Tag Archives: Personal Income Tax

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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Do I need to file taxes in Madeira?

Do I need to file taxes in Madeira? This is the main question that expats relocating to Madeira ask to us as tax consultants. This is the most simple answer we can give: if you are resident, for tax purposes, yes (this includes non-habitual tax residents status holders).

Tax Residency

Tax residency, in the case of expats, is obtained either by having lived for more than 183 days (consecutive or not) in Madeira/Portugal 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.

Taking into consideration the above, residents, for tax purposes, are obliged to file personal income tax in Madeira/Portugal reporting their worldwide income earned, IBAN (or equivalent) number of foreign bank accounts held and corresponding taxes paid (in Portugal and/or abroad).

Fines

According to Article 116 of the General Taxation Infringements System, failure to file a tax return within the legal deadline is punishable by a fine of 150 to 3,750 euros.

If one decides to hand over the tax return on your own initiative, within 30 days of the end of the reporting obligation, one may be left with the minimum fine, which is 25 euros (12.5% of the minimum legal amount). This only applies if the Portuguese Government has not been penalized in its initial declaration (i.e. if it has not received amounts to which it was not entitled).

But if one hands in tax return more than 30 days after the deadline one will have to pay a minimum fine of 37.50 euros (25% of the legal minimum), which can go up to 112.50 euros if, by the time you regularise the situation, the Tax Authority has already initiated an audit.

This reduced fine must be paid within 15 days of notification. If this payment is not made within the time limit, administrative offence proceedings will be initiated and the minimum fine applicable will be EUR 150 to which the costs of the proceedings will be added.

If the failure to make a declaration is delayed, the fine may be as high as EUR 3 750. Also in this context of delay, if the tax authority finds inaccuracies or omissions in its tax return, the fine ranges from EUR 375 to EUR 22 500.

Exchange of Information

Tax authorities in the EU have therefore agreed to cooperate more closely so as to be able to apply their taxes correctly to their taxpayers and combat tax fraud and tax evasion.
Administrative cooperation in direct taxation between the Competent Authorities of the EU Member States helps to ensure that all taxpayers pay their fair share of the tax burden, irrespective of where they work, retire, hold a bank account and invest or do business. This is based upon Council Directive 2011/16/EU which establishes all the necessary procedures, and provides the structure for a secure platform for the cooperation.​

Scope: the scope of the Directive encompasses all taxes of any kind with the exception of VAT, customs duties, excise duties and compulsory social contributions because these are already covered by other Union legislation on administrative cooperation. Also recovery of tax debts is regulated via its own legislation.

The scope of persons covered by particular exchanges of information depends on the subject matter. The Directive covers natural persons (i.e. individuals), legal persons (i.e. companies), and any other legal arrangements like trusts and foundations that are resident in one or more of the EU Member States.

Exchange of Information: the Directive provides for the exchange of specified information in three forms: spontaneous, automatic and on request.

  • Spontaneous exchange of information takes place if a country discovers information on possible tax evasion relevant to another country, which is either the country of the income source or the country of residence.
  • Exchange of information on request is used when additional information for tax purposes is needed from another country.
  • Automatic exchange of information is activated in a cross-border situation, where a taxpayer is active in another country than the country of residence. In such cases tax administrations provide automatically tax information to the residence country of the taxpayer, in electronic form on a periodic basis. The Directive provides for mandatory exchange of five categories of income and assets: employment income, pension income, directors fees, income and ownership of immovable property and life insurance products. The scope has later been extended to financial account information, cross-border tax rulings and advance pricing arrangements, country by country reporting and tax planning schemes. These amendments which extend the application of the original Directive are loosely based on the common global standards agreed by tax administrations at international level, notably at the OECD. However, they sometimes go further and importantly they are legislative rather than being based on political agreement without legislative force. The Directive provides for a practical framework to exchange information –  i.e. standard forms for exchanging information on request and spontaneously, as well as computerised formats for the automatic exchange of information – secured electronic channels for the exchange of information and a central directory for storing and sharing information on cross-border tax rulings, advance pricing arrangements and reportable cross-border arrangements (“- tax planning schemes”). Member States are also required to provide a feedback to each other on the use of information received, and to examine together with the Commission how well the Directive supports the administrative cooperation.
  • Other Forms of Administrative Cooperation: The Directive provides for other means of administrative cooperation such as the presence of officials of a Member State in the offices of the tax authorities of another Member State or during administrative enquiries carried out therein. It also covers simultaneous controls allowing two or more Member States to conduct simultaneous controls of person(s) of common or complementary interest, requests for notifying tax instruments and decisions issued by the authority of another Member State.
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Bitcoin

Cryptocurrency Taxation in Portugal

Portuguese Central Bank’s position on cryptocurrencies

Since there is no central entity that guarantees the irremovability and finality of payment orders, virtual currency cannot be considered a safe currency, as there is no certainty of its acceptance as a means of payment. The same is to say that the Portuguese Central Bank (Banco de Portugal) does not technically recognise cryptocurrency as currency per se due to lack of monetary policy regulation.

Portuguese Tax and Customs Authority’s position

It is the understanding of the Portuguese Tax and Customs Authority 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”. Its position is, therefore, in line with that of the Portuguese Central Bank.

As such, income resulting from the sale of cryptocurrencies will not be taxable under the Personal Income Tax Code, within the scope of category E (referring to capitals), nor subject to being taxed under category G (referring to equity increases, as capital gain).

Furthermore, it is also the understanding of the Portuguese Tax and Customs Authority that the profits obtained from the sale of cryptocurrencies are not taxable under the Portuguese tax system, unless by their regularity ends up constituting a professional or entrepreneurial activity of the taxpayer, in which case it will be taxed as a qualifying income under the category B (freelancing) of the Personal Income Tax Code.

Last, but not least, the Portuguese Tax and Customs Authority issued clear guidelines in January 2019 providing many answers to questions related to dealing with cryptocurrency, reporting obligations, cryptocurrency invoicing rules, rules for initial coin offerings,etc…

European Court of Justice and VAT

Jurisprudence of the European Union Court of Justice (EJC) on bitcoin, states that  its sale is an onerous activity, subject to VAT, but covered by the exemption, as with other means of payment with a liberating value . “Considering the decision handed down by the ECJ (…) the exchange of cryptocurrency for‘ real ’currency constitutes a provision of services carried out against payment, exempt from VAT”.

Thus, the Portuguese Tax and Customs Authority concludes that although “cryptocurrency remuneration is a service provision subject to VAT”, the VAT code article that defines the exemptions covers “also cryptocurrency transactions”.

In the medium-long run

It is expected that, in the medium term, cryptocurrencies will be regulated and their tax regime concretely defined. In fact, its regulation may not imply taxation of the income derived from them. However, it is expected that it may eventually pass through its classification as financial assets, and through its classification as a security or derivative – not as a currency for purchase and sale transactions – with a consequent change in the definition of a security. Should this be the case, the respective income, obtained by taxpayers who do not engage in any activity related to cryptocurrencies, could eventually be taxed as passive income, such as capital income (for examples as dividends in proportion to the original investment) or capital gains.

Conclusion

Although Portugal has great conditions, from a personal income tax and VAT standpoint, for those who income is generated through cryptocurrencies, some uncertainty remains due to the fact that there’s no regulatory framework, which in turns makes it difficult for individuals (and companies) to open bank accounts in the country to be used for the purpose of trading.

Further to the above, crypto traders opting for taking up residency in Portugal, and more specifically Madeira Island (due to is safe haven status during the Covid-19 pandemic) for tax purposes, may combine the above benefits with the ones available under the Non-Habitual Resident taxation regime, under which most the foreign sourced income is exempt.

MCS and its team has more than 20 years of experience in assisting international investors and expats making their move to Portugal and Madeira Island. Should you request our assistance do not hesitate to contact us.

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Applying for NHR

Applying for NHR in Madeira (or Portugal for that matter) is a straightforward process that nevertheless requires experienced assistance, given that tax residency relocation does require a careful analysis of one’s income structure and jurisdictions involved.

Generally speaking the Non-Habitual Resident (NHR) scheme is a 10-year tax exemption granted by the Portugal to all those wishing to relocate to Portuguese territory, regardless of their nationality, and who have not qualified as resident, for tax purposes, in the last 5 years prior to application.

Under the NHR regime, qualifying taxpayers are granted the following the benefits on their foreign income:

  • Taxation exemption on employment and freelancer (self-employment) income if it is subject to tax 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 under applies.
  • Freelancer income derived from high value-added service activities, with a scientific, artistic or technical character, are also exempt if effectively 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.

For one to apply for the NHR regime, one must first be deemed as resident, for tax purposes, in Portuguese territory. This means 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 to presume the intention to hold and occupy it as the habitual place of  residence.

Applying for NHR: Step by step

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.

Why is a tax consultant needed?

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 analyzed and adjusted, if needed, on a timely manner in order to comply with the NHR scheme rules.

Therefore, when thinking about relocating to Madeira, having a tax consultant that fully understands the nuances and variables surrounding the NHR scheme and the implications arising from such relocation, including those deriving from migration rules and double taxation treaties.

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.

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NHR Regime – Update of Procedures

Following the publishing of the new list of “high value added activities” applicable to non-habitual residents (NHR) that register from 2020 onward, the Portuguese Tax Authority (AT) has decided to change the way which it controls how the high value added activities are performed.

Old procedure:

The AT had adopted a very lengthy and bureaucratic administrative procedure involving prior recognition, through presenting academic and contractual documents, and that took place simultaneously with the request for registration as a non-habitual resident or whenever the NHR would require such recognition at a later stage.Such approach did not rule out subsequent auditing by the AT concerning compliance with the regime requisites.

Such approach did not rule out subsequent auditing by the AT concerning compliance with the regime requisites.

New procedure:

Any NHR who wishes to benefit from 20% flat tax rate applicable to the activities recognized as being of high added value just need to refer such through the personal income tax return that is to be submitted annually by the NHR status holder, in accordance with the Law. There is no need to obtain prior recognition from the AT.

Proof concerning High Value Added Activities in case of audit

  • Employment or supply of services contract;
  • Proof of registration in a Professional Association or Guild;
  • Document proving that he or she has an administrative position; Declaration attesting to the beginning of the activity, in the case of independent workers; or
  • Other official documents that serve as proof that he or she exercises the invoked activity.

What is the NHR Regime?

It 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.

NHR status is valid for a period of 10 consecutive and non-renewable years, unless the taxpayer becomes non-resident for tax purposes for a period of 5 years before reaplying to the scheme.

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Tax Reporting Obligations in Portugal

Tax reporting obligations in Madeira and Portugal are a serious matter for who are residents, for tax purposes, including those under the NHR (Non-Habitual Resident) status, we cannot stress enough the following warning: all worldwide income needs to be reported to the Portuguese Tax Authority, along with the corresponding taxes paid abroad and foreign bank accounts held.

Residents and NHRs status holders are therefore required to report, on a yearly basis, to the Portuguese Tax Authority the following income and it’s jurisdiction of origin:

  • Salaries (Type A Income);
  • Business or Professional Income (Type B Income);
  • Capital Income (Type E Income);
  • Real Estate Income (Type F Income);
  • Capital Gains (Type G Income);
  • Pensions (Type H Income); and
  • IBAN Numbers of Foreign (non-Portuguese bank accounts)

To the above mentioned incomes that must be declared, resident taxpayers are also required to declare corresponding tax paid and social security contributions, where applicable, and corresponding jurisdictions. This allows the Portuguese Tax Authority to analyze the income sources and apply the exemptions, under the NHR scheme, where legally applicable.

Furthermore, the double-taxation treaties signed between Portugal and other countries have exchange of information clauses that allows both parties to inform each other on the income and taxes paid in each jurisdiction.

Reporting your worldwide income allows the Portuguese Tax Authority to cross-check and randomly audit taxes declared, with the foreign information from its counterparts, and demand truthful reporting from all Portuguese tax residents.

Failure to comply with Portuguese tax reporting obligations, as a resident for tax purposes, may incur in criminal liability.

Fore more information on tax reporting obligations, implications or assistance do not hesitate to contact us at management@mcs.pt or www.mcs.pt.

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