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Moving To Portugal – Tax Planning And The Non-Habitual Resident Regime – Capital Gains Tax



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Introduction

Individuals who become resident in Portugal can benefit from a
particularly favourable tax regime known as the ‘Non Habitual
Resident (NHR) Regime’, provided they have not been resident in
Portugal in any of the previous five tax years.

Under the NHR regime, substantial tax exemptions can apply for
the first ten years of residence in Portugal.

If you are moving from the UK to Portugal, certain sources of
income may escape taxation in both the UK and Portugal.

Tax Benefits of the NHR regime

Earnings

If you work in Portugal and your activity is included on the
official list of ‘high value activities’ published by the
Portuguese government, your earnings (from both employment and
self-employment) will be subject to tax in Portugal at a flat rate
of 20%.

This flat 20% rate compares favourably to the standard scale
rates of income tax in Portugal that currently go up to 48%, plus a
surcharge that applies to income over €80,000.

If you work outside of Portugal, the earnings from your overseas
employment may be tax free in Portugal, provided certain conditions
are met, however, you are likely to find that those earnings are
taxable in the source country, and professional advice should be
taken to determine the extent of taxation in the source
country.

Note that you are not required to have a ‘high value
activity’ in order to access the NHR regime. The only test of
eligibility for the NHR regime is that a person must not have been
a resident in Portugal in any of the five previous tax years.

Pension income

The tax treatment in Portugal of pension income depends on the
nature of the pension. Most double tax treaties (DTTs) allocate
sole taxing rights to the country of residence and this treatment
would normally apply to employment pensions, personal pensions and
state pensions.

However, there is an exception where the pension is a government
service pension. For this type of pension, most DTTs allocate sole
taxing rights to the country of source.

Where Portugal has sole taxing rights and the individual
qualifies for the NHR regime, pension income is taxable at a flat
rate of 10% in Portugal. The 10% rate was introduced on 31st March
2020.

For individuals who were already registered under the NHR regime
before 31st March 2020, overseas pension income continues to be
exempt from tax in Portugal.

Investment Income

In general, other types of income, such as dividends, interest,
royalties, rental income, capital gains etc, from a foreign source
will be exempt from taxation in Portugal, under the NHR regime
provided:

  • Such income may be taxed in the source country under the terms
    of a Double Tax Treaty (DTT); or

  • If no DTT exists, such income may be taxed in the source
    country under the rules of the OECD Model Tax Convention on Income
    and on Capital, the source country is not a blacklisted tax haven,
    and the income is not regarded as arising from a Portuguese source
    under Portuguese tax rules.

Non-habitual residents in receipt of UK dividends, for example,
can avoid tax on those dividends in Portugal, since the UK/Portugal
treaty provides that they may be taxed in the UK. The dividend
income may also be tax free in the UK under the UK’s
‘disregarded’ income rules. It may therefore be possible
for individuals resident in Portugal under the NHR regime to avoid
tax in both the UK and Portugal on UK source dividend income.

The NHR regime can be particularly favourable, therefore, for UK
business owners who receive remuneration primarily by way of
dividend income.

Capital Gains

Under the NHR regime, a capital gain is exempt in Portugal if it
may be taxed (under tax treaty rules) in the country of source.

Under many DTTs, capital gains on the disposal of real estate
are taxable in the country where the real estate is situated. In
such cases, Portugal would not tax the gain. However, the tax
position in the country where the property is situated would need
to be considered.

Most DTTs provide that capital gains on shares are taxable only
in the country of residence, so share gains are likely to be
taxable in Portugal only.

Gains are taxed at a flat rate of 28% in Portugal (35% if the
asset is located in a tax haven), and therefore it may be more tax
efficient to dispose of shareholdings before moving to Portugal, if
your country of residence taxes them at a more favourable rate.

Specific advice would need to be taken.

Exemption with Progression

For all types of income which qualify for exemption in Portugal
under the NHR regime, whilst the income itself is not taxed in
Portugal, it is nevertheless taken into account for the purposes of
determining the rate of tax that applies to any other income
taxable in Portugal under the normal scale rates (for example,
Portuguese rental income or Portuguese earnings that do not qualify
as high value activities). This has the effect of increasing the
effective tax rate applying to any non-exempt income (exemption
with progression).

Registration for NHR Regime

Individuals must be formally registered as a Non-Habitual
Resident in order to benefit from the favourable tax regime. The
application to register for the NHR regime must be submitted by
31st March following the first year of residence in Portugal. The
application must include a statement that the individual has not
been resident in Portugal in any of the previous five years.

If you cease to be Portuguese resident but you return to
Portugal within the initial ten year period, you can be taxed under
the NHR for the remaining number of qualifying years.

Summary

The NHR regime makes Portugal a particularly attractive country
for many individuals who are looking to move overseas.

Certain types of foreign income and gains can be exempt from tax
in Portugal, although you will always need to consider the tax
treatment in the country of source.

The tax treatment in both countries will depend on the nature of
the income and gains, the country of source, and the terms of the
double tax treaty between that country and Portugal, if there is
one.

In some circumstances, where income and gains do not qualify for
tax exemption in Portugal, a higher rate of tax may be payable in
Portugal compared to the individual’s former country of
residence, and other tax planning opportunities may need to be
considered.

It is therefore essential to seek professional advice if you are
considering moving to Portugal as a Non-Habitual Resident.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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