Portugal New Offshore Tax Heaven
Tax regime for Non Habitual Residents – NHR
Portugal is part of the European Union, the Euro Zone and the Schengen area. 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 favorable investment climate. The country is investing in becoming a premium touristic and real estate location, as well as one of the leading EU countries for R&D and new technologies.
Summary of Portuguese beneficial tax regime for Non Habitual Residents:
- Since 2009 there has been a 20% flat rate for certain Portuguese- source income (employment and self-employment income), and an exemption for almost all foreign source income, available to non habitual residents.
- 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.
- 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.
4. Beneficial tax treatment for pensions and other life insurance products (including unit linked) may further significantly reduce the effective tax burden on capital invested.
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 offers interesting opportunities in a tax friendly environment and non black listed jurisdiction, including:
- More than 60 Double Tax Treaties, including with Malta, Macao and Hong Kong;
- More than 50 Investment Protection Agreements;
- More than 15 tax Information Exchange Agreements signed (most of which are already in force) e.g., Bermudas, Cayman and Guernsey;
- Several Social Security Agreements.
Portugal provides an excellent quality of life for the 21th Century investor or businessman. The tax regime for individuals is very attractive, surpassing other regimes in many ways. Portugal evokes images of whitewashed luxury villas by the beach and championship-standard golf courses. Little wonder that it continues to be one of the more popular regions for Non Habitual Residents.
The low effective tax burden, further enhanced by the regime for non-habitual residents, the free remittance of funds, the friendly residence permit regime (allowing for free movement within the Schengen zone) and the possibility to apply for Portuguese nationality and, consequently, a EU passport, make Portugal a very attractive location.
Europeans will find surprising tax breaks from life in Portugal
The special tax regime for non-habitual tax residents, with a flat income tax rate of 20% for certain Portuguese employment and self-employment 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.
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.
n 2009, as a result of its traditional liberalism and multicultural approach, Portugal maintains very close links with the rest of the world, including Africa (Angola, Mozambique and Cape Verde), Asia (China, including Macao) and South America (Brazil). Portugal introduced a beneficial voluntary Personal Income Tax (PIT) regime for non habitual residents aiming to attract talent in high value added activities and High Net Worth Individuals 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. High Net Worth Individuals 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.
Portuguese tax has its grey areas, which is why it is important to seek expert help – which could turn out to be beneficial. Take Trusts, for instance. There is no concept of these useful tax vehicles in Portugal – but that does not mean that you cannot take advantage of them.
Wrapping up your investments into an appropriate offshore life assurance bond can still provide significant tax benefits. The original capital can be taken out of the structure at any time, tax free, and tax only starts when you have taken out the starting capital. This assumes you do not have regular withdrawals, but ad-hoc irregular ones.
Withdrawals of income in excess of the original capital are taxed at discounted rates; after five years, only 60 per cent of the withdrawals is liable to income tax; after eight years, it falls to 20 per cent.
For example, on an initial investment of €100,000, assuming that €20,000 is withdrawn each year on an irregular basis, there would be no tax to pay in years one to five whilst the amount of the original capital is being withdrawn. In years six to eight inclusively, tax would only be payable on €12,000, and from year nine only €4,000 would be taxable each year out of the €20,000 withdrawn.
Personal Income Tax (PIT)
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, and 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.
Retirement & Pensions
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.
Capital Gains Tax
Investing in the stock market may be giving even the most hardened investors the heebie-jeebies but, over the long-term, history suggests that shares outperform all other asset classes. And when gains have been made, the capital gains tax regime is favorable. Capital gains arising from sale of shares owned for more than 12 months are tax-free. Otherwise, the tax rate is a favorable 10 per cent.
Inheritance Tax (IHT)
Unlike others European Countries, where IHT is still an emotive subject, you could get away with paying no death duties whatsoever. IHT was abolished in 2004 for close family members such as spouses and children. Otherwise inheritance tax, which is now replaced by Stamp Duty, is payable at a rate of 10 per cent – but only on assets situated in Portugal.
Case Study
Can you save money by careful tax planning? Paul Smith, 60 and a widower, is about to become a Portuguese resident but remains UK domiciled for now.
The calculations below show how much tax Paul would pay were he to be taxed at the standard rates, and also how much tax he could save by investing tax-efficiently as a Non Habitual Resident. If Paul were to be taxed on his income under the standard position his liability would be for a gross income of € 200.000 (GBP 160.000), and he is taxable in 45 per cent in PTI, his Net income is about €110.000.
When Paul chose to move to Portugal, as a Non-Habitual Resident, under the existing Double Tax Treaty, he became to have a 20 pc flat tax, with an annual saving of €50.000, and being able to stay with the Non-Habitual Resident status, at least, for the next 10 years, he can save about € 500.000, and all gains and income roll up tax-free.
Regarding Paul’s Inheritance, if his assets are above € 400.000 (GDP 325.000), they are also taxable by 40 per cent according to the UK Inheritance Tax (IHT). However, as Portuguese Non Habitual Resident, his assets became Inheritance Tax-free to first degree relatives (spouse/children), and in other cases such as donations to other family members, are taxable with a Stamp Tax of 10 pc.
It is not a surprise that Portugal is becoming a top choice for High Net Worth Individuals who wish to take up residence in the European Union.
In conclusion, under the non-habitual residents tax regime, Multinational Corporations will have a major advantage in placing their centers 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 High Net Worth Individuals are able to accrue their wealth in a white listed 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.
Contacts :
GETiN- Relocation Services, Praça da Armada, 35-1º 1350-027 Lisboa Portugal
