Lisbon treaty: Technical briefing with NDR

13th July 2015

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PA Adviser

Portugal may not be top of everyone’s list in terms of tax-friendliness, particularly given the recent backdrop of the recession and bail-out, but it does have a history of running successful tax-friendly programmes, for example the Madeira and Azores free-trade zones, the former of which is still in operation.

Both the Non-Habitual Residency (NHR) programme introduced in 2009 and the Investor Visa programme introduced in 2012 can be classified as unqualified successes. However, it is important to distinguish between the two: NHR is a tax programme aimed at EU citizens while the Investor Visa is a residency programme aimed at non-EU citizens, both of which can be combined.

Portugal has always been a traditional holiday and retirement destination but is now becoming an increasingly attractive location for those in employment with more flexible working conditions wishing to relocate and those in receipt of a pension and other types of income.

Basic principles

The non-habitual resident status was introduced in 2009 and gives those who become tax residents in Portugal the opportunity to benefit from a tax exemption on qualifying income and a preferential rate of tax of 20% on certain types of income from high value-added activities for 10 years.

Qualifying income includes pension, interest, dividends and royalties. Qualification for the programme is straightforward: satisfying a residency test and the test of not having been tax-resident in Portugal in the previous five years.

Residency: After legislation that came into force on 31 December 2014, the residency test has changed its main focus from a 183-days’ test to the concept of habitual residency. This is opening the door to international families with diverse business interests. There is no requirement to purchase a property, nor does any minimum value apply to purchase/rental. Both Portuguese and non-Portuguese nationals can apply.

Operation of the exemption: What makes the programme attractive is that it works together with the extensive network of double taxation agreements (DTAs) that Portugal has in place. However, there does not have to be a DTA in place, the general rule being that the income should be subject to tax, but not necessarily taxed, in the source country, provided that the source country is not classified as a tax haven by the Portuguese tax authorities. There is a list of tax havens that has been in place since 2011.

Pension income: Pension income is the most well tested source of income and attracted the first wave of NHRs from Scandinavia. Pension income is also the most liberally treated: the source of the pension income is irrelevant and it will benefit from a double exemption in both the source country and in Portugal.

Taking the example of a UK-sourced pension, according to the DTA between the UK and the Portugal, a taxpayer in receipt of pension income should be taxed in his country of residence. However, as an NHR, pension income is not taxed. This implies a double exemption, ie no income tax would be payable either in the UK and in Portugal on pension income.

Other forms of income: As the programme matures, individuals with more complex asset portfolios are attracted to it. For example, dividends are also free of tax in Portugal to NHRs, although they would normally be subject to a withholding of 10% or 15% in the source country (once again depending upon the terms of the DTA). The same principles will apply to interest and royalties.

High-value activities: A list of high-value activities has been published that can benefit from a flat rate 20% tax. These activities principally relate to scientists, information technology, a number of professions, education and research and development.

What happens after 10 years? The programme has been limited to a period of 10 years for political reasons. After 10 years, NHRs can continue to reside in Portugal under the normal Portuguese tax regime, something retirees have been doing for many years, without the NHR programme being in place.

Practicalities and timing: Decisions will normally be issued within three to six years and there is a high rate of success. The decision will be backdated to the tax year in which the application has been made. There is a strong and genuine indication that the government is doing all it can to make the application procedures as efficient as possible.

Other benefits of Portugal: There is no wealth tax in Portugal and the rate of succession tax is 0% between spouses, ascendants and descendants. Private healthcare is accessible and competitive, and the secondary and tertiary education systems are of a high standard.

Case studies

Mr Smith is a UK tax resident. He is in receipt of a UK private pension and is now considering moving to a more tax- friendly jurisdiction.

Can he apply for NHR status? Yes

Would he qualify? Provided that he satisfied the habitual residency test, yes. For these purposes he should move to Portugal and have a Portuguese address.

When should he apply? If he wished to apply for the tax year 2015, and presuming that he satisfied the residency test, he could apply anytime in 2015.

What would the benefits of the NHR status be? He would receive his pension free of tax in Portugal and in the UK.

Miss Brown is a UK tax resident. She also owns a property in Portugal and is the sole shareholder of an English company importing dairy products, for which she is also a director. She will be will be retiring as director next year. She also has some investment income from shares, receives interest on bank account deposits and some Irish rental income.

Can she apply for NHR status? After confirmation that she is duly registered with the Portuguese tax authorities as a non-resident, yes.

Would she qualify? Provided that she satisfied the residency test, yes.

When should she apply? If she wished to apply for the tax year 2016, and presuming that she satisfied the residency test, she could apply anytime in 2016.

What would the benefits of the NHR status be? She would receive her pension, dividends, investment income and interest tax-free in Portugal and the UK, subject to any withholding at source. The rental income would be taxed separately in Ireland.

What should she do next? Start the pre-clearance procedure and take advice on her exit from the UK.

Portugal may not be top of everyone’s list in terms of tax-friendliness, particularly given the recent backdrop of the recession and bail-out, but it does have a history of running successful tax-friendly programmes, for example the Madeira and Azores free-trade zones, the former of which is still in operation.

Both the Non-Habitual Residency (NHR) programme introduced in 2009 and the Investor Visa programme introduced in 2012 can be classified as unqualified successes. However, it is important to distinguish between the two: NHR is a tax programme aimed at EU citizens while the Investor Visa is a residency programme aimed at non-EU citizens, both of which can be combined.

Portugal has always been a traditional holiday and retirement destination but is now becoming an increasingly attractive location for those in employment with more flexible working conditions wishing to relocate and those in receipt of a pension and other types of income.

Basic principles

The non-habitual resident status was introduced in 2009 and gives those who become tax residents in Portugal the opportunity to benefit from a tax exemption on qualifying income and a preferential rate of tax of 20% on certain types of income from high value-added activities for 10 years.

Qualifying income includes pension, interest, dividends and royalties. Qualification for the programme is straightforward: satisfying a residency test and the test of not having been tax-resident in Portugal in the previous five years.

Residency: After legislation that came into force on 31 December 2014, the residency test has changed its main focus from a 183-days’ test to the concept of habitual residency. This is opening the door to international families with diverse business interests. There is no requirement to purchase a property, nor does any minimum value apply to purchase/rental. Both Portuguese and non-Portuguese nationals can apply.

Operation of the exemption: What makes the programme attractive is that it works together with the extensive network of double taxation agreements (DTAs) that Portugal has in place. However, there does not have to be a DTA in place, the general rule being that the income should be subject to tax, but not necessarily taxed, in the source country, provided that the source country is not classified as a tax haven by the Portuguese tax authorities. There is a list of tax havens that has been in place since 2011.

Pension income: Pension income is the most well tested source of income and attracted the first wave of NHRs from Scandinavia. Pension income is also the most liberally treated: the source of the pension income is irrelevant and it will benefit from a double exemption in both the source country and in Portugal.

Taking the example of a UK-sourced pension, according to the DTA between the UK and the Portugal, a taxpayer in receipt of pension income should be taxed in his country of residence. However, as an NHR, pension income is not taxed. This implies a double exemption, ie no income tax would be payable either in the UK and in Portugal on pension income.

Other forms of income: As the programme matures, individuals with more complex asset portfolios are attracted to it. For example, dividends are also free of tax in
Portugal to NHRs, although they would normally be subject to a withholding of 10% or 15% in the source country (once again depending upon the terms of the DTA). The same principles will apply to interest and royalties.

High-value activities: A list of high-value activities has been published that can benefit from a flat rate 20% tax. These activities principally relate to scientists, information technology, a number of professions, education and research and development.

What happens after 10 years? The programme has been limited to a period of 10 years for political reasons. After 10 years, NHRs can continue to reside in Portugal under the normal Portuguese tax regime, something retirees have been doing for many years, without the NHR programme being in place.

Practicalities and timing: Decisions will normally be issued within three to six years and there is a high rate of success. The decision will be backdated to the tax year in which the application has been made. There is a strong and genuine indication that the government is doing all it can to make the application procedures as efficient as possible.

Other benefits of Portugal: There is no wealth tax in Portugal and the rate of succession tax is 0% between spouses, ascendants and descendants. Private healthcare is accessible and competitive, and the secondary and tertiary education systems are of a high standard. 

Case studies

Mr Smith is a UK tax resident. He is in receipt of a UK
private pension and is now considering moving to a more tax-
friendly jurisdiction.