Category Archives: Personal Income Tax

Getting Residency Right

When it comes to relocating to Madeira Island (or Portugal), confusion arises among expats between residency for taxation purposes and residency for immigration purposes.

Although both concepts are closely related to one another, one does not necessarily imply the other.

Expats looking into effective relocation to Madeira Island must first concern themselves with obtaining residency for immigration purposes. European Union Citizens, European Economic Area Citizens, and Swiss Citizens will formalize their residency status by obtaining the Certificate of Registration for EU/EEA/Switzerland citizens (CRUE) from the municipality where they live.

EU/EEA/Swiss citizens living in Madeira (or in any Portuguese territory) for longer than three months are must, according to law, formalize their right of residence. After three months, this class of citizens has 30 days to register themselves with the municipality.

Thir-country nationals (non-EU/EEA/Swiss citizens) can only formalize their right of residency if they have applied for the necessary visa with the Portuguese diplomatic mission in their country of residence. Alternatively, they can make an investment that might qualify them for residency. With the visa obtained, third-country nationals will have a given number of days to enter Portuguese territory and apply for the residency permit matching the Portuguese residency visa issued in their passport.

In the case of residency, for tax purposes, the Portuguese Personal Income Tax Code generally considers a taxpayer to be a tax resident if they remain more than 183 days in Portuguese territory. This counting refers to any period of 12 months beginning or ending in the year in question.

Further to the above, one is also a resident, for tax purposes, if they own housing that supposes the intention to maintain it and occupy it as a habitual residence. In the event of a conflict in the definition of the tax residence, one must consider the criteria for its meaning in the Double Taxation Agreement signed between Portugal and the country of residence.

It is theoretically possible for the Portuguese Tax and Customs Authority to consider an expat as a resident, therefore liable to worldwide income taxation, even if they are not registered for immigration purposes.

Alternatively, should an expat need to update his tax residency status, from non-resident to resident, they will need to produce evidence of effectively residing in Portuguese territory for immigration purposes.

Having that said, those effectively relocating to Madeira, for tax and immigration purposes, will need to follow these steps:

  1. Getting the visa in the passport,
  2. Flying to Portugal with the visa,
  3. Applying for residency with the Immigration and Border Services, under the visa on your passport,
  4. Receiving residency card from the Immigration and Border Services;
  5. Updating tax residency status with the tax authorities, based on the residency card issued;
  6. Applying for tax benefits.

Steps 1-4 are to be substituted by CRUE (as previously mentioned above).

Last but not least, we understand that Portuguese bureaucracy (and lack of English language skills in the civil service) is daunting for expats in the relocation process. MCS team of lawyers and accountants is ready to assist you and your family in having a smooth relocation. Should you require our assistance, please do not hesitate to contact us.

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Digital Nomads

Digital Nomads in Madeira

Madeira offers the perfect conditions to attract digital nomads with its natural beauty, nature activities, culture and fantastic climate conditions all year round.

With reduced taxation, adequate infrastructures, competitive operational costs, safety and quality of life, Madeira positions itself to provide digital nomads with a unique package of benefits, offering a wide range of solutions to their specific needs.

Speedy internet is a must in a digital nomad way of life. Madeira benefits from a Submarine Cable Station, hosted in the “Madeira Datacenter”, operating several international optical submarine cables, allowing interconnectivity with national and international SDH networks and providing, as such, significant advantages in terms of quality, cost, bandwidth and scalability.

Another available infrastructure is the Internet Gateway provided by Marconi Internet Direct (MID). This MID offers international Internet access without any contention and uses diversity to access global backbones.

Last but certainly, not least, the IP platform has its international connectivity distributed by: 3 PoPs (London, Amsterdam and Paris), peering connections with hundreds of major international ISPs and IP transits to Europe and the USA.

All the aforementioned infrastructures combined with an easy-going island life make Madeira a unique destination within Europe to relocate as a digital nomad.

Immigration Requirements

EU-Citizens, EEA Citizens and Swiss Citizens

EU citizens living in Madeira (or in any Portuguese territory) for longer than three months have to formalize their right of residence by registering.

After three months in Madeira (or in any Portuguese territory), EU citizens have 30 days to register, after which they receive a registration certificate.

Failure to register is an offence punishable by a fine of between EUR 400 and 1500.

Registering or remaining registered without meeting the necessary conditions is punishable by a fine of between EUR 500 and 2500.

In the event of an abuse of the law, fraud, or false marriage or partnership of convenience, residence rights will be refused and withdrawn.

Non-EU Citizens

If you are a third-country national, kindly note that you are not entitled to perform any job to a Portuguese entity without a visa. Furthermore, before your relocation, be sure to have a proper entry visa if you plan to stay longer than the visa-free period.

At the moment, Portugal does not have any form of digital nomad visa. Given this, if you plan to stay for an extended period, alternative visas such as the passive income visa or the golden visa may be routes you may consider. It is also important to note that different visas have different minimum stay requirements.

Before your relocation, be sure to understand what type of visa is more appropriate to your specific situation and engage a Bar certified lawyer to guide you through this process.

Tax Implications

Generally speaking, those digital nomads residing up to 183 days in a given year in Madeira are not considered residents for taxation purposes. Therefore, they are not subject to personal income tax on their worldwide income.

Notwithstanding the above, if you have a real estate property (either rented or purchases) that you can occupy 183 days in a given year, or if you engage Portuguese entities as a freelancer during that period, personal income tax implications could arise. Under these circumstances, be sure to hire a tax consultant to avoid any unpleasant surprises.

Suppose you are considering a more extended stay, either as a freelancer or an employee. In that case, there are tax benefits for expats wishing to effectively relocate to Madeira, namely those foreseen under the Non-Habitual Tax Resident scheme.

Freelancers staying more than 183 days in a year

Free-lancers qualifying as residents for tax purposes, beware!

Income from a commercial, industrial, or agricultural activity and income from a sole trader (including scientific, artistic, or technical services) or intellectual rights (when earned by the original owner) may be taxed under a simplified regime or based on the taxpayer’s organized accounts.

The simplified regime will apply only to taxpayers who have opted out of organized accounts, have a turnover or a gross business and professional income lower than EUR 200,000 (for 2020) in the previous year. Under this simplified regime, only 75% of revenue is taxed, provided it arises from business and professional services listed in the table referred to in Article 151 of the PIT Code.

Under the simplified regime, the coefficient of 75% decreases by 50% and 25% in the taxation period of the beginning of activity and the following one.

The income ‘deduction’ arising from applying the coefficient of 75% is partially conditioned by the verification of expenses and charges effectively incurred and related to the activity.

Therefore, to the taxable income determined by applying the coefficients will be added the positive difference between 15% of the gross income and the sum of the following amounts (the EUR 27.000 mentioned during the meeting):

  • EUR 4,104 or, when higher, the total amount of mandatory social security contributions (in part not exceeding 10% of the gross income received).
  • Staff expenses, wages, or salaries communicated to the Portuguese tax authorities.
  • Property rentals allocated to the professional activity communicated through the issue of an electronic receipt or a specific statement, whose invoices and other documents are communicated to the Portuguese tax authorities (if only partially assigned to the professional activity, it is considered only 25% of the total amount).
  • 1.5% of the tax registration value of the properties assigned to the business or professional activity or 4% of the tax registration value of properties assigned to hospitality or letting activities (if only partially assigned to the professional activity, it is considered only 25% of the total amount).
  • Other expenses with the acquisition of goods and services related to the activity, duly communicated to Portuguese tax authorities, namely: costs with current consumption materials, electricity, water, transports and communications, rents, litigation, insurance, leasing rents, mandatory fees paid to professional associations and other organizations representing professional activities to which the taxpayer belongs, travels and stays of the taxpayer and one’s employees (if only partially assigned to the activity, it is considered only 25% of the total amount).
  • Imports and intra-Community acquisitions of goods and services related to the activity.

In addition to the above deduction, the amount of mandatory social security contributions paid exceeding 10% of gross income and related to such professional activities may also be deducted from the self-employment income if not deducted for other purposes.

The contributions rate applicable to self-employees corresponds to 21.4%. The monthly contribution basis for self-employees corresponds to 1/3 of the relevant remuneration determined in each reporting period and produces effects in that month and the following two months. To determine the tax-relevant remuneration of the self-employed, it is considered the income received in the three months previous to the reporting month. The relevant revenue corresponds to 70% of the amount of services rendered. The contribution base considered for each month has a maximum limit of 12 times the value of the IAS (5,265.72 euros, value in 2020), i.e. maximum contributions per month are 21.4%x(12 IAS) = EUR 1126.86.

As a freelancer or self-employed person, it is essential to note that you will be exempt from making Social Security payments for the first 12 months from the start of your activity. Social security contributions are due between the 10th and the 20th of the month following the month they refer.

VAT in Portugal is payable by all businesses with a turnover over €12,500 on taxable services. There are three rates of IVA in Madeira:

  • General rate: 22% on taxable goods and services
  • Intermediate rate: 12% on food and drink
  • Reduced rate: 5% on bare necessities, including certain foods (e.g., meat, fruit, vegetables, cereals), books, newspapers, medicines, transport and hotel accommodation

VAT is payable to the Portuguese Tax Authority seven days after the reporting deadline periods, either quarterly or monthly.

Last but not least, invoicing must occur through a Portuguese Ministry of Finance dully approved software.

Personal Income Tax on Residents

Digital nomads who relocate for an extended period, more than 183 days, maybe liable to Portuguese personal income tax on their worldwide income. Having that said, exploring the Non-Habitual Tax Resident (NHR) route may be an option that one should consider.

Generally speaking, under the NHR scheme, foreign-sourced income is exempt from personal income tax in Portugal, provided compliance with the scheme’s requirements is observed. In addition, Portuguese sourced income may be subject to a flat tax of 20% if the activity carried out by the digital nomad is a high-added-value activity.

Cryptocurrencies

Income derived from buying and selling crypto is not taxable in Portugal; due to a somewhat ambiguous tax ruling on crypto income tax exemption. Therefore, applying for a new tax ruling is something that one should consider before relocating to Portugal.

Alternatively, your income structures should be in line with the current rules of the NHR scheme for said crypto income to be exempt from personal income taxation. One ought to seek professional tax advice on this matter before converting crypto to fiat currency as a Portuguese tax resident.

Furthermore, as of this date, banks in Portugal are not crypto-friendly. The Portuguese Blockchain Association has informed us that banks are only willing to accept fiat funds from duly accredited (by the Portuguese Central Bank) trading platforms.

Corporate Income Tax

The corporate tax rate applicable to companies in Portugal may vary, depending on which part of the Portuguese territory said companies are incorporated and domiciled. From the get-go, Madeira is the Portuguese territory with the highest tax efficiency for companies.

 Type of entity incorporatedMIBC*Autonomous Region of MadeiraPortuguese mainland
Resident entities and permanent establishments of non-resident entities5%14,7%21%
Resident entities characterized as small or medium enterprises, on the first € 25 000 of taxable profit11.9%17%

* Incorporation of entities within the MIBC – Madeira International Business Center allows for a 5% tax rate that is only applicable on taxable profit deriving from non-resident entities (otherwise, the standard rates apply) along with additional tax benefits for shareholders. For more detailed information, please click here.

auctor: Miguel Pinto-Correia, Economist

Should you have questions regarding relocation to Madeira, as a digital nomad or expat, our experienced team of lawyers and accountants is ready to assist you.

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British Expats in Portugal beware

More often than not, British expats in Portugal (Madeira Island included) face warnings from our tax advisors regarding the compliance of their income structure with the Portuguese Personal Income Tax Code in general and the Non-Habitual Resident scheme in particular.

The warnings mentioned above are related to the economic links that said expats maintain with the Crown Dependencies and British Overseas Territories (BOTs), from which they derive part of their income. Under Portuguese Personal Incomer Tax law, capital income (dividends, interests) and capital gains from real-estate derived from Crown Dependencies and BOTs, jurisdictions classified in Portugal as tax havens, are taxed at a flat tax rate of 35%.

The classification of Crown Dependencies and BOTs as blacklisted tax havens is unlikely to change, especially given the launch of the European Tax Observatory, a new research laboratory funded by the European Commission to assist the EU’s fight against tax abuse. Further to this, the Organisation for Economic Co-operation and Development (OECD) is currently undertaking work to reach a deal on overhauling the international tax system – to get an agreement by mid-2021, which may jeopardize the treatment of these territories.

British expats moving to Madeira Island must seek specialized international tax advisory concerning their personal income structure, compliance with the existing taxation rules and benefits, and re-structuring their income sources before relocation. Therefore, deterring unwanted and avoidable tax exposure.

auctor Miguel Pinto-Correia

Our team of lawyers and accountants is ready to assist you in assuring relocation to Madeira Island that meets your expectations. Feel free to contact us.

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Bitcoin

Is Portugal a Crypto Tax Haven?

First and foremost, it is essential to understand that Portugal has no tax legislation (crypto tax) nor provisions on cryptocurrencies and crypto-assets. Given this current absence of tax legislation on crypto assets, the Portuguese Tax and Customs Authority (AT) has issued a tax ruling on the taxation of cryptocurrencies at a taxpayer’s request.

Based on the tax-ruling mentioned above, the current understanding of the Portuguese Tax and Customs Authority is that: “cryptocurrencies are not technically considered “currency” because they do not have a legal tender or liberating power in Portugal, however, (…) they can be exchanged, with profit, for real currency (…), with specialized companies for the effect, with its value, compared to the real currency, being determined by the online demand for cryptocurrencies”.

Therefore, the position of the AT is in line with that of the Portuguese Central Bank, the latter recently tasked with licensing crypto-trading platforms in Portugal under EU-Law.

Given the above, income resulting from the sale of cryptocurrencies will not be taxable under the Portuguese Personal Income Tax Code, neither within the scope of category E (capital-gains income) nor subject to being taxed under category G (equity increases).

The AT understands that profits obtained from the sale of cryptocurrencies are not taxable under the Portuguese tax system. However, should the gain be regular, it will qualify as a professional or entrepreneurial income, and as such, taxed at the progressive tax rates that can go up to 48%.

However, the AT does address in  its ruling:

  • The concept of what it deems as the sale of a cryptocurrency or asset. Is it the sale of cryptocurrencies and crypto-assets for other cryptocurrencies and crypto-assets? The sale of cryptocurrencies and crypto-assets for fiat currency? Or both?
  • What qualifies as a regular activity, or how often must trading occur for the AT to deem it regular and taxable under the category B type of income.
  • The taxation, if any, of staking or mining.

Given the above, high-risk takers, based on their notions of what they wish to understand from the loose tax ruling, consider Portugal to be a crypto tax haven, where their income is not taxed (for the time being).

One can argue that the Portuguese Tax and Customs Authority would have difficulty proving regularity and income flow derived from trading.

Under the current rules, those who are residents, for tax purposes, in Portugal could have their income audited under “wealth manifestation” rules. The same is to say that if the taxpayer conducts high-profile/luxury purchase of property and transportation, the Portuguese Tax and Customs Authority could request justification of how the income is generated and how often).

On the other side, low-risk takers opt to strictly follow the ruling and register themselves as free-lancers and subject their income to personal income tax and social security contributions based on how much they earn.

Considering the above, low-risk takers relocating to Portugal can still legally benefit from low taxation on their crypto income under the non-habitual resident (NHR) scheme. As such, before effective relocation to the country, restructure of crypto-income must occur. This restructuring must happen so that the income generated entirely abides by the NHR tax exemption rules. Such means that crypto income should be received in Portugal either as dividends or salaries paid by a foreign entity.

The mere holding of crypto does not generate, for the time being, a taxable event.

In short, Portugal is a crypto tax haven if one is willing to take fully take the risk of non-reporting based on a 2016 loose tax ruling. Suppose you do not wish to restructure your income flow prior to relocation to Portugal. In that case, you will not find low-risk solutions in this jurisdiction, and you should be considering other jurisdictions.

auctor Miguel Pinto-Correia

All mentions above are merely academic and opinionated, so the considerations in this article and the examples are given should not be seen as something certain in legal terms.

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Funchal

Buying Real Estate with Crypto in Portugal

Is it possible to buy a property with crypto-currencies in Portugal?

Although there are already some websites where you can “buy and sell” real estate using crypto-currencies, including some options located in Portugal, and although this type of business has already been carried out in the United Kingdom, in my opinion, this type of operation will always be controversial.

Whether it is due to the “speculative aura” brand given by public authorities to cryptocurrencies or the difficulty in complying with certain parameters and assumptions of the European laws to combat money laundering and financing of terrorism, there is no open offer in the current market to negotiate and carry out a property purchase and sale transaction under these circumstances, at least that would comply with all the demands made by law.

It should also be said, and except in the best of cases, that because cryptocurrencies are not considered to have a legal course in Portugal as a legally established form of currency, according to the Bank of Portugal, it is considered to be a virtual coin/asset, there will always be a legal obstacle to entering into any purchase and sale transaction under the terms of the assumptions and requirements set out in Article 47 of the Notarial Code.

Taking into account that Portuguese law limits the means of payment for the purchase of a property, those mentioned in the Notary Code, this hinders and creates the first obstacle to the purchase and sale of real estate being able to be made using payment in cryptocurrencies.

However, since the dawn of trade between human beings, goods were not acquired through purchase with currency as consideration and price payment.

Since the dawn of trade, and up to the present day, many businesses have been conducted through the exchange of goods.

It may not be possible to buy a property with cryptocurrencies; however, the law does not stipulate any express prohibition on exchanging property for any other good or service.

These atypical contracts are based on the parties’ autonomy, availability and will are called swaps or exchange contracts.

The exchange contract, in general terms, is a contract not autonomously typified by law and to which the rules of freedom of agreement apply and subsidiarily the rules relating to purchase and sale. It is, in short, a contract whereby the ownership of an asset or other right is exchanged for the ownership or right to another asset.

Eventually, it will be as legitimate to exchange a real estate property for a car, a boat, a jewel, for gold or other precious metals, for the provision of a service, or any other good or service, as it would be, for example, to exchange a property for cryptocurrencies, or any other thing, provided that the property/good is not physically or legally impossible, contrary to law or indeterminable.

Bearing in mind that cryptocurrencies are not considered to have a legal course in Portugal, they will eventually have to be considered a “thing”, a good, such as a bar of gold, and that the concept of a thing within the scope of an exchange contract is quite extensive, it will always be said that within the contractual freedom and autonomy of the parties, two persons or entities may enter into an exchange contract whereby one of them transfers the property and the other, in exchange, transfers a certain number of cryptocurrencies.

Regarding the registration of the property right over the real estate by the buyer, and under the notarial legislation in Portugal, even if the acquisition has been made through an exchange contract in which one of the goods is not subject to registration, as is the case of cryptocurrencies, it will be possible for the buyer of the property to register the property using the exchange contract as sufficient title.

The exchange of immovable property for movable property or any other good or service that is not immovable does not integrate the exchange concept for Property Transfer Tax (IMT) purposes, as provided for in article 4 c) of the CIMT.

As such, calculation of the IMT will be made under the general terms.

In this case, the acquirer of the property will be required to pay IMT, which will be calculated on the value that the parties have attributed to the property or on the taxable patrimonial value, whichever is greater, applying the same rule as to stamp duty.

Although there is nothing in the law that prevents the contract of exchange of real estate property for cryptocurrencies, it is important to note that since there is no doctrine, jurisprudence or specific legislation on the subject, all mentions above are merely academic and opinionated, so the considerations in this article, as well as the examples given, should not be seen as something certain in legal terms.

auctor Pedro Marrana

 

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Minimum wage increase

The two parties that support the majority in Madeira’s Legislative Assembly consider it reasonable and realistic to set the regional minimum wage at 682 euros (still the lowest in Western Europe).

The proposal, approved by Madeira’s Legislative Assembly, of the Regional Government, which was agreed by most social and economic stakeholders, represents a net increase of 31.12 euros compared to 2020 (i.e. an increase of 4,8%), and a 32% increase compared to 2015.

Once it receives assent from the Representative of the Republic on the Autonomous Region of Madeira, the minimum wage law will take effect retroactively, i.e. January 1st 2021.

 

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Will and Testament for Expats in Madeira

What is a ‘cross-border succession’?

A succession is the transfer upon death of the estate — rights and obligations — of the deceased. Rights can be, for example, the ownership of a house, a vehicle or a bank account; obligations can include debts, for example.A cross-border (or international) succession is a succession with elements from different countries: for example, the deceased lived in a country other than that of his/her origin, the heirs of the deceased live in a different country or the deceased owned assets in several countries

Why are EU rules on cross-border successions necessary?

Every year more citizens in the European Union move to another EU Member State to study, work or start a family. As a result, each year more than half a million families are involved in cross-border successions.In cross-border successions, the authorities of several countries may have legal authority to deal with the succession (for example the authorities of the deceased’s country of nationality and the authorities of the country in which the deceased last lived) and the laws of several countries may apply (for example the laws of all the countries where the deceased owned property). Citizens may therefore need to start succession proceedings in different countries and deal with the laws of various countries. This can be costly and may result in authorities issuing conflicting decisions.To make cross-border successions easier to plan and manage, the EU adopted legislation in 2012, the succession regulation (Regulation (EU) No 650/2012).

What does the EU regulation do?

The regulation lays down rules to determine which EU Member State’s authorities will deal with a cross-border succession and which national law will apply to that succession. In this way, a citizen or a testator (the person who makes a will) can plan their succession and heirs no longer need to deal with multiple national laws and authorities.The regulation also makes it easier for a court decision or a notarial document dealing with a succession matter issued in one EU Member State to have effects in another EU Member State. Finally, the regulation creates the European certificate of succession (ECS), a document that can be requested by heirs (as well as legatees, the executors of a will and the administrators of the assets of the deceased) to prove their status and exercise their rights in another EU Member State.

For the purposes of the regulation, the term ‘EU Member State’ should be understood as covering all EU Member States except Denmark, Ireland and the United Kingdom, as the latter countries do not participate in the regulation.

What is covered by the EU regulation?The regulation deals with certain procedural issues linked to a cross-border succession — that is, which EU Member State’s authorities will deal with the succession, which national law will apply to the succession, how court decisions and notarial documents on succession matters will produce effects in another EU Member State and how the ECS can be used.The regulation does not deal with the substantive issues of a cross-border succession, such as what share of the deceased’s assets should go to his/her children and spouse and how free the testator is to decide to whom he/she will leave his/her assets. These issues will continue to be governed by national law.The regulation does not govern certain matters that can be linked to a cross-border succession, for example:

  • he civil status of citizens (for example who was the last spouse of the deceased);
  • the property regime of a couple, whether in a marriage or a registered partnership (that is, how the couple’s assets should be distributed in case of the death of one of the spouses or partners);
  • maintenance obligations towards dependent persons (for example a former spouse or children following a divorce);
  • pension plans;
  • companies, including how the deceased’s shares in a company should be transferred;
  • the recording of inherited property in a register (for example the recording of the ownership of a house in the land register).

The regulation does not deal with tax law either. The national law of each EU Member State will determine which taxes on the succession should be paid and where.

The key principles of the EU regulation

The regulation makes cross-border successions simpler and cheaper.

Authorities and law of the deceased’s last country of residence: the authorities of the EU Member State where the deceased last lived will deal with the succession and, in principle, will apply the law of that EU Member State to the succession.

Choice of law possible: citizens, however, can choose that the law of their country of nationality should instead apply to their succession. This choice of law can be made in a will or in a separate declaration. The country whose law is chosen can be an EU Member State or a non-EU country.

Recognition, acceptance and enforcement in other EU Member States: court decisions on succession matters issued in one EU Member State will be automatically recognised in other EU Member States. If their recognition is opposed, they will be declared enforceable under simplified rules. Official documents (such as notarial documents) on succession matters (for example a will or a certificate of succession) drawn up in one EU Member State will also be accepted and declared enforceable in another EU Member State under simplified rules.

ECS (European Certificate of Succession): heirs can obtain such a certificate in an EU Member State to enable them to prove their status as heirs over assets located in other EU Member States.

Source: European Commission and European Judicial Network

MCS and its multi-disciplinary team, with more than 20 years of expertise, is ready to assist you in assuring that your will and testament meets complies with your wishes and preferred law. Feel free to contact us.

 

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Digital Nomads in Madeira

Digital Nomads in Madeira Islands are on the rise thanks to a joint initiative lead by the Regional Government of Madeira, Portugal’s Tourism Board and StartUp Madeira. The current digital nomad village pilot project is being run from Ponta do Sol municipality and is  ready to host up to 100 remote workers within a co-working space and surrounding village housing (plans to expand to other buildings – both in the village and elsewhere on the island – are also in the works).

Most of the digital nomads coming to Madeira Island are European Union nationals, mainly, but not only, from Germany, the Netherlands, Spain, mainland Portugal, Poland, Ireland and the Czech Republic. Notwithstanding those already present on the island, more nationalities are expected to come: South Africa, the United States and Nigeria, just to name a few.

Madeira offers a unique island life in Europe with “access to mountains and the ocean, affordability, friendly locals and “blazing fast internet“, its manageable size” which can be “more conducive to finding community and lingering longer than larger places”.

It is therefore no surprise that many digital nomads wish to remain well beyond the standard one or two month period. Nevertheless digital nomads must be aware of the tax implications and immigration implications arising from long-term stays or from engaging local economic agents (i.e. clients and/or suppliers).

Given the above,  it is important for digital nomads to engage experienced tax and immigration consultants, such as MCS, to better understand not only the implications of their move to Madeira Island, Portugal, but also any linked obligations that might arise from their relocation.

Those seeking an effective long-term relocation will be pleased to know that although Portuguese bureaucracy might be hard to grasp there are also huge benefits in complying with all the rules since day one.

Digital nomads looking into long-term relocation may apply for the Non-Habitual Resident tax scheme, a set of tax benefits that can last for a 10-year consecutive period that allow, generally speaking, for exemption of personal income tax on foreign income at capped tax rates of 20% on employment or free-lancer income (provided requisites are met).

MCS and its multi-disciplinary team, with more than 20 years of expertise, is read to assist you in your relocation to the island. Feel free to contact us.

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Tax residency and its implications

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.

Tax residency is important for the purposes of obtaining the Non-Habitual Status (NHR), as one must first be resident in order to apply for NHR status and one has until 31st March of the year following that of registration as resident to obtain said status.

Reporting Obligations

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.

Our team at MCS, with more than 20 years of experience in the sector, is able to assist you pertaining taxation matters in Madeira and in Portgual. For more information our services click here.

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Tax Representative and Taxpayer Number

Those relocating to Portugal will soon discover that having a Portuguese Taxpayer Number (locally known as NIF – Número de Identificação Fiscal) is required for conducting business and engaging with governmental authorities for the purposes of almost anything.

To give a rough idea you are required to hold a Portuguese taxpayer identification number for the purpose of engaging the judicial system; opening a bank account; buying, renting or selling real estate property; buying or selling a car; incorporate a company; enrolling your kids in school (yes, your kids do need to have a NIF too); applying for membership with a professional guild; applying for residency; registering a trademark or patent; receive inheritance; celebrate any type of contract, etc…

Notwithstanding the above it is important to take into account that taxpayer number numbers are associated with one the following tax residency status:

  • Non-Resident
  • Resident: generally speaking those who have lived for more than 183 days (consecutive or not) in Portugal in any period of 12 months starting or ending in the relevant year; or having a house, at any time throughout the 12-month period, in such conditions that allow to presume the intention to hold and occupy it as the habitual place of residence.

Those qualifying as non-resident, or being registered as such, are required under to law to appoint a a tax representative, who can be a and individual or an entity with tax residency in Portugal. The only exception to this rule is those taxpayers residing in another European Union Member-State.

The consequences of the lack of a tax representative are close to those concerning the lack of NIF. In other words, anyone who is non-resident taxpayer abroad and does not have a appoint tax representative in Portugal cannot exercise the rights of complaint, appeal or challenge. Furthermore, “the Portuguese Tax and Customs Authority may rectify the tax residency of non-residency on its own initiative based on the information at their disposal”, with all the tax and reporting obligations that such action may incur.

Given the above the appoint a tax representative is of the utmost importance for those qualifying as non-residents outside the European Union and should establish tax representation through contract with an experienced representative. We at MCS have been providing such service for more than 20 years to international investors and expats alike.

Do not hesitate to contact our team should you have any questions.

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