Is Portugal tax-free? Does the NHR scheme exempt one from paying taxes in Portugal?
The NHR is the unique personal income tax system applied to the foreign income of natural persons in Portugal. This program is developed specifically for those who aspire to relocate to Portugal. Under such a program, those who qualify for the Non-Habitual Resident (NHR) regime are considered Portuguese tax residents and are taxed at a lower rate or exempt from further taxation.
To determine if one’s income is tax-free in Portugal, answer the question, is Portugal tax-free? One must understand that the NHR personal income tax exemption requirements are triggered by the tax treaty signed between Portugal and the income’s territory of source (in the absence of a tax treaty, the OCDE Model Convention is considered).
How do NHR tax exemptions work?
Foreign income earned by an NHR status holder is subject to the following taxation (or exemptions):
- Taxation exemption, in Portugal, on employment income is granted if the income is subject to taxation in the source country under the applicable Double Taxation Agreement or is considered not derived from a Portuguese source.
- Pensions are subject to a flat tax rate of 10% in Portugal.
- Freelancer income / Independent Contractor derived from high value-added service activities with a scientific, artistic or technical character is exempt from taxation in Portugal if said income 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. Otherwise, a flat tax of 20% applies.
- Taxation exemption on foreign-sourced interests, dividends, capital gains, income from immovable property (rents), royalties, intellectual property income and business income) if: these may be taxed in the country of origin under a Double Taxation Agreement concluded between Portugal and the respective State or; if these types of 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.
Is Portugal tax-free? Yes, if your income structure complies with the NHR scheme conditions under Portuguese Tax Law. Foreign income earned by an NHR status holder is tax-free (or taxed at special rates), provided the above taxation conditions are met under the existing double taxation agreement or OCDE Model Convention.
Should the tax treaties not comply with the requirements mentioned above, NHR status holders (like all other tax residents in Portugal) will be liable to pay the difference between the tax due in the source country and the tax due in Portugal, should the latter apply a higher tax rate for the same income bracket. NHR exemptions, when compliant with the above requirements, exempt the status holder from paying the said difference in Portugal.
Not all income is tax-free in Portugal
NHR status holders must be made aware that:
- 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.
The last point above means that any other type of income obtained abroad, as business or professional income, not covered by this tax regime for non-habitual residents, will be taxed on Portuguese territory according to the rules set in the Portuguese Tax Code, i.e., according to the convention to eliminate double taxation held by Portugal and the source State, in case there is one; or in case there is no Convention, apply the unilateral standard to eliminate international juridical double taxation.
Furthermore, the Personal Income Tax Code foresees an increase in the rate applicable to capital income obtained in Portuguese territory by persons domiciled in a country, territory or region deemed as tax havens (blacklisted jurisdictions), from 28% to 35%. This applies even to those who have NHR status.
The abovementioned aggravated rate also applies for capital income paid to residents in Portugal by entities in tax havens and for capital gains obtained by residents in Portugal on securities issued by entities in tax havens.
Is Portugal tax-free? The straight answer is that it depends on your income tax structure. Reach out to our professionals, have your income structure analyzed, and set a course of action before applying for NHR status to benefit from the existing scheme fully.
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. Should you wish to incorporate a company in Madeira Island, please do not hesitate to contact us.