Portugal and taxation: Busting the myths
8 Oct 15
A Portuguese tax resident can be taxed at a rate of 56.5%, but director at Blevins Franks Jason Porter unveils some of the exemptions and reliefs offered to UK expats who decide to make Portugal their home.
From January 2009, Portugal introduced tax reliefs for new arrivals, under the banner of the non-habitual residents (NHR) regime. The principal objective was to attract individuals and their families to Portugal, over any other jurisdiction under consideration.
Eligibility
Eligibility is simple; individuals who establish residence in Portugal for the first time, or who have not been tax resident in the previous five tax years can apply to be registered as NHRs. Once registered, they qualify for beneficial tax treatment for a period of 10 years. If a person ceases to be resident during that time, he/she may resume residence and continue to qualify for these benefits, with the NHR status paused and resumed later.
A special tax rate of 20% is applied to employment and self-employment income derived from a “high value-added activity of a scientific, artistic or technical nature” within Portugal, as per a list published by the Portuguese tax authorities. There is also tax exemption for other foreign-source income (pension, rental income, capital gains, interest, dividends, as well as other investment income), provided certain conditions are met.
Sources of income
Whilst this income will qualify for exemption from tax in Portugal, it may be taken into account to calculate the tax rates that apply on other Portuguese sources of income.
In general, income like dividends, interest, and rental income from a foreign source will be exempt from taxation in Portugal, provided:
- Such income may be taxed in the state of source under the rules of a Double Tax Treaty (DTT); or
- Such income may be taxed in the State of source under the rules of the OECD Model Tax Convention on income and on capital (if no DTT exists) and it is not regarded as arising from a Portuguese source, under Portuguese tax rules.
UK dividends for instance, will be tax free in Portugal under the NHR regime since the UK/Portugal treaty provides that they may be taxed in the UK (even though in practice they are unlikely to be taxed in the UK, due to the disregarded income rules).
In contrast, capital gains on shares may be taxed only in the country of residence, so gains on UK shares would not be exempt in Portugal.
