Definition of Tax Residency
Generally, a taxpayer is considered to be a tax resident in Portugal if he remains more than 183 days. This counting refers to any period of 12 months beginning or ending in the year in question.
One is also resident if he/she owns housing that supposes the intention to maintain it and to occupy like habitual residence.
In the event of a conflict in the definition of the tax residence, the taxpayer must take into account the criteria for its definition in the Double Taxation Agreement signed between Portugal and the country of residence.
Consequently, for a taxpayer who is a tax resident in Portugal, the Personal Income Tax, IRS, will be levied on his or her worldwide income. The IRS tax rate can go up to 48%.
On the other hand if a taxpayer is not a tax resident in Portugal, the IRS tax is levied only on income obtained in Portugal, provided that they are not subject a withholding tax.
As such, a resident taxpayer in Portugal is required to file the IRS Form 3 reporting his/her worldwide.
A non-resident taxpayer will only have to file a declaration in the case of obtaining rental income Portuguese source.
Tax Residency and CRS
The Portuguese Tax Code requires all taxpayers who work and/or reside abroad to communicate the change of their tax address to the Tax and Customs Authority (“AT”) within 60 days.
However, a large part of expat communities abroad fail to do so. This leads them to incorrectly report their income earned in both countries.
This issue has become more “serious” if we take into account that banks now collect and report information on bank account balances held by non-resident (for tax purposes) clients to the tax authorities.
The opposite also happens: foreign banks will report the accounts held by taxpayers resident in their national territory to their respective tax authorities, who will then communicate this information to the tax authorities of the country of origin.
This exchange of information stems from the implementation of the Common Reporting Standards (“CRS”), created by the OECD and of which Portugal and 92 other countries are involved.
Among the 93 jurisdictions, offshores like the Cayman Islands, the British Virgin Islands, Channel Islands are also included.
These commons reporting standards aim to combat tax evasion and money laundering and can have an impact on the tax residency status of thousands of expats.
CRSs can then risk expats’ income to be taxed in their country of origin and in their country of residence, if tax residence status are not up to date in all jurisdictions.
It is therefore extremely important that expats update their tax residence status with the competent tax authorities.
A leading destination for all ages, Portugal is asserting itself as a major start-up destination in Europe, and with that hundreds of techies are willing to relocate to Europe’s oldest country. But it is not just the Web Summit’s new capital, Lisbon, who’s attracting new residents, Madeira is also getting its share. The Portuguese archipelago, one of most richest regions in Portugal, has an agreement with Saint Peter (all-year-round good weather) and therefore is attracting freshly retired residents from Central and Northern Europe every year.
Smart Tax Incentives for New Residents
The Portuguese Government is not relying on the country’s “good looks” to attract investment, in fact, it has resorted to an interesting tax policy aimed at luring and securing foreign investment in the long term. The tax policy? Portugal’s Non-Habitual Resident (NHR) Regime.The NHR Regime is a special tax residency status, applicable to all those who fall under the following conditions, regardless of nationality or age:
- Be a tax resident under Portuguese domestic legislation; and
- Not have been taxed as a Portuguese resident in the five years prior to taking up residence in Portugal.
Provided you check the previous requirements, you can benefit from a total tax exemption on foreign source employment, professional, pension, dividends, interest, capital gains and rental incomes. All you need to do is to make sure that those incomes are either taxed at source, in accordance with the applicable tax treaty or that are not deemed as derived from Portugal nor from a tax haven (in the case of dividends, interests, capital gains and rents).In case you work in Portugal and earn either employment or professional income from a Portuguese source, then those incomes will only be liable to a 20% flat tax rate, provided the job performed is deemed as a high-added value profession by law.
Investing in Portugal, from a tax standpoint, has never been easier!
Reduced Tax Costs for Start-Ups and Investors
Apart from the NHR Regime applicable to any Start-up employee that complies with the regime’s conditions, start-up founders can reduce their tax-related operational costs through the International Business Center of Madeira. This preferential and highly efficient tax regime grants significant advantages to companies structured in Madeira Island, of which I highlight the following:
- 5% corporate tax (against mainland’s 21%), in all international operations;
- Total exemption from withholding tax on dividend remittances from the Madeira companies, for non-resident shareholders;
- Exemption on capital gains payments, for non-resident shareholders.
Professional tax consultancy is required
Regardless of the tax benefits that someone may benefit from in Portugal, one thing is for sure: applying correctly for them is not a straightforward thing. Despite all the advantages there is a somewhat considerable amount of red tape and formalities that require an experience professional in order to swiftly apply and benefit from the existing tax incentives.Nevertheless, the next time you think Portugal as a paradise, just remember that the country is much more than good weather and good food.