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Golden Visa and Tax Benefits

Golden Visa – Can it be a profitable investment? Tax Benefits related to the rehabilitation of real estate.

In the last few articles I have been mentioning and outlining several reasons why the purchase of a property worth 350 thousand Euros with rehabilitation works will be a good and profitable investment to obtain the Golden Visa.

Associated to a lower investment value, which will be a minimum of 350 thousand Euros for the purchase of a property and rehabilitation works, in comparison to the investment of 500 thousand Euros for any property or group of properties, the option for rehabilitation of urban real estate, especially in the perspective of its profitability through rental housing, there are also other advantages for the investor.

In addition to some support programs and funds available to owners who proceed with the rehabilitation of buildings in areas of urban rehabilitation, in this article we will specifically focus on the aspect of tax benefits associated with urban rehabilitation, which adds even more advantages to the Golden Visa regime through real estate investment.

The Golden Visa regime in the form of investment in a minimum global (acquisition of property and rehabilitation) value of 350 thousand Euros foresees that the same can be made in real estate located in an area of urban rehabilitation, or in real estate whose construction has been concluded at least 30 years ago.  This is also the premise in the case of the tax benefits stipulated in article 45 of the Statute of Tax Benefits (EBF), as the benefits will be attributed when the rehabilitation works are carried out in real estate that is in either of the two aforementioned situations.

However, there are two other conditions, in this case cumulative, which need to be observed:

  1. a) the property rehabilitation interventions must be promoted under the terms of the Urban Rehabilitation Legal Regime;
  2. b) As a result of the intervention referred to in the previous sub-paragraph, the maintenance status of the property needs to be two levels higher than that previously attributed, and must have at least a Good level, comprehending that the energy efficiency and thermal quality requirements applicable to the buildings are fulfilled.

In order to comply with that mentioned in paragraph b), it will be necessary to request a technical evaluation from the Municipality and the fee for such evaluation of the state of conservation will be reduced by 50% in these cases.

If the requirements are fulfilled, in accordance with the EBF, the tax benefits to be granted are as follows:

Exemption from municipal property tax (IMI) for a period of three years from the year, of the conclusion of the rehabilitation works, with the possibility of this exemption to be renewed and extended, at the request of the owner, for a further five years in the case of properties assigned to rental for permanent dwelling purposes or to own as permanent dwelling;

Exemption from municipal tax on onerous transfers of real estate (IMT) in the acquisition of real estate for rehabilitation, provided that the purchaser begins the respective works within a maximum period of three years from the date of acquisition;

Exemption from municipal property transfer tax (IMT) on the first transmission of property, following the rehabilitation intervention, in the case that the property will be used as rental for permanent dwelling purposes or, when located in an area of urban rehabilitation, also for own and permanent dwelling purposes;

In my opinion, these exemptions allied with the Golden Visa regime, in which the investor is obliged to maintain the investment property for a period of five years, may bring enormous advantages by mitigating the most onerous taxes and costs related with the acquisition and holding of a property.

The first advantage will be the IMI exemption that may last for eight years after the acquisition and rehabilitation of the property, if it is used to rent for habitational purposes, or even if it’s used as the permanent habitation of the investor.

The second advantage will be not having to pay IMT if the rehabilitation works are started within the first three years after the acquisition of the property. That is, there is a suspension in the payment of IMT during the first three years, and a total exemption of its payment if it is proven that the owner started the rehabilitation within the maximum period established.

If we take as an example a property acquisition to rehabilitate in the amount of 350 thousand Euros, the investor can be exempted from paying the 8% tax on that amount, corresponding to a value of 16,964.75 Euros.

Finally, the advantage of exempting the future purchaser of the rehabilitated property from the IMT tax, if he uses the property for rental as a permanent residence, or even as his own permanent residence.

This advantage of exempting the future buyer of the payment of IMT is a great advantage at the level of marketing of the property in the future, when the investor under the Golden Visa, has already exceeded the five years in which it is required to maintain ownership of the property, and now decides to capitalize the investment through the sale of the same.

Another interesting tax benefit is the fact that the cost of the contract for the rehabilitation of the property can be taxed in terms of VAT at 6% instead of the usual 22% applicable to construction contracts. With a rehabilitation contract, it will be possible to apply the lower rate of VAT.

Also at the Personal Income Tax (IRS) level there are some interesting benefits when opting for the investment in real estate for rehabilitation, through the Golden Visa, and its profitability through renting.

And although it is not contradictory to the Golden Visa regime, the truth is that in order to benefit from these incentives in terms of IRS, the investor must become a tax resident in Portugal, something that every so often it’s not a common aspiration from the investors.

As we know, many of the investors who opt for the Golden Visa, do not intend to become tax resident in Portugal, however for other investors who effectively choose to move to Portugal cutting ties with their country of origin, the change of tax residence to Portugal is not an impediment at all.

For those investors who choose to become tax resident in Portugal, Article 71 of the EBF, grants two tax benefits in terms of IRS:

  1. a) Capital gains earned by IRS taxpayer’s resident in Portuguese territory arising from the first disposal, subsequent to the intervention, of property located in an urban rehabilitation area, are taxed at an autonomous rate of 5%, without prejudice to the option for aggregation;
  2. b) Rental income earned by IRS taxpayer’s resident in Portugal is taxed at 5%, without prejudice to the option for aggregation, when it derives entirely from the rental of real estate located in an ‘urban recovery area’, recovered under the terms of the respective recovery strategies;

Finally, and perhaps of less relevance for those who make an investment under the Golden Visa, also in terms of IRS, if the investor becomes tax resident in Portugal, he will be entitled to deduct 30% of the costs incurred by the owner/investor related to the rehabilitation of the property, up to a limit of 500 euros.

As mentioned above, there are other tax benefits associated with rehabilitation if the investment is made through other vehicles holding the property, and there are also other incentives and support in the form of funds and support for rehabilitation.

Nevertheless, as it was possible to demonstrate, the tax incentives themselves, allow, in the case of investment through rehabilitated real estate, to mitigate one of the disadvantages most often mentioned in real estate investment under the Golden Visa regime, which is related to the tax costs, some fixed as the IMI, throughout the five years in which the investor is obliged to keep the property in his ownership.

Therefore, using the example I have been giving, the profitability of the investment through the rental housing, it is possible to avoid most of the tax costs in the procedure of purchase and maintenance of the property.

auctor Pedro Marrana

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Relocating to Madeira? What not to do!

If you are considering relocation to Madeira Island (Portugal) there are a few simple steps that you ought to follow in order to avoid tax and immigration complications in regards to 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, such as British, ought to have the appropriate residency visa in 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 declaration in the case of obtaining rental income 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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Golden Visa – Affordable housing and legal requirements

What are the Golden Visa’s legal requirements for the investment through real estate rehabilitation?

As mentioned in my last article, in this fourth article I will analyze the requirements for the acquisition and execution of rehabilitation works on real estate, in the global amount equal or superior to 350 thousand Euros to be eligible, under the Golden Visa program.

Firstly, it will be necessary to define what types of property will be eligible.

Any property regardless of its purpose, whether for housing, commerce or services, whose construction has been completed at least 30 years ago, or that the property is located in an area of urban rehabilitation (even if its construction has been completed less than 30 years ago).

Regulatory Decree no. 9/2018 of 11 September has changed the way the means of proof of compliance with the above-mentioned requirements for the investment to be eligible under the Golden Visa, were drafted.

However, there are some details that sometimes escape investors, and which it is important to point out.

I would say that the two most important details are:

  • whether the property is in a rehabilitation area, or its construction was completed at least 30 years ago, in order for it to be eligible the applicant will always have to carry out works on the property;
  • for the purposes of the regulatory decree mentioned above, what matters is the date on which the construction of the property were concluded, and not the date on which it was registered in the land register, or that it was registered in terms of tax registry or even when it was acquired for the first time;

There should be no confusion between the requirement and how to prove the requirement. Article 65-D, number 4, paragraph h) of Regulatory Decree 9/2018 of September 11, is quite clear when mentioning that it is necessary to prove the conclusion of the construction of the real estate property or properties at least 30 years ago, regardless of whether or not that situation/fact results from the land registry certificate.

We should not confuse the date of inscription of the property in the tax registry or the date of its registration in the land registry office, the normative clearly and specifically requires proof of the date of conclusion of the construction.

The way to prove the date of the definitive conclusion of the construction will be, in principle, through the property’s use permit, which should clearly and unequivocally mention the date on which the construction work is considered to have been concluded and that the property can be used for the purpose for which it was intended.

In principle, it should be the property’s use permit that will dictate and serve as proof if the construction of the property was completed or not at least 30 years ago, but sometimes that can be mentioned in the land registry certificate.

Concerning the obligation to carry out construction works and rehabilitation of the property, the Regulatory Decree no. 9/2018 of 11 September, amended article 65-D of Regulatory Decree nr. 84/2007, of November 5th, and established that in order to prove that the required rehabilitation works have been carried out, it will be necessary to present:

  1. Prior communication or ii) licensing request to carry out the urban rehabilitation operation or iii) a construction work contract to carry out rehabilitation works in the properties subject to acquisition, signed with a legal entity that is duly authorized by the Institute of Public Markets, Real Estate and Construction, I. P.

If we make a brief analysis of the legal regime of urban rehabilitation, established by Decree-Law No. 307/2009, of 23 October, both to the definitions of building rehabilitation, as well as to the definition of urban rehabilitation, contained in article 2 of the referred rule, and an analysis of articles 4, 6 and 6-A of the Legal Regime of Urbanization and Building (Decree-Law No. 555/99 of 16 December), we can reach the following conclusions:

  • Rehabilitation of buildings – the form of intervention intended to confer adequate performance characteristics and functional, structural and constructive safety to one or more buildings, to the functionally adjacent constructions incorporated in its patio, as well as to the fractions eventually integrated in that building, or to grant them new functional aptitudes, determined according to the options of urban rehabilitation pursued, in order to allow new uses or the same use with higher performance standards, and may comprise one or more urbanistic operations;
  • Urban regeneration – is the form of integrated intervention on the existing urban fabric, in which the urban and real estate heritage is maintained, in whole or in substantial part, and modernised through the carrying out of works of remodelling or improvement of urban infrastructure systems, of equipment and of urban or green spaces for collective use, and of works of construction, reconstruction, extension, alteration, conservation or demolition of buildings;

Therefore, the Legal Regime of Urbanization and Building (Decree-Law No. 555/99 of 16 December) will define what type of works will demand a ii) license to carry out works of rehabilitation, the type of works that will only demand a i) prior communication, or the iii) works that will demand no type of previous control, namely the works of little urban relevance.

Taking into account that any of the types of works mentioned in articles 4 to 6-A of Decree-Law No. 555/99 of 16 December correspond to works that can be framed as building rehabilitation works, the type of document proving the execution of the works that is required under Regulatory Decree 9/2018 of 11 September will depend on the degree of intervention in the property that is made.

Therefore, I believe it is more than defensible that, for the purposes of eligibility under the provisions of article 65 D, number 4, paragraph e) of Regulatory Decree 9/2018 of 11 September, it will be sufficient that the investor carries out works that effectively improve the quality of the property, that improve its energy certification, or that benefit its conservation, safety, in relation to its previous state, even if it has already benefited from rehabilitation works.

As an example, the replacement of windows and doors, for options that improve the energy certification of the property, or even the installation of solar panels, replacement of flooring or interior lining, for one that improves the quality of the property, are eligible works, and suffer no more than the addition of the contract to carry out rehabilitation works, provided that, concluded with a legal person that is duly authorized by the Institute of Public Markets, Construction and Real Estate, I.P.

Having said this, and in summary, there is a good investment opportunity in the Golden Visa regime, in the possibility of combining the acquisition of property with remodeling or rehabilitation works, for a total amount equal to or greater than 350 thousand Euros, if simple directives are followed in order to make the investment eligible.

This type of investment may effectively modernize the urban fabric in Portugal, help in the recovery of many aged areas of cities, which have an enormous potential for a more sustainable housing pole in terms of cost, and in turn more profitable.

auctor Pedro Marrana

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Golden Visa – Rehabilitation for affordable housing

In the last article I have mention that in 2021, it will be possible to observe an increasing trend in the betting on construction and rehabilitation of urban real estate, in order to accommodate the growing demand in the market for more affordable housing, specially pursued by young couples, who end up leaving their parents’ house at later stages than 40 or 50 years ago, and look for a new home closer to the best infrastructures, the jobs, the best socio-cultural activities and the best services, specifically health services and care.

Even with the news that BCE will maintain a monetary policy that will ease the resource to credit for habitation, keeping the interest rates stuck near at 0%, the fact is, we currently face the cold truth of one of the biggest economic crises in history, which impact, and duration will depend on the global measures taken by the several governments, in terms of supporting the sustainability of several economic sector, companies and specially jobs. This means, that even with low interest rates, the habitation on the bigger urban areas needs to make a change in order to be more affordable, more effective in terms of the usage of construction materials, and more sustainable.

This leads me to consider, in the scope of the Golden Visa procedure, that the bet on the investment in the value of 350.000 Euros, in real estate, whose construction has been concluded at least 30 years ago or located in an area of urban rehabilitation and execution of rehabilitation works of the acquired real estate, may be a good solution to advance towards the transformation of the housing market in urban centers, keeping a solid bet on the profitability of the investment.

In Portugal, whether in Lisbon, Porto or even Funchal, there are good opportunities for properties with the characteristics and requirements mentioned in the previous paragraph.

The fact that there are a good number of properties that can fulfil the above requirement, together with the fact that over the last 10 years we have seen the exponential growth of the area of urban rehabilitation of cities, as well as the intervention of new techniques of reconstruction, reconditioning, use of new and better materials and architectural solutions, create the perfect symbiosis for the bet in this market segment.

It is also important to mention that in Portugal there are tax benefits for the rehabilitation of real estate for residential purposes, and in addition to the tax benefits granted, which range from municipal tax exemptions, to reduced VAT rates for construction services, there are also, depending on each municipality, support and financing programs for the rehabilitation works on the acquired real estate.

These tax and non-tax benefits will be addressed in articles that I will publish in the future.

The Golden Visa program obliges the applicant to keep the real estate investment for a period of five years in its ownership, going through the two renewals of the temporary residency permit, until the applicant reaches the possibility of requesting for the permanent residency permit, but that does not prevent the applicant  from using the investment in a profitable way, for example through renting.

Another form that is not ruled out, is the lease for a period of five or six years, with purchase option at the end of that period for a value determined from the beginning, ensuring that price for the future, or even leaving that value open to a possible market valorization of the property.

This way I believe it is possible to give the fullest mark of the term investment, to the Golden Visa, keeping the fulfillment of the obligation to retain ownership of the property during the period of five years.

The next step should be getting to know what material requirements are needed regarding the investment beside the minimum amount of the global investment.

Within the application procedure for obtaining a Golden Visa, the requirements that are necessary, regarding the real estate investment, beside that the global value needs to be equal or higher than 350.000 Euros, are:

  1. the construction of the acquired property must have been concluded at least 30 years ago or be located in an area of urban rehabilitation;
  2. rehabilitation works will have to be carried out on the real estate acquired;

The requirements mentioned above need to be proven at the time of the application for obtaining the Golden Visa by this investment route.

The way to prove the requirements in a) should be done either through documentation of the property’s land registry for the first part of that paragraph, or through a declaration of the Municipality attesting the location of the property in an urban rehabilitation area, concerning the second part of that paragraph.

A more complex issue will be the meaning and scope to be given to what is intended by the rehabilitation works that must be carried out.

Undoubtfully, some sort of rehabilitation work needs to be done in either case, but I don’t believe that the legislator had the intention to force a full rehabilitation of the property, but rather gave great latitude in the volume of works to be performed in order to be considered that the rehabilitation of the property has been carried out.

In the next article I shall provide a deeper analysis of what I deem to be considered rehabilitation work for the purposes of complying with the requirement mentioned in the point b) above.

Having said this, in the next article I will again address in general terms the requirements for the investment of 350 thousand Euros in real estate built more than 30 years ago, or in an area of urban rehabilitation, and focus more specifically on the interpretation that I believe to be more correct and balanced, regarding the interpretation of the obligation of rehabilitation works, and what will be the extension or volume of those works, which may vary according to the physical state of conservation in which the real estate is acquired.

auctor Pedro Marrana

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Golden Visa – A profitable investment?

Although the advent of vaccines showed a light at the end of the tunnel to solve the pandemic crisis, we are still far from solving the serious economic crisis that will follow.

There are doubts as to whether the government measures in the various countries to stimulate and recover the economy will be taken in time, and if so, whether they will be sufficient to guarantee some immediate stability that will allow the gradual economic recovery.

While risk is always an inalienable part of investment, in times of greater uncertainty any investor appreciates the security of informed analysis, and that is our goal with the several articles I shall be doing twice a week concerning the Golden Visa and the different forms of investment.

In my first article, I shall initiate the analysis of the most common form of investment, real estate.

Although there are several forms of investment under the Golden Visa, real estate investment has remained the preferred form of investment since the beginning, corresponding to €4,908,676,856.49 of the total €5,431,263,516.27 invested since October 2012, under the Golden Visa program.

According to many international consultants, the Portuguese Golden Visa program is among the most sought after and successful global visa programs, specially by the means of real estate investment, along with other destinations such as Switzerland or Montenegro.

Real estate investment under the Golden Visa can be carried out in two ways:

(a) acquisition of real estate of a value of €500,000 or more;

  1. b) Acquisition of real estate, whose construction has been concluded at least 30 years ago or located in an area of urban rehabilitation and execution of rehabilitation works of the acquired real estate, in the total amount equal to or over €350,000 or more;

The value of any of the forms of investment may be reduced by 20% when it is carried out in low density territory (NUT III level with less than 100 inhabitants per km2 or per capita GDP below 75% of the national average)

The legal nomenclature of the Golden Visa program is Residence Permit for Investment, and as the name indicates, the investment can be capitalized, so the applicant can, besides using the acquired property as his/her own home, rent it or use it for commercial, industrial, agricultural or tourism purposes.

It is important to focus on this characteristic of the investment, on its ability to be capitalized, not just held, and how stable that form of investment will be in Portugal for the next years.

Given the high volatility of cryptocurrency investment, which requires a highly informed investor to be contemporary within the blockchain system, the fact that commodity markets are in an uncertain period of transition, and that the stock market leaves some apprehension as to future stability, real estate investment turns out to be a relatively safe investment given the indicators of the past year.

Also, there will be tax benefits associated with any of the forms of property investment, whether in the scope of rehabilitation, or for the purchase of a permanent dwelling, or even through the exploitation of the property for tourism or long-term rental purposes. These tax benefits will be analysed in future articles.

In the following articles I will make an analysis of the real estate market in Portugal, with a special emphasis in Madeira Island, either in the perspective of sale, renting or any other form of profitability, either in the housing, commercial or tourism market, always aggregated to an investment perspective within the Portuguese Golden Visa program.

auctor Pedro Marrana

Our multidisciplinary 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

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Golden Visa in Portugal? Why Madeira?

Golden Visa in Portugal, a residency and citizenship by investment program, is having some of its rules changed when it comes to the investments requirements that allow someone to take up residency (and eventually citizenship) in Portugal.

One of the changes the Portuguese Golden Visa program pertain to the location of the of real estate investment. Under the new rules for the Portuguese Golden Visa real estate investment can only be considered, for the purposes of obtaining the residency permit, if said property is located in the Autonomous Region of Madeira (the Pearl of the Atlantic), in Azores or in the interior of the Portuguese mainland.

The Madeiran Real Estate Market and the Golden Visa

Real estate investors in Madeira can be divided into two categories, those coming from the European Union and those coming outside of the Union, both in search for a safe place, high-standard quality of life and eternal Spring.

Golden Visa in Madeira, through  is mainly sought after by South Africans, British, Americans and Russians. Why Madeira? While house prices in Portugal rose 5.9% in 2020, in the midst of the Covid-19 pandemic, settling at €2,147 per square metre (m2), Madeira’s housing prices rose 7,8%, above the mainland’s average (reflecting not only the quality the construction quality of the property’s sold, but also Madeira’s unique location and spring-like weather throughout the year allowing the use of the properties for touristic rentals in a sustained way).

Statistics also show that the median price of dwellings in Madeira (1,332 €/m2) are above of Portugal’s northern capital, Porto, (1,264 €/m2) – registering a year-on-year rates of change +12.2%. Therefore, it is not surprise, to find a Madeiran municipality (Calheta) among the Portugal’s top 10 municipality for rentals.

Madeira being named the “Best Island Destination in the World” by the World Travel Awards for several years in a row has also made a positive impact on its desirability as an real estate market that is sought after by investors with medium and long-term visions, since the characteristics that gave Madeira the award for “Best Island Destination in the World” will not disappear.

Another reason for why real estate investors opt for Madeira is its safety, from a Covid-19 pandemic point of view, thanks to the way the Regional Government has successfully managed the pandemic and the regional healthcare system resources to fight it.

For all the reasons above plus the quality of life and work-life-balance that one finds in Madeira it is no surprise that Madeira is on track to become one the most sought after regions where one can do an investment to obtain a Portuguese Golden Visa.

 

 

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Golden Visas Limited to Madeira

What will change?

The Portuguese Government has published its decree-law introducing substantial changes to the Portuguese Golden Visa programme and thus the following new rules apply to obtain said visa:

  • Capital transfer in the amount of 1.5 million euros or more;
  • Capital transfer in the amount of € 500,000 or more, which is applied to research activities carried out by public or private scientific research institutions, integrated into the national scientific and technological system;
  • Capital transfer in an amount equal to or greater than € 500,000, intended for the acquisition of investment fund units;
  • Capital transfer in an amount equal to or greater than € 500,000, intended for the constitution of a commercial company with headquarters in the national territory.
  • The purchase of real estate with a value of € 500,000 or more is only allowed when the houses are located in the Autonomous Regions of the Azores and Madeira or in the interior territories.

These changes come into force on January 1, 2022.

Why Madeira, of all other places in Portugal?

Weather: Geographically located off the coast of Africa, Madeira is certainly European.  The currency is the euro, the culture is European and politically speaking Madeira is 100% Portuguese.  And yet the climate is sub-tropical with temperatures rarely dropping below 20 degrees centigrade even in the winter, and a high level of rainfall in the mountainous interior ensures the island is very green for the majority of the year.

Reduced operational costs: Madeira offers low operational costs when in comparison with other European countries. In fact, the cost of human resources and the price of several goods and services are very competitive when directly compared with other European locations, allowing companies to face considerably lower costs when establishing operations in Madeira.

Connectivity: Business wise, Madeira has a highly qualified workforce and most of the people speak and understand the English. Add that to the fact the its Cristiano Ronaldo Airport connects you to most of European capitals (Paris, Amsterdam, Vienna, Zurich, London, Berlin…) and it is easy to understand why the tech start up scene is developing.

In terms of international communications connectivity, Madeira is connected to a Submarine Cable Station connecting Europe to Africa and the Americas, 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.

Safety: Madeira is Portugal’s safest region, with a criminality rate of just 26 criminal cases per thousand inhabitants.

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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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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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Digital Nomad Paradise

Madeira Island, has asserted itself as a digital nomad paradise not only due to its tax friendly policy towards corporations and individuals, but also due to its internet connection and infrastructure.

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.

Further to the above, and as of 2021m Madeira is also benefiting from the EllaLink connection.

EllaLink is a optical platform offering secure high capacity connectivity on a low latency transatlantic route (<60 ms round-trip delay time between Portugal and Brazil), linking major terrestrial and subsea hubs in Europe and Latin America. EllaLink is a privately funded and independent company committed to providing services on a Carrier Neutral, Open Access basis.

EllaLink will provide telecoms connectivity between Europe and Latin America connecting key financial centres, major data centres and the key population’s areas. EllaLink will be providing the first-ever direct fibers between the two continents with a point of presence in Sines, Madrid, Lisbon, Marseille, Barcelona, Fortaleza, São Paulo and Rio and onward connectivity to the USA, Europe, Asia, and Africa and the Middle East.

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