Portugal has good climate, food and wine; providing an excellent quality of life and now to add to the list an attractive tax regime for the modern investor. The low effective tax burden, further enhanced by the regime for non-habitual residents (NHR), the free remittance of funds, the friendly residence permit regime, allowing for free movement within the Schengen. With a stable political and social environment, a secure society, a highly skilled and English fluent labour force and an excellent quality of life, Portugal offers a favourable investment climate. The country is investing in becoming a premium tourism and real estate location, as well as one of the leading EU countries for R&D and new technologies.
The special tax regime for NHR, with a flat income tax rate of 20% for certain Portuguese source income (employment and self-employment income), and an exemption for almost all foreign source income; further increases the attractiveness of Portugal and shows the Portuguese commitment to attract the best international talent, as well as wealthy individuals and their families. The Portuguese tax system offers interesting opportunities in relation to wealth, gift and inheritance taxes as well as business and rental income, capital gains, dividends, interest and pensions. Wealthy individuals and their families, whether of Portuguese nationality or not, should look closely at what Portugal has to offer for the planning of their income and wealth, as well as for a successful transmission to the next generation.
Tax regime for non habitual residents (NHR)
In 2009 Portugal introduced a beneficial voluntary Personal Income Tax (PIT) regime for NHR aiming to attract talent in high value added activities and Ultra and High Net Worth Individuals (UHNWI’s) and their families to Portugal. This regime aims to boost Portuguese competitiveness both in R&D and new technologies and other listed high value added sectors. UHNWI’s and their families may also benefit, as it is often more advantageous than other similar regimes. The new regime is available to all individuals becoming tax resident in Portugal (if they were not Portuguese tax residents in the previous 5 years), and the status is granted for a period of 10 consecutive years. To be considered as a tax resident, the individual should remain for more than 183 days in Portugal during the relevant fiscal year or have a dwelling in Portugal at 31 December of that year with the intention to hold it as his or her habitual residence. Non habitual residents will be subject to a reduced 20% PIT rate both on salaries and business and professional income of a Portuguese source arising from high added value activities of a scientific, artistic or technical nature.
Non habitual residents will be exempt from PIT on salaries of a non-Portuguese source if such salaries were subject to tax in the country of source under an existing Double Tax Treaty or, if no Tax Treaty exists, were subject to tax in another jurisdiction and are not considered as Portuguese source income under domestic rules. Business and professional income of a non-Portuguese source relating to high added value services of a scientific, artistic or technical nature, as well as from intellectual or industrial property or industrial, commercial or scientific information, earned by NHR abroad are exempt from PIT provided such fees could have been taxed under an existing Double Tax Treaty or could have been taxed in another non-black listed jurisdiction in accordance with the provisions of the OECD.
Rental income, investment income and capital gains of a non-Portuguese source obtained by non- habitual residents are also PIT exempt, provided the above mentioned conditions are met. Pensions paid abroad to non-habitual residents are also PIT exempt if such pensions were subject to tax under an existing Double Tax Treaty or if the pension should not be considered as obtained in Portugal and related contributions did not allow a PIT deduction in Portugal. In conclusion, under the non-habitual residents tax regime, MNC’s will have a major advantage in placing their centres of excellence in Portugal, for example their R&D departments, and Portuguese companies will have a significant stimulus to attract the best talent. Furthermore, by becoming Portuguese non habitual residents, the UHNWI’s are able to accrue their wealth in a friendly tax environment, to dispose of their assets benefiting from tax exemptions, to pass on their wealth or estate without inheritance or gift taxes and/or to enjoy their retirement without tax leakage on their pensions
Examples of Portuguese beneficial tax regimes, include:
1. A tax exemption for gifts or inheritances to spouse, descendants or ascendants. Inheritance or gifts to other individuals will be either not taxable, due to the generous territoriality rules, or subject to a flat 10% stamp tax rate.
2. No wealth tax and free remittance of funds either to Portugal or abroad. Nil taxation on dividends with proper planning or otherwise a 28% flat tax rate will apply. Tax credit for international double taxation may be available.
3. Beneficial tax treatment for pensions and other life insurance products (including unit linked) may further significantly reduce the effective tax burden on capital invested.
4. Companies licensed to operate in the Madeira International Business Centre (MIBC), including branches of non-resident entities, with a licensed issued until 31 December 2014, benefit from a 5% CIT rate until 31 December 2020.
4. The reduced CIT rate applies on income derived from transactions with non-residents (or with other MIBC entities), limited to thresholds of taxable income and depending on the creation of jobs. The MIBC special tax regime also provides for generous benefits regarding withholding taxes on interest, royalties and services.
5. Portuguese companies may take advantage of EU non-discrimination rules and EU Directives on mergers, dividends, interest and royalties, as well of Portuguese double tax treaties.
6. Portugal has signed more than 60 double tax treaties, including with Malta, Macao and Hong Kong, as well as more than 50 investment protection agreements. It has more than 15 tax information exchange agreements signed (most of which are already in force) e.g., Bermudas, Cayman and Guernsey, and several social security agreements, offering interesting opportunities in a tax friendly environment.
The information is general in nature, therefore we recommend that you seek further advice before making any decision in this area.