Tax benefits

Tax benefits

10-YEAR TAX EXEMPTION SCHEME
 
Portugal may not be the first country that comes to mind when talking about favorable tax regimes but, in fact, Portugal offers a very attractive tax regime to newly resident individuals, referred to as Non-Habitual Residents (NHRs).

For a period of 10 years this regime provides a flat income tax rate of 20% for qualifying employment, self-employment and pension income and a tax exemption for almost all foreign source income.

Portugal has signed 67 double tax treaties, 61 of which are in force, more than 50 investment protection agreements, 15 tax information exchange agreements, most of which already in force (e.g. Bermuda, Cayman and Gibraltar) and several social security agreements.


How can a person gain status as a non-habitual resident?

- Not being a Portugal resident for the past 5 years;

- Go to a local tax office and register as a Portugal tax resident. For this to be possible, you have to stay in Portugal for 183 non-consecutive or consecutive days or have a home in Portugal on December 31st of that year with the intention to hold it as a habitual residence.

- Request that the status of Non-Habitual Resident be attributed at the time of registering as a tax resident in Portugal, or by 31st March of the year following that in which you become a resident in Portugal.


Once Non-Habitual Resident Status has been obtained, what is the taxation rate and incidence applicable to domestic source income?

The applicable rate of taxation is 20% for both self-employment and employment cases. A surcharge of 3.5% is also currently applicable.

This taxation applies to income derived from high added value activities of a scientific, artistic or technical nature:
- Engineers, architects and related fields
- Auditors
- Actors, musicians and fine artists
- Technicians, liberal professions and other related fields
- Psychiatrists, dentists and doctors
- Teachers
- Investors, directors and managers, when part of companies covered by the contractual regime provided for in the Investment Tax Code
- Senior managers


Once Non-Habitual Resident Status has been obtained, in which cases is foreign income obtained by Non-Habitual Residents exempt from taxation in Portugal?

In the case of pensioners and retired people, when:

- Income is taxed in the source State, in accordance with the convention to eliminate double taxation, signed by Portugal and that State; or

- Income is not considered to have been obtained through a Portuguese source, according to the criteria stated in the IRS Code for personal income tax.

In the case of income derived from employment, when:

- Income is taxed in the State of origin, in accordance with the convention to eliminate double taxation, signed by Portugal and that State; or

- Income is taxed in another State with which Portugal has not signed any convention to eliminate double taxation, as long as the income is not considered to have been obtained in Portuguese territory, in accordance with the criteria in article 18 of the IRS Code for personal income tax.

In the case of income from self-employment (through the provision of services of a high added value, of a scientific, artistic or technical nature, or through intellectual or industrial property, investment income, rental income, capital gains income or other increases in equity), when:

- Income may be taxed in the source country, territory or region, in accordance with the convention to eliminate double taxation, or;

- In the event that no convention to eliminate double taxation has been signed, the OECD model convention may be applied (taking into consideration the observations and reservations made by Portugal) and as long as the source country, territory or region does not have a privileged tax regime, and as long as the income is not considered to have been obtained in Portuguese territory, in accordance with the criteria in article 18 of the IRS for personal income tax.


OTHER TAX BENEFITS

- Tax exemption for gifts and inheritance tax to spouse, descendants or ascendants. Inheritances or gifts to other individuals will be either not taxable, due to generous territoriality rules, or subject to a flat 10% stamp tax rate.

- No wealth tax and free remittance of funds either to Portugal or abroad.

- Beneficial treatment for pensions and other life insurance products (including unit linked) may further significantly reduce the effective tax burden on capital invested.

- Companies licensed to operate in the MIBC, including branches of non-resident entities, benefit from a 5% flat Corporate Income Tax (CIT) rate until 31 December 2020, applicable to income derived from transactions with non-residents (or with other MIBC entities), limited to thresholds of taxable income, and depending on the creation of jobs. Exemption from withholding tax applies on dividends, interest, royalties and services.

- Portuguese companies may take advantage of EU non-discrimination rules and EU Directives on mergers, dividends, interest and royalties, as well as Portuguese double tax treaties.

- Dividends and capital gains obtained by Portuguese companies can benefit from a participation exemption regime, which make Portugal interesting as a location for investments abroad, including investments in Brazil and the Portuguese speaking countries in Africa.