Portuguese Non-Habitual Residents tax regime
Within approximately two months before the end of the application of the Brexit transition period, it becomes crucial for the citizens of the United Kingdom (UK) to secure their tax residency in Portugal, in particular for the purposes of registration under the special regime of taxation in Portugal – the Portuguese Non-Habitual Residents tax regime (NHR regime).
In this context, on 31 January 2020, the UK have formally left the European Union (EU) and entered into an 11-month transition period, agreed within the Withdrawal Agreement with the EU, which was planned to be in force until 31 December 2020.
This Withdrawal Agreement establishes that the registration rules in a certain EU country should apply until the end of the transition period. As a consequence, the UK citizens and their respective family members with residence established in Portugal will continue to be considered as residents in this country, without any kind of interruption or limitation to that qualification.
The first step that should be followed by the UK citizens after the move to Portugal is the application for a Portuguese taxpayer number. The taxpayer number is requested, in this first stage, as non-tax resident and may be useful for purposes of signing a rental contract or open a bank account in Portugal.
It is important to note, however, that after the transition period it will be mandatory to nominee a Portuguese tax representative for purposes of the abovementioned request of the taxpayer number, as non-tax resident. Currently, this nomination is merely optional.
Subsequently, after buying an immovable property or signing a rental contract in Portugal, the UK citizens should proceed with the request of an EU Residency Certificate.
In this context, in accordance with the current Portuguese legislation, UK citizens that meet the criteria in order to be considered as Portuguese residents for less than five years must apply, before 31 December 2020, for temporary residence, through the application of an EU Residency Certificate in the local Council of the place of residence, while the ones that qualify as Portuguese residents for five years or more should apply for permanent residence.
Afterwards, the UK citizens should proceed with the change of the taxpayer number as non-tax resident to tax resident, which is made through the change of the tax address to Portugal (although the taxpayer number remains the same). After this step, a person starts to qualify as Portuguese tax resident.
As Portuguese tax resident, the UK citizen will be subject to taxation on the worldwide income received. Consequently, the NHR regime may be the best and the most efficient solution in terms of taxation in Portugal, as the income may be exempt from taxation or be subject to taxation at a low tax rate in this country.
Hence, with the Brexit transition period coming to an end, an increasingly high number of UK citizens are opting to change their tax residency to Portugal and proceed with the registration under the NHR regime. Naturally, this scenario is transforming Portugal in one of the best countries with growing opportunities for successful investments and becoming the favourite option chosen by pensioners and high net worth individuals.
The NHR regime is available to all individuals that qualify as Portuguese tax residents in a certain tax year under the general residency criteria and who were not considered as Portuguese tax residents in any of the previous five years.
In this respect, the NHR regime is not country-specific, being based on the extensive Double Taxation Agreements celebrated by Portugal and other countries (including with the UK). As such, UK citizens should continue to benefit from this regime after the end of the transition period in the same conditions as other third country nationals currently benefit.
In general terms, Portuguese tax legislation establishes a favourable tax regime for the NHR, as follows:
- A special tax rate of 20% applicable to employment and self-employment income derived from a “high value-added” activity exercised in Portuguese territory, as per a list published by the Portuguese Government (Ministerial Order No. 230/2019);
- Employment income from a foreign source will be exempt from taxation, if such income is effectively taxed in the State of source;
- Pension income from a foreign source will be taxed at a flat tax rate of 10% (the former exemption was revoked);
- Tax exemption (with progression) for foreign-source income such as professional income, rental income, capital gains, interest, dividends, as well as other investment income, provided certain conditions are met. In most cases, capital gains on the sale of securities are taxable at a flat rate of 28%.
Since the beginning of this year, with the entry into force of the State Budget Law from 2020, the foreign pension income started to be subject to taxation at the abovementioned flat tax rate of 10%, under the NHR regime. However, this is still lower than the majority of the tax rates applicable in Portugal, as well as the tax rates in force in other European countries.
As the qualification as an EU national is not a criterion for benefiting from the regime, Brexit will not affect the eligibility for the registration as NHR.
Notwithstanding, it is advisable for the UK citizens who are considering to move to Portugal and proceed with the registration under the NHR regime to do it so before the end of the transition period, i.e. before 31 December 2020, as it will be a much simpler procedure to follow while being considered as EU citizens.
Portuguese Non-Habitual Resident Tax Regime