LISBON, 13 FEBRUARY 2018
Portugal’s has done some really smart things since its financial crisis that make it one of the most attractive residency options. Its “Non-Habitual Residency” programme makes it the only jurisdiction in the E.U. with territorial taxation, and does not require residents to spend a minimum amount of days per year in Portugal. Combined with how it treats gains from crypto-currency trading, we wanted to take a closer look.
An enlightened approach
Portugal has suffered from a deep financial crisis and as part of its measures to restore its financial health, it has come up with a rather enlightened regime to attract foreign residents who benefit from the sole jurisdiction in Europe that has a purely territorial tax base, putting it on a footing with much-touted tax residencies such as Hong Kong or Singapore.
Essentially, the NHR regime grants qualifying individuals the possibility of becoming tax residents of a white-listed jurisdiction whilst legally avoiding or minimising income tax on certain categories of non-Portugal sourced income and capital gains for a period of 10 years.
It has proven very attractive to entrepreneurs, professionals, pensioners or high net worth individuals who are looking to enjoy a life free of income tax. This is in addition to the non-existence in Portugal of wealth tax or of inheritance/gift tax for close relatives and an enlightened approach to taxation of crypto.
Non-EU citizens also qualify!
One of the key attractions of the NHR programme is that it is also open to non-EU passport holders under Portugal’s investor visa knowns as the “Golden Visa”.
This “ARI” (Autorização de Residência para Actividade de Investimento) regime grants a residence permit in Portugal, allowing visa-free travel within the Schengen Space to non-EU/EEA/Swiss citizens (and their dependants) who make an investment in Portugal of at least 200,000 EUR or who create a minimum of 8 new permanent jobs in the country.
With such relatively low investment amount and minimal stay requirements of only 7 days during the first year and 14 days during each subsequent 2-year period, the Golden Visa is particularly well suited for someone who does not intend to live in Portugal but wishes to access the benefits of EU residency and, eventually, even citizenship.
We can report that various nationalities, especially Russian and Chinese, have been taking up this visa and one of its ripple effects is a flurry of renovation activity in Lisbon’s historic centre and a hot real estate market in some of the coastal resorts such as Cascais.
For EU citizens (including, up to mid-2019, British citizens), who have a right of free movement throughout the EU, Portuguese residency comes without any requirement to invest in Portugal: a simple declaration with the Portuguese tax authorities, which can be done by Power of Attorney, is sufficient.
Residency without presence
Residency in Portugal is habitually triggered by spending more than 183 days there however for the NHR programme, having a Portuguese address is sufficient.
In practice, typically tax authorities accept whichever address you state as yours. However, for first-rime residents they may request to see documentary evidence, and the address of an accountant, a resident relative or friend may not be accepted.
The best solution therefore for a NHR who does not live permanently in Portugal is to purchase a property you use on a need basis, but that is otherwise managed by a specialist agent for vacation rentals.
A cheaper hack is to rent a property and sub-let it to someone else, as long as there are some bills in your name.
You may already own a property before applying to become a NHR as long as you have not been tax resident in Portugal in any of the 5 years preceding your application.
Once you obtain NHR status, the regime applies for 10 years.
10 years a tax exile
NHRs benefit from the following tax exemptions for income obtained abroad:
- Professional Income – Exempt in Portugal as long as it is effectively taxed in the country of origin;
- Private retirement pensions – Exempt in Portugal as long as this income is not considered, according to the Portuguese Law, as a Portuguese sourced retirement pension (i.e. as long as this income is not paid by Portuguese social security entities);
- Dividends, interest, royalties, real estate capital gains, etc. – Exempt as long as there is a Double Taxation Treaty between Portugal and the source country and the source country has a tax on such income. Here, the extensive network of Portuguese Anti-Double Taxation Agreements (76 in force, 3 more pending) is very helpful as it effectively exempts most income that would otherwise be taxed abroad from Portuguese taxes. Given that most Double Taxation Treaties are with non-offshore jurisdictions, this would mean that income from most business centres can be exempt;
All non-foreign sourced income, i.e. income obtained in Portugal, will be taxed in Portugal. This includes:
- Professional Income – Taxed at a at rate of 20% when derived from “high added value activities”, which includes entrepreneurs;
- Income from Property – Taxed at a at rate of 28%;
- Real Estate Capital Gains – Only 50% of the capital gain is taxed and levied at the progressive Portuguese tax rate.
- Capital Gains – Taxed at 28%;
- All other types of Income – In principle, the default Portuguese rate will progressively apply up to 48%.
Note that under the Portuguese personal income tax code, profits derived from professional activities, eligible services, royalties, investment income, rental income and capital gains sourced from blacklisted tax havens are excluded from the special tax exemptions granted to the NHR and are liable to Portuguese tax at aggravated rates. However, there are several so-called “tax havens” that are white-listed, such as those that are EU member states (Luxembourg, Malta, Cyprus, Estonia, Bulgaria, etc.) and, for example, the following:
As a result, most income from the above should be exempt from personal income tax in Portugal.
Finally, as tax resident, you get an official tax residency certificate so your tax status is non-controversial. In this light, to maintain your tax residency in Portugal without spending more than half a year each year in Portugal, you will have to organise your travels such that you do not trigger tax residency in any other country where you spend time. The UK in particular comes to mind which has a very low threshold.
In addition, you may need to have an address in Portugal available to you “in a way that may lead to the supposition of an intention to keep and occupy it as a habitual home”, so care should be taken in particular as to the handling of correspondence that you will receive at your Portuguese address, including from the Portuguese tax authorities.
Treatment of Crypto
A recent binding ruling from the Portuguese tax administration says that gains from the sale of cryptocurrency are not taxed in Portugal unless the individual taxpayer carries on a business or professional activity and earns income from crypto in that context.
This effectively means that personal income taxation would not apply to cryptocurrency gains in Portugal. Taxation may only take place when its regularity constitutes a business or professional activity for the taxpayer.
The ruling also seems to imply that if NHRs undertake cross-border cryptocurrency transactions on a foreign crypto exchange, possible taxes imposed by that foreign country may be minimized or eliminated under a Double Taxation Treaty. Leading jurisdictions for crypto trading such as the US, UK, Japan and Hong Kong all have double tax conventions with Portugal which should help in this respect.
Portugal’s Non-Habitual Residency regime, and its Golden Visa for non-EU citizens, is arguably one of the most attractive residency options that have emerged in recent years. For non-EU citizens, its investment amount of EUR 200,000 is low compared to other jurisdictions with investor visa.
In addition, it opens the way to a much-prized EU passport with free movement across the entire Schengen zone.
Finally, the low physical presence required to remain qualified for Portuguese tax status allows for great freedom of movement and makes the regime ideal for roaming entrepreneurs and developers who receive income from other business centres.
DISCLAIMER: Nothing in the post constitutes legal or tax advice.