active business or income from stock exchange investments, you must watch out for the tax avoidance prevention laws and the effective management regulations. In order to make the most of being an NHR in Portugal and not pay taxes on your foreign company you need:

  • A company in the European Union
  • The majority of managers (2) to be non-Portuguese
  • Non-Portuguese clients
  • The DTA must state that there is a possibility of taxation on dividends in the country of origin

Another alternative to be able to enjoy the advantages of the regime for non-habitual residents is being lucky enough to belong to one of the eligible professions (see above). If this is the case, as a freelancer or entrepreneur you will pay a tax rate of 20% + 3.5% on your domestic income and you can, under certain circumstances, remain free from tax on your foreign income.

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What you need:

  • A company in the European Union
  • The majority of managers (2) to be non-Portuguese
  • Non-Portuguese clients
  • The DTA must state that there is a possibility of taxation on dividends in the country of origin

HOW TO BECOME AN NHR: REQUIREMENTS

Obtaining tax-exemption in Portugal is difficult, however, by emigrating to Portugal and applying for NHR status, it can become very easy. In other words, if you qualify for obtaining tax-exemption, then emigrating to Portugal is the least of your problems. Generally, you should only pay attention to these 3 aspects in order to become a resident in Portugal and enjoy NHR status:

  1. Residency permit in Portugal. You can get this as a citizen of the EU/EEA or, if you do not have an EU passport, with the so-called “Golden Visa” for investors.
  2. Fiscal residency. You cannot have been taxed in Portugal during the last 5 years.
  3. Application for non-habitual residence status. Once you have moved to your new residence or, at the very latest, before the 31st of March of the following year, you have to apply for NHR status.

The granting of NHR status is not automatic, but you will not be denied it if you meet all the conditions. In order to be considered a fiscal resident in Portugal, there are some clear rules, which can be particularly beneficial for digital nomads and people that travel often. You only have to meet one of the following requirements:

  • Stay for a minimum of 183 days in the country, whether interrupted or continuous
  • Have a house available and have “intention” to live there
  • Be a member of a Portuguese ship or aircraft crew
  • Have a spouse or children in the country
  • Be employed overseas by the Portuguese state
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Requirements

  • Stay for a minimum of 183 days in the country, whether interrupted or continuous
  • Have a house available and have “intention” to live there
  • Be a member of a Portuguese ship or aircraft crew
  • Have a spouse or children in the country
  • Be employed overseas by the Portuguese state

Buy a property and rent it out

If you are an NHR in Portugal but you prefer not to live there, the best thing is to buy a house and rent it out through an agency. If your contract allows it, you could also sublet your rented home. Depending on the house’s location, it is possible that, given a large number of tourists in Portugal, you could even make a profit.

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When applying, you have to do the following:

  • Show or apply for a Portuguese tax identification number
  • Show your passport or national identity card
  • Prove that you have housing available in Portugal
  • You may have to show the residency permit granted by the municipality

IS LIVING IN PORTUGAL AS AN NHR WORTH IT?

Settling down in Portugal can be beneficial. NHR status does not appear on the Portuguese residency permit and, in the eyes of your country of origin, you live in a Western country with high-taxation. In other words, there is certainly no tax inspector who will find fault with you emigrating there.

Furthermore, the country is extremely diverse and attractive. Portugal is a modern country where you will find everything you need. It also has one of the most advanced personal freedom policies in the world. For instance, activities such as prostitution and drug use are legal and there are hardly any arbitrary restrictions on alcohol, smoking, homosexuality, etc. Even as an emergency refuge, if there are wars, crises or large-scale conflicts, Portugal and especially its islands, the remote Azores or Madeira, not only offer warm weather throughout the entire year, but are also isolated, and have incredible nature and the ability to survive self-sufficiently.

It is worth mentioning that it is possible to relocate companies to Madeira in a very tax-beneficial way (5% corporation tax). Those able to meet the requirements for tax-exemption have a very good option in Portugal.


Do you need help becoming an NHR?

If you are not sure whether the NHR regime is the most suitable for you, you can go over the programme in a consultation session and, in doing so, clarify the more suitable alternatives for tax-exemption. We can put you in touch with one of our local lawyers who we know are knowledgable and experienced as to the complex regulations. We offer a list of lawyers you can choose from if you want assurance, who will help you to analyse the double taxation agreements relevant for your foreign income. You might, of course, opt to make your own choice and instruct a lawyer. Nevertheless, we do not recommend you to try to submit tax returns in Portugal by yourself but look for a tax advisor with experience in the NHR regime.

Regardless of what you decide, we hope we have been able to show you the interesting opportunities that this country offers which you probably know as a holiday destination but certainly not as a tax haven.

Q&A

If you have further questions about the NHR, feel free to get in touch with us. We will pass them on to competent legal advisers or accountants. 


Disclaimer:
Nothing in this analysis is to be considered legal advice. It is solely an interpretation of the information we have accumulated through research and various professionals dedicated to this topic. For comprehensive explanations of specific subjects, please consult your lawyer. If you don’t yet have a lawyer, contact A1 ALGARVE REAL ESTATE to receive an unbiased list of competent and knowledgeable lawyers in the Algarve.

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Check List

  • Not sure whether the NHR regime is suitable for you?
  • Get in touch with us. We will pass you on to competent legal advisers or accountants. 
  • We offer a list of lawyers you can choose from who will help you to analyse the double taxation agreements relevant for your foreign income.
  •  You might opt to make your own choice and instruct a lawyer of your own. 
  • We definitely do not recommend you to try to submit tax returns in Portugal by yourself but look for a tax advisor with experience in the NHR regime.