Without a doubt, the ultimate expat tax benefit is the Non-Habitual Tax Resident Tax Regime (NHR) granted by Portugal (Madeira Island included) to those wishing to relocate (or return) to the country, regardless of their nationality.
What are the Ultimate Expat Tax Benefit?
If you have not been deemed tax resident in Portugal in the previous 5 years and you decided to acquire tax residency in Portugal, then you are able to apply for the NHR status under which you will benefit from:
- A unique personal income tax treatment over a 10-year period, which included the possibility of enjoying a 10-year tax exemption on almost all foreign source income;
- 20% flat rate, instead of the normal tax rates that can go up to 48%, for certain Portuguese source incomes (from high-added value activities, as determined by Ministerial Order, as well as income from self-employment).
- Not needing to have a minimum staying period, although one must be careful with tax residency implications in other jurisdictions
- Becoming part of a white-listed tax jurisdiction within the European Union
- A tax exemption for gifts or inheritance to “direct line” family members (descendants and ascendants)
- No wealth tax
- Free remittance of funds to Portugal
In order to qualify for all the above mentioned tax benefits one must have the right to legally reside (i.e. from an immigration perspective) in Portugal. As such at the moment of the application one must either be Portuguese, a European Union citizen, and European Economic Area Citizen or a holder of a visa (for example: the Golden Visa or the Passive Income Visa) that entitles one to reside in the Portuguese territory.
Notwithstanding the above, EU/EEA citizens are required to obtain a EU/EEA Residency Certificate from the City/Town Hall with jurisdiction over their tax residency address in order to comply with EU/EEA citizens immigrations requirements. The documents needed to be presented in order to obtain such certificates vary from municipality to municipality, although under law such documents are the following:
- A valid Identity Card / Passport;
- A written Affidavit declaring that you have a Professional activity as a worker or as self-employed in Portugal; or An Affidavit, declaring that you have sufficient funds for you and for your family, and that you are covered by health insurance when the same applies to Portuguese citizens in your country of origin.
Once right of residency is established, from a tax stand point all the NHR applicant needs to do is to hold an abode, either purchased or rented, in Portugal ready at December 31st of that year with the intent to hold habitual residence.
Income Taxation under the NHR – Foreign Sourced Income
- Taxation exemption on employment income is granted if the income is subject to taxation in the source country, in accordance with 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%. In case they are subject to tax in the source country, in accordance with the applicable Double Taxation Agreement, a tax credit applies.
- 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 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 in accordance with the OECD model of tax convention (excluding tax havens) in cases where there is no Double Taxation Agreement.
List of jurisdictions deemed as tax havens (this includes some jurisdiction with whom Portugal has signed a Double Taxation Agreement): American Samoa, Liechtenstein, Andorra, Maldives, Anguilla, Marshall Islands, Antigua and Barbuda, Mauritius, Aruba, Monaco, Ascension Island, Monserrat, Bahamas, Nauru, Bahrain, former Netherlands Antilles, Barbados, Northern Mariana Islands, Belize, Niue Island, Bermuda, Norfolk Island, Bolivia, Other Pacific Islands, British Virgin Islands, Palau, Brunei, Panama, Cayman Islands, Pitcairn Island, Channel Islands, Puerto Rico, Christmas Islands, Qatar, Cocos (Keeling), Queshm Island , Iran, Cook Islands, Saint Helena, Costa Rica, Saint Kitts and Nevis, Djibouti, Saint Lucia, Dominica, St. Peter and Miquelon, Falkland Islands, Samoa, Fiji, San Marino, French Polynesia, Seychelles, Gambia, Solomon Islands, Gibraltar, Saint Vincent and the Grenadines Granada, Sultanate of Oman, Guam, Svalbard, Guyana, Eswatini, Honduras, Toquelau, SAR Hong Kong (China) Trinidad and Tobago, Jamaica, Tristan da Cunha, Jordan, Turks and Caicos Islands , Kingdom of Tonga, Tuvalu, Kiribati, United Arab Emirates, Kuwait, United States Virgin Islands, Labuan, Vanuatu, Lebanon, Yemen, Liberia.
Income Taxation under the NHR – Portuguese Sourced Income
- 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 taxation general rules.
High-Added Value Activities
- General Manager and Executive Manager of Companie
- Directors of Administrative and Commercial Services
- Production and Specialty Services Directors
- Hotel, restaurant, trade and other service directors
- Experts in the physical sciences, mathematics, engineering and related techniques
- Dentists and stomatologists
- University and Higher Education Teacher
- Information and Communication Technology (ICT) Experts
- Authors, journalists and linguists
- Creative and performing arts artists
- Intermediate science and engineering technicians and professions
- Information and Communication Technology Technicians
- Market-oriented farmers and skilled agricultural and livestock workers
- Skilled, market-oriented forest, fishing and hunting workers
- Skilled workers in industry, construction and craftsmen, including in particular skilled workers in metallurgy, metalworking, food processing, woodworking, clothing, crafts, printing, precision instrument manufacturing, jewellers, craftsmen, electrical workers and in electronics.
- Plant and machine operators and assembly workers, namely stationary and machine operators
Please note that the above list is updated through Ministerial Order issued by the Minister of Finance.
Engaging a Tax Consultant
Notwithstanding the above it is important to obtain specialized advice from a reputable tax consultant to help navigate not only through the Portuguese bureaucracy, but also to help fully comply with the regime’s requirements and tax reporting obligations arising with such status.
Did you know that Portugal, and therefore Madeira, blacklists and penalizes, through taxation, income deriving from more than 80 different jurisdictions including all British Overseas Territories and British Crown Dependencies? Did you know that the Portuguese fiscal year matches the calendar year? Did you know that not all types of pensions maybe exempt from taxation? Did you know that even though you are an NHR you are still obliged to file tax returns in Portugal?
The above-mentioned small details can become a headache if your income structure and relocation dates are not analysed and adjusted, if needed, on a timely manner in order to comply with the NHR scheme rules.
Applying for NHR status
The first step regarding NHR application is to obtain a Portuguese Taxpayer Identification Numbers (NIF) as non-resident in Portuguese territory. In order to do this, applicants need to provide proof of residency abroad through a government issued document. Non-EU-Citizens must also appoint a tax representative when applying for a NIF.
Only once you have obtained residency can you apply for a NIF as resident in Portuguese territory. Change of residency status with the Portuguese Tax and Customs Authority can only be done by presenting proof of said residency, i.e. by presenting a residency permit card issued by the Portuguese Borders and Aliens Service (SEF) or a EU/EEA-Citizen Residency Certificate issued by the City or Town Hall with jurisdiction over the applicant’s residential address. Furthermore, proof of real estate purchased or rental agreement (short-term tourist rentals are not accepted) may also be requested.
Upon change of residency status, from non-resident to resident, for tax purposes you will be able to apply for the NHR status until March 31st of the following year. Please note that if you have appointed a tax representative you now ought to dismiss such representative.
In order to apply for NHR status one must firstly apply for a password to access the Portuguese Tax and Customs Authority website, through which the application is to be submitted by your tax consultant. Any random audits carried to the said application are notified on the tax authority’s website and ought to be replied there too.
auctor Miguel Pinto-Correia
MCS and its team has more than 20 years of experience in assisting corporate and private clients wishing to relocate to Madeira. For more information on our services please do no not hesitate to contact us.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more