Tag Archives: Non-Habitual Resident

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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Relocating to Madeira? What not to do!

If you are considering relocating to Madeira Island (Portugal), there are a few simple steps that you ought to follow to avoid tax and immigration complications regarding residency on the island.

There are many cases where expats, unknowingly registered themselves as residents when their actual personal circumstances do not meet such criteria.

Alternatively, there are expats who never register themselves as residents and end up complying with EU immigration law and Portuguese tax law. This puts them in risk of fines, tax interests and, in worst cases, liable to criminal behaviour.

Residency for immigration purposes

EU citizens living in Madeira (or in any Portuguese territory) for longer than 3 months have to formalize their right of residence by registering.

Registration for immigration purposes, must occur up to after 3 months in Madeira (or in any Portuguese territory), EU citizens have 30 days to register, after which they receive a registration certificate. Applications are filled with at the local city/town hall (Câmara Municipal) with jurisdiction over their residential address.

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 an offence punishable by a fine of between EUR 500 and 2500.

Third-country nationals should have the appropriate residency visa o order to lodge a residency permit application with the Portuguese Immigration and Borders Service.

Residency for tax purposes

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 income earned and corresponding taxes paid.

A non-resident taxpayer will only have to file a tax return if obtaining income from a Portuguese source.

What not to do?

Do not register yourself with the Portuguese Tax and Customs Authority, for tax purposes, not with your local Town/City Hall, for immigration purposes, without consulting a lawyer or a tax adviser. The concepts of tax residency and residency for immigration purposes and intertwined and one does not necessarily imply the other.

A tax adviser, or a lawyer, will be able to fully understand your situation and income structure and advise you on the best course of action so that you ought to take. This is important, specially to safeguard your income, whenever possible under, under Portuguese law.

Our team of lawyers, economists and accountants has more than 20 years of experience and is able to provide expats an integrated approach to investment and relocation to Madeira Island by operating as one-stop-shop. Through MCS expats are able to deal in an huge array of matters such as personal and corporate income taxation in Madeira, immigration (including Golden Visa), company incorporation, legal assistance with real estate purchase/rental and succession.

auctor Miguel Pinto-Correia

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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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Americans Moving to Portugal

In recent months we have seen a trend of Americans moving to Portugal or inquiring about the advantages available to them in this European Union Member-State.

Portugal itself is a unique budget destination, having a surprisingly affordable cost of living, and an ideal place to either retire and invest in the sun, by providing unique tax benefits for those effectively relocating to the country. But what many Americans do not know is that Portugal’s Pearl of the Atlantic, Madeira Island, offers all the perks available in the mainland and sophisticated and affordable Island living.

Just under a two-hour flight from Lisbon, Madeira Island combines European flare, tropical vibes and unique tax perks for expats wishing to retire or find peace of mind to conduct their business from the comfort of a peaceful island connected directly to other major European capitals—including Paris, Brussels, London, Berlin, and Zürich.

Getting Residency in Madeira

Unless you also hold a European Union passport or your spouse is an European Union citizen, you will have to, generally speaking, apply for a residency visa at the Portuguese Embassy with jurisdiction over of the country where you currently live.

There are different types of visa that you can choose from including passive income visa (also known as a D7), visa to conduct business (either as a free-lancer or as a business owner), among others. Alternatively once can also apply for a Residency Permit for Investment Purposes, also known as the Golden Visa, therefore skipping application for a visa with the Portuguese Embassy prior to travelling to Madeira.

Digital Nomads and Pensioners

Digital nomads and pensioners wishing to relocate to Madeira Island, Portugal, may be eligible to the very sought after Non-Habitual Resident scheme, a set of tax benefits available to those effectively taking up tax residency on the island. Under the NHR scheme foreign sourced income is exempt from personal income taxation in Portugal (Madeira island included), while some types of Portuguese sourced income may be subject to special flat rates.

To digital nomads and internet entrepreneurs, who usually need a good internet connection to generate their income, Madeira offers incredible internet speeds, when compared to mainland Europe. This is because 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 kind of contention and using diversity in the access to international backbones.

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.

On the other hand, pensioners (and digital nomads) moving to the island will be surprised with the stress-free day-to-day life and the cultural offerings are immensely diverse for an island. Museums with Flemish and religious art, churches hosting organ music festivals, monthly symphonic orchestra and chamber music concerts, gastronomical and traditional folk festivals throughout the year, and recurring art exhibitions are just some examples of Madeira’s active cultural scene.

Launching your business

Unlike the Portuguese mainland, Madeira Island offers unique tax perks to those wishing to open a company in Portugal. Benefiting from a unique tax regime, known as the Madeira International Business Center (MIBC), Madeira is the only region in Portugal offering a 5% corporate income tax rate to companies whose profits are derived from non-resident entities.

English is the way

The strong bond with the British community is also seen in Madeira’s medical and law sectors. You’ll have no trouble finding English-speaking doctors or lawyers catering to the expat community.

If you are looking into relocating with your kids you will be pleased to know that Madeira has international kindergartens and schools offering the International Baccalaureate (IB) program.

With rents and restaurant prices an average 10.5% lower than those in the Algarve, and up to 80,5% lower than in Lisbon, Madeira is one of the most affordable places to spend live in this part of the world. Utility costs are lower here, too — electricity is as much as 21.8% lower than in the Algarve, internet 11.2% less costly.

The founding of Madeira Corporate Services (MCS) dates back to 1995. MCS started as a private and corporate service provider in the Madeira International Business Center and rapidly became one of the leading management firms. As a result of its position in the market, the quality of the services it has been providing for over a decade and full compliance with business ethics, MCS was awarded the Merit Certificate by SDM – Sociedade de Desenvolvimento da Madeira.

auctor Miguel Pinto-Correia

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NHR and Cryptocurrencies

The evolution of the currency has been raised to a completely digital level, and it may currently have no physical representation, being only in a bank account in the form of a computer record, consisting of a monetary value registered, for example on your smartphone.

Crypto-currency is nothing more than digital codes which are assigned certain values controlled by a data system, where records of transactions are kept permanently, protecting crypto-currency from being falsified or stolen.

In general terms, and according to the European Central Bank’s definition, crypto-currency is a type of digital money, not yet regulated, nor linked to any central bank.

Bitcoin is the crypto-currency that has been most valued in recent years, currently it is worth more than gold. In fact, crypto-currencies like Bitcoin have been gaining importance in the international financial sector, both as an investment and for the protection of financial assets. Where some may see uncertainty, the risk-takers see it as an opportunity.

Although the Portuguese Tax and Customs Authority (AT) has already pronounced itself on the matter, through binding information, it does not materialize that crypto-currencies should be taxed as financial assets.

However, the AT considers that taxpayers who have registered as free-lancers to transact crypto-currencies should be subject to taxation on business or professional income (category B type of income). The AT also opens the hypothesis that the income obtained through the crypto-currencies can be considered an asset increase, and be considered a capital gain.

Regardless of whether or not any of the options are considered, for taxpayers carrying out any activity related to crypto-currencies, in another country, such income, provided it is generated outside Portugal, is exempt from taxation under the non-habitual resident regime for a period of ten years after the status is granted.

In another, more recent, binding information issued by the tax authorities on the issue of crypto-currencies, dealing not with personal income tax but with VAT, following the European Union Court of Justice’s jurisprudence which consideres “bitcoin, like traditional currencies which have a discharging value, has no other purpose than to serve as a means of payment”. This means that “since they are means of payment whose function is in itself exhausted, their mere transfer does not constitute a chargeable event for VAT”.

Although the issue of taxation of crypto-currencies continues to be a controversial one, and the lack of regulation in Portugal regarding operations and transactions of crypto-currencies has both sides of the advantage and of the uncertainty, the truth is that Portugal ends up becoming attractive for people who want to invest in crypto-currencies, if one considers the possibility of relocating to Portugal and taking advantage of the regime of the Non-habitual Resident.

Being a completely remote activity, it makes more and more sense to look at this type of investment and to congregate it to the regime of the Non-habitual Resident, where the eventual gains with the crypto-currencies, whether they are dividends, income from a professional activity, or capital gains from an asset increase, would be exempt from taxation for ten years under that regime.

Besides the benefit of living in one of the most beautiful and safe countries in the world, with a fantastic climate, and with excellent living conditions, many of those who created their structures abroad to invest in crypto-currencies, could ensure the non-taxation of their earnings for a period of ten years.

auctores Pedro Marrana & Vitor Abreu

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Switzerland

The best of both worlds

In international taxation one can seldomly have the best of both worlds. However, Portugal is proving otherwise, thanks not only to the Madeira International Business Centre, but also to the Non-Habitual Resident (NHR) tax regime.

Created in September 23rd, 2009, the NHR regime is a set of personal income tax exemptions and reduced rates aimed at people wishing to transfer their residence to Portugal. Those qualifying for the NHR regime are entitled to the above-mentioned reduced rates for a period of 10 consecutive years.

Among the several tax benefits deriving from the NHR regime, is the tax exemption on foreign sourced income (interests, dividends, capital gains, income from real estate property (rents), royalties, intellectual property income and business income) provided that: these latter types of income can be taxed in the country of origin under a Double Taxation Agreement signed with with Portugal.

Given the above, potential investors with structures in Malta or Switzerland can relocate to Portugal and have peace of mind with respect to dividends/profits distributed by Maltese and Swiss companies (such as a SICAV type company – investment company with variable capital) to their shareholders benefiting from the NHR scheme.

In fact, the Portuguese Tax and Customs Authority not only applies full tax exemption on income received from the above entities (as generally foreseen in the Portuguese Personal Income Tax Code), but has also established recently binding information to its taxpayers that dividends paid to NHR shareholders of Maltese companies and SICAVs are exempt from personal income tax in Portugal.

In the light of the Double Taxation Treaty concluded with Malta in Portugal, the tax credit provided to shareholders is assimilated to dividends, taking into account the specificity of the Maltese tax system of imputing income to shareholders.

On the other hand, and although the Portuguese Personal Income Tax Code considers the income paid by a collective investment organization, namely a SICAV, to its participants, is as capital income, in light of the Double Taxation Treaty between Switzerland and Portugal, the same income is considered as dividends.

Further to the above, the same treaty establishes a situation of cumulative tax jurisdiction for this income, with Portugal being able to exercise taxation as the State of residence of the beneficiaries, and Switzerland, as the State of the source. Therefore, under the NHR regime, income deriving from SICAVs will be exempt from taxation in Portugal.

The NHR as a stand-alone option, or together with the corporate tax incentives under the Madeira International Business Center, makes available to international investors. a higher degree of international mobility and liquidity, the latter through a low corporate tax rate of 5% applicable to international services companies.

These features of the Portuguese Tax System make it possible for one to benefit from the best of both worlds.

auctor Miguel Pinto-Correia

MCS and its team have more than 20 years of experience in assisting private clients who want to transfer residence or invest in the Autonomous Region of Madeira.

Obtaining RNH status requires a careful assessment of the income structure of the potential beneficiary.

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Taxation of Foreign Pensions

It is increasingly common for expats to come and spend their retirement in Madeira Island, Portugal. They bring with them not only their savings of a lifetime of work, but also their foreign pensions.

Fulfilling the criteria of tax residence in Portugal (residing more than 183 days in Portuguese territory, or, when residing less time, having a house here that can be occupied at any time in the same period of time), those who reside, for tax purposes, in Portugal, are subject to the legal obligation to annually report their foreign bank accounts and their worldwide earnings to the Portuguese Tax and Customs Authority.

It is therefore important to understand the taxation framework of foreign pensions that tax residents in Portugal are subject to.

According to the OECD Model Convention, to which most countries and territories adhere, in order to avoid double taxation “pensions and similar remuneration paid to a resident of a contracting State [in this case Portugal] as a result of previous employment can only be taxed in that State [Portugal]”. In other words, foreign pensions earned by tax residents in Portugal can only be, in most cases, taxed in Portugal.

Notwithstanding the previous paragraph, “pensions and other similar remuneration paid by a contracting State or by its political subdivision or local authority, either directly or through funds, constituted by them, to a natural person, as a result of services rendered by that person to the State, or its subdivision or municipality, can only be taxed in that State.” That is to say, foreign pensions paid to former civil servants can only be taxed by the State where the former civil servant has performed his duties.

Note, however, that the overwhelming majority of expats who come to live to Portugal will be receiving pensions derived from previous commercial or industrial activities, this means that under the law, their pensions in Portugal will be subject to progressive rates of up to 48%.

The only way to avoid such high taxation on pensions by obtaining the status of Non-Habitual Resident (NHR), which must be requested by the taxpayer on arrival in Portugal (provided that the conditions are met). Beneficiaries of the NHR regime thus have their foreign pensions subject to a fixed rate of 10% on earned pensions from foreign sources.

In addition to the benefits described above, beneficiaries of the NHR scheme may also benefit from exemptions and reduced personal income tax rates on other types of income for a period of 10 consecutive years.

auctor Miguel Pinto-Correia

MCS and its team have more than 20 years of experience in assisting private clients who want to transfer residence or invest in the Autonomous Region of Madeira.

Obtaining RNH status requires a careful assessment of the income structure of the potential beneficiary.

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Madeira is open for business

Starting July 1, Madeira and Porto Santo, Portugal, will be open to international travelers. To ensure security for both visitors and residents, all people traveling to the Atlantic islands will have to either present a negative test done within 72 hours prior to departure or be tested upon arrival (without any costs; COVID-19 tests on arrival will be paid for by the Madeira Government).

The Madeira Islands, Discover Madeira says, are focused on being a COVID-safe destination and are working with SGS, a world leader in certification, to ensure good practice across the destination to minimize risk in the wake of COVID-19 (coronavirus).

In May, Madeira developed a good practices document to deal with COVID-19. These measures are intended to provide comfort to those who travel and, ultimately, for the wellbeing of all. These three initiatives—to cover testing costs, partner with SGS in certification and develop a good practices document—form the destination’s plan to ensure a safe vacation for all visitors.

Good to know: According to Discover Madeira, the Portuguese island had very few cases of COVID-19 and acted quickly to control the virus on the archipelago. Portugal, overall, has been commended for its response to coronavirus. At present, Madeira has registered 90 positive cases of COVID-19, 67 recovered cases and no deaths.

Of volcanic origin, its location provides a mild climate and sea all year round, in addition to scenery of mountains, valleys and cliffs, all covered by the Laurissilva vegetation, named Natural Heritage of Humanity by UNESCO. The archipelago is formed by a set of islands, the main and only inhabited being Madeira and Porto Santo.

in Travel Agent Central

Offering unique corporate and personal tax advantages to expats and digital nomads, Madeira is a reference in Portugal for those looking to work and live in the sun. We at MCS have more than 20 years of experience in assisting companies, expats, digital nomads and entrepreneurs relocating to the Pearl of the Atlantic.

 

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Non-Habitual Resident Due Diligence

The Non-Habitual Resident regime/scheme is the special Portuguese taxation regime applicable to the foreign income of natural persons. This program is specially designed for people wishing to transfer their residence to Portugal.

Those qualifying for the Non-Habitual Resident (NHR) regime qualify as residents, for tax purposes in Portugal, and are taxed at reduced or zero rates.

NHR status is valid for a period of 10 consecutive years, provided that the applicant was deemed non-resident in 5 previous years prior to taking up residency.

Having tax residency in Portugal is key to obtain the NHR. Therefore, prior to applying for NHR status, one must be deemed resident for tax purposes in Portugal. According to Portuguese tax law one is resident:

  • 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 to presume the intention to hold and occupy it as the habitual place of residence.

Usually proof of residency outside Portugal prior to becoming resident and applying for the NHR is not required, unless:

  • There is a random audit carried out to one’s application by the Portuguese Tax and Customs Authority; or
  • One is a Portuguese citizen who forgot to update their tax residency in their Portuguese ID card (Cartão de Cidadão) after relocating outside Portugal in the five previous years to application.
  • One has engaged in the previous five years with the Portuguese tax authority in any way that has enable the Portuguese Tax and Customs Authority to deem that person as resident for tax purposes.

Given the above, we always advise prospective NHR status applicants to obtain, prior to the moment of their application, all relevant and legal documents that can be accepted by the Portuguese Tax and Customs Authority as proof of tax residency abroad in the 5 years previous to their application.

These abovementioned documents that should be gathered by any NHR applicant in the jurisdiction of previous tax residency are:

  1. Tax Residency Certificate.
  2. Proof of income earned, and corresponding tax paid abroad (i.e. tax return filed and corresponding tax settlement notice).
  3. Rental agreement or property purchase deed showing permanent residency intention.
  4. Work contract or pension pay slips.
  5. Utility bills.

Notwithstanding the above, the most relevant documents are the ones mentioned in 1 and 2.

If you are thinking of relocating and obtaining the NHR status and prevent it from being granted, due to the causes above, get your paper work in order.

For more information on these matters please do not hesitate to contact us. MCS’s team has been assisting expats relocating to Madeira for over 20 years and in dealing the Portuguese Tax and Customs Authority in their behalf.

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Changes to the Golden Visa and the NHR scheme

Following the approval of the Portuguese State Budget for the FY2020 the following changes have been introduced regarding the Golden Visa and the Non-Habitual Resident (NHR) scheme:

Golden Visa

Before the Approval of the State Budget: real estate investment, for the purposes of obtaining a residency permit, was allowed to be carried out in entire Portuguese territory.

After the Approval of the State Budget: the Portuguese Government has been authorized by the Assembly of the Republic, for a period of one year, to legislate on changes to the Golden Visa regime.

Under such authorization the Government is allowed to limit real estate investment, for the purposes of obtaining a residency permit, to the Portuguese mainland’s interior and the Autonomous Regions of Madeira and Azores.

Furthermore, under such legislative authorization, the Portuguese Government is expected to increase the minimum amount of the investment required to obtain the residency permit.

Last, but not least, these changes will not affect the Golden Visas already issued under the old rules.

NHR scheme

Before the Approval of the State Budget: those under the NHR scheme would have their:

  • Pensions exempted from personal income taxation in Portugal, provided that: pensions are taxed in the jurisdiction of origin according to the Double Tax Treaty entered into between Portugal and that jurisdiction; or provided the income cannot be considered as obtained in Portugal according to Portuguese domestic law.
  • Professional income (“free-lancer” income) derived from high added value activities in only be exempt in Portugal, provided that: the income may be taxed in the jurisdiction of origin according to the Double Tax Treaty entered into between Portugal and the jurisdiction concerned ; or in case Portugal has not entered into between a Double Tax Treaty with the jurisdiction of origin, the income may be taxed in conformity with the OECD Model Tax Convention (in this case, this exemption shall only apply if the jurisdiction of origin is not considered a black listed jurisdictions and as long as the income cannot be considered as obtained in Portugal according to domestic law).

After the Approval of the State Budget:

  • NHR status holders are taxed at the rate of 10% relative to net pension income. This measure can be offset through a tax credit in order to avoid any potential double taxation.
  • Professional income derived from high added value activities from foreign sources can only be exempt in Portugal, provided that effective withholding tax is applied by the source jurisdiction.

The above rules are in force since April 1, 2020.

For more information on these matters, please do not hesitate to contact us.

 

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