Portuguese tax regime for non-habitual residents

Pedro Ghidoni de Pina -

In an attempt to promote foreign investment the Portuguese Government has decided to clarify and enact provisions in order to attract high net worth professionals, entrepreneurs and pensioners, namely by executing an attractive tax regime for foreign individuals who wish to establish permanent or temporary residence in Portugal.

The great innovation and advantage of the above mentioned regime is the ten year period during which the income received by individuals developing a high value added activity from a Portuguese source is subject to a reduced flat tax rate, and the income, namely pensions, capital gains or business profits, may be fully exempt from tax if received from a foreign source.

This incentive tends to provide the perfect conditions for foreign individuals to reside in Portugal, furthermore, adding to this incentive the territorial proximity, the common cultural background, the reduced cost of living, the low real estate prices, the good healthcare availability and ultimately the weather, Portugal is presently ranked amongst the top five countries for foreign individuals to reside.

Eligibility criteria

Until 31st March of the year after the one in which the individual has become a tax resident, that individual is eligible to register as a non-habitual resident as long as it:

  • qualifies as a Portuguese tax resident under Portuguese law;
  • has not been registered as Portuguese resident in the five previous years; and
  • presents a certificate of residence providing evidence of effective taxation abroad.

The individuals who fulfill these requirements are eligible to register themselves as non-habitual residents and to be taxed as such for a ten year period, provided that the necessary legal requirements continue to be met during such period.

Regime Description

This regime foresees a reduced 20% flat rate tax for Portuguese sourced income derived from high value added activities of a scientific, artistic or technical character, such as architects, engineers, IT technicians, researchers, doctors, university teachers, designers, self-employed professionals, investors and company directors under certain conditions. On the other hand, the regime establishes a tax exemption for foreign-source income if certain requirements are met, namely in respect of taxation in the source State and type of income. These conditions are as follows:

  • Pensions - Under this provision, pensions may benefit from total exemption from tax, as long as the foreign-source pension income is subject to tax in the source State in accordance with a double taxation treaty entered into between Portugal and that State or, alternatively, if the income is not considered to arise in Portuguese territory.

  • Employment Income - The exemption will apply to foreign-source income if it is taxed in the source State in accordance with a double taxation treaty entered into between Portugal and that State, or, if no tax treaty is in place, the income is taxed in the source State and is not considered to arise in Portuguese territory.

  • Capital Gains, Property Income, Profits and Interests - Regarding foreign-source business and professional income arising from (i) high value added activities, (ii) intellectual property rights or from knowhow in the industrial, commercial, or scientific areas, (iii) property income, capital income and gains, the exemption will apply if the income/gains can be subject to tax in the other State under a double taxation treaty entered into between Portugal and that State. Alternatively, if no tax treaty has been entered into, the exemption applies if the income/gains can be taxed in the source State pursuant to the rules of the OECD model tax convention.

Regime Application

For a foreign person to register as non-habitual resident in Portugal it is required that it obtains a Portuguese taxpayer number by registering at the Tax Department as a Portuguese tax resident, which implies an effective address in Portugal, corresponding to a dwelling intended to be used as residence. After this registry at the Tax Department an application for tax treatment under the non-habitual resident tax regime should be submitted until 31st March of the subsequent year.