The Portuguese government established the non-habitual resident (NHR) scheme in 2009. This tax resident special status offers expats (including Portuguese nationals) who want to live in Portugal a 20% flat tax on certain types of Portuguese sourced income or a complete exemption from taxation on their foreign income for a period of ten consecutive years. And this is not exclusive to retirees. To obtain this special tax residency status, careful preparation is required. Over 23,000 persons profited from this tax regime in total. Naturally, taxpayers must fulfil some requirements to qualify for NHR status in Portugal, and one of them is becoming a resident, for taxation purposes, in Portuguese territory.
Conditions to benefit from NHR status
- Not have been deemed tax resident in Portugal in the previous five years (a tax residence certificate and proof of tax paid abroad may be required).
- Acquiring Portuguese tax residence. Either by having 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 presuming the intention to hold and occupy it as the habitual place of residence.
- Non-EU/EEA citizens will need to obtain a valid visa from the Portuguese Embassy/Consulate of their country of residency that entitles them to have a residency permit in Portuguese territory. (e.g., a Golden Visa, a Passive Income Visa or another type of visa).
- EU/EEA citizens will need to obtain an EU/EEA Citizen Residency Certificate from the City/Town Hall with jurisdiction over their tax address.
Filing the application for the registration as Non-Habitual Tax Resident until 31 March of the year following that of registration as resident (e.g. 2017– registration until 31 March 2018).
Recognition of the NHR status is not automatic and requires a formal application to be lodged with the Portuguese Tax and Customs Authority. In addition, and in case of a random audit to the application, the Portuguese Tax and Customs Authority can request documents proving tax residency in the previous five calendar years (e.g., Tax Residency Certificates and proof of tax settlement abroad). Having such records with you at the time of application is crucial.
The NHR status is awarded for a non-renewable term of ten years, provided that the individual is regarded as a tax resident in Portugal for each of these ten years. If a person is not recognized as a tax resident in Portugal for a year, his status remains unchanged. Indeed, an individual who has been unable to benefit from the NHR throughout these ten years may always reapply and benefit from the plan during any of the remaining years of that period, commencing with the year in which they regain tax residency in Portugal.
Notes on tax residency
In the case, you apply for tax residency status, as foreseen under Portuguese Law, and yet maintain tax residency in your home jurisdiction, in the event of an exchange of information between tax authorities, as foreseen under the tax treaty, or as foreseen under the Multilateral Competent Authority Agreement (concerning CRS – Common Reporting Standard), conflict of tax residency will arise. In this eventuality, you would be obliged to provide proof of tax residency in one of the countries and face the consequences of incorrect reporting in the other.
Failure to comply with registration as a resident for tax purposes and to comply with the annual tax reporting obligations lead to criminal liability.
NHR income tax reporting obligations
All residents, for tax purposes, in Portugal are required to report annually their worldwide income and foreign bank accounts held to the Portuguese Tax and Customs Authorities. Those qualifying as NHR are not exempt from such reporting obligations because they are tax residents under Portuguese tax law and for international treaties to avoid double taxation.
The above means that even if you are exempt from taxation under the NHR, you are required under the law to report your worldwide income, the corresponding taxes (paid abroad or in Portugal) and the related Social Security contributions.
Taxation under the NHR tax status
Income from Foreign source
- Taxation exemption on employment income is granted if the income is subject to taxation in the source country, under the applicable Double Taxation Agreement, or are considered not to be derived from a Portuguese source.
- Pensions are subject to a flat tax rate of 10%. A tax credit may apply per the applicable Double Taxation Agreement if they are subject to tax in the source jurisdiction.
- Freelancer income / Independent Contractor derived from high value-added service activities, with a scientific, artistic or technical character, are also exempt if these can be taxed in the country of source, with which Portugal has a Double Taxation Agreement or, in the absence of such agreement, when the income is not to be considered obtained in Portuguese territory.
- Taxation exemption on other types of foreign-sourced income (interests, dividends, capital gains, income from immovable property (rents), royalties, intellectual property income and business income) if these can be taxed in the country of origin under a Double Taxation Agreement concluded between Portugal and the respective State or; if these types income may be taxed in the State of origin under the OECD model of tax convention (excluding tax havens) in cases where there is no Double Taxation Agreement.
Income from Portuguese source
- Employment income and business or professional income derived from high added value activities are taxed at a flat rate of 20%.
- Remaining employment and business or professional income (not considered of high added value) and other types of income shall be aggregated and taxed according to the general taxation rules.
List of High-Added value jobs
112 – General director and executive manager of a company;
12 – Directors of administrative and commercial services;
13 – Directors of production and specialized services;
14 – Directors of hotel, restaurant, commercial and other services;
21 – Specialists working in physical sciences, mathematics, engineering and similar technical fields;
221 – Physicians;
2261 – Dentists and stomatologists;
231 – Teachers at universities and higher learning establishments;
25 – Specialists in information and communication technologies (ICT);
264 – Authors, journalists and linguists;
265 – Creative artists and performing artists;
31 – Intermediate level science and engineering technicians and professionals;
35 – Information and communication technologies technicians;
61 – Market-oriented farmers and qualified agricultural and livestock workers;
62 – Market-oriented qualified forestry, fisheries and hunting workers;
7 – Qualified industrial, construction workers and artisans, including skilled workers in the fields of metallurgy, metalworking, food processing, wood manufacturing, clothing production, handicrafts, printing, manufacture of precision instruments, jewellers, artisans, electricity and electronics workers;
8 – Operators of installations and machines and assembly workers, namely fixed installations and machine operators.
How to get NHR status?
The Portuguese Tax and Customs Authority is responsible for grating the NHR status. To maximize the benefits of NHR status, it is critical to follow the proper procedure and avoid rushing. We can never emphasize this enough. Appropriate planning is crucial for a successful relocation and application for NHR status. To obtain NHR status, taxpayers must meet the following requirements:
- Ascertain that one is eligible for the NHR status;
- Obtain a Portuguese Tax Identification Number;
- Prepare and apply for the NHR status with Portuguese Tax and Customs Authority;
- Formally reply to an NHR application audit (if applicable);
- File the annual personal income tax returns, disclosing your worldwide income and corresponding taxes paid in Portugal.
Preparing, filing, and monitoring an application for NHR status can be cumbersome and challenging to navigate if one does not speak the language or, even worse, understands the nuances of Portuguese administration. Many expats submit an incomplete dossier or do not submit it on time, and their fantasy of ten years of tax-free living evaporates. Advice from a lawyer and a board-certified accountant is crucial and must not be overlooked.
This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind.