Non-Habitual Residence tax regime in Portugal

Since 2009 and the introduction of the Non-Habitual Residence (NHR) tax regime, Portuguese authorities have been enticing wealthy individuals and families to relocate to Portugal using significantly beneficial tax treatment for the first ten years that they live in Portugal.

While this may sound like the preserve of the uber-rich, this isn’t necessarily the case and is a tax system which is open to those currently in certain types employment as well as retirees who either live, or are planning to live, on an income from pension from outside Portugal.

What is Non-Habitual Residency status?

The Non-Habitual Residence status was introduced in Portugal to offer people a legitimate way for people to earn, save and invest in a jurisdiction without paying tax on things like inheritance, the disposal of assets and pension income. Being granted NHR status ensures that, for ten years, people who are tax resident in Portugal (and accepted for Non-Habitual Residence status) can essentially receive certain incomes free of tax both in Portugal and in the country of the income source.

The Non-Habitual Residence regime could be especially beneficial for retirees as income which is received from pensions overseas is not taxed in Portugal on the basis that it has normally be taxed at source (i.e. the location of the pension).

Non-habitual residence status also means that people living, working and receiving an income in Portugal are subject to only 20% of their entire Portuguese based income, and also means that they can potentially claim 25% of this tax as a cost for acquiring their income. This could effectively bring the rate of income tax down to a NET of just 15%.

Applying for Non-Habitual Residence status

If an individual wants to apply for Non-Habitual Residence status, there are a number of requirements which must be met as a minimum, including:

• You must not have been resident in Portugal for the previous five tax years
• You must be physically resident in Portugal
• You must also be resident in Portugal
• When applying, you must be a tax resident in Portugal
• You must own (or rent) a property in Portugal

While the process, provided it is executed correctly, can be relatively straightforward it can often take a fair amount of time. To maximise your chances of becoming a Non-Habitual Resident, it is vital that you seek expert advice at the beginning of the process.

What foreign income is considered exempt from tax in Portugal through the Non-Habitual Residence Status?

There are a number of foreign income sources which would be exempt from tax, both at source through tax exemption double treaties, and in Portugal. These include income from:

• Foreign pensions, including private and personal pensions in the UK. While the pension income may be taxed at source, it may also be possible to transfer the pension to a jurisdiction which means tax is also not deducted at source.
• Investment income, such as dividends and capital gains and rental income. Royalties which are received in another country may also be exempt under a Non-Habitual Residence status.
• Income from foreign employment, provided it is taxed at source under double tax treaty agreements.

In all cases, it is vital that the income is not received, or deemed to be originating from any Portuguese source.

Tax on income from employment in Portugal

The Non-Habitual Residence status in Portugal also offers tax benefits to people who are planning to live and work in Portugal. If you are considered as working in a "high added value" profession, you may be able to take advantage of a tax rate of 20% of any income generated from Portugal.

There are a number of professions which are eligible, centred around activities which could be considered scientific, artistic or technical in nature.

This means that you may be able to benefit from becoming non-habitually resident in Portugal if you are any of the following:

• Architects or engineers
• Actor, fine artist or musician
• Doctor or dentist
• Teacher or lecturer
• Senior management

How do you apply for Non-Habitual Residence status?

While not every application for Non-Habitual Residence status will be successful, the process does not take long and, providing it is handled correctly, can even be achieved within weeks of the original application.

The key to remaining eligible and maximising your chances of success is to speak to someone who is an expert in understanding the eligibility criteria and has experience of assisting people through the process.

It is important to remember that your behaviour, including buying a property in Portugal, will all have a bearing on whether you are able to become Non-Habitually Resident in Portugal.