You need to know more about the non habitual resident Portugal program, also known as NHR Portugal if you are planning to live in Portugal or if you are thinking of a great country to pay personal income tax.
More than 10,000 people from all across the world have successfully applied, reducing their tax obligations.
The NHR scheme, which was launched in 2009 and modified in 2020, is a great solution for people who want to live in Portugal and want to maximize their tax planning.
It is a tax system that grants a 20% tax rate and a total exemption on foreigner incomes.
In the NHR Portugal program, there is a possibility of greatly improving your tax burden if you want to be taxed there.
This program link with double taxation agreements, also known as DTAs.
DTAs let most types of income to be taxed in the nation where it was earned.
However, most countries opt not to tax non resident incomes because they wish to be viewed as open to international investment.
Due to international taxation rules, Portugal do not tax most of foreign source incomes from people under the NHR tax scheme.
This makes it possible for NHR citizens to get income from abroad almost totally tax free.
Portugal currently has DTAs with 79 nations, and in the absence of a DTA, the OECD model tax convention may be applied.
We will explain what it is and its requirements in this text.
Portugal offers an attractive residence program that permits non habitual residents to be exempt from tax on personal foreign income.
The NHR Portugal program is a special tax regime that grants the possibility of more beneficial taxation with regard to Personal Income Tax (IRS).
The Portuguese government has implemented an attractive tax program, granting the possibility of lower incidence of IRS, if you manage to meet certain requirements.
We already emphasize that each case is unique and we will bring the generic case, however, you should always consider the feasibility of requesting or not the status of non habitual resident when deciding to live in Portugal.
Research, compare and find a qualified lawyer to decide what will be the best path for your tax planning.
Whether for foreigners living in Portugal or for portuguese emigrants who want to return, this special taxation regime for Personal Income Tax (IRS) brings tax reductions for passive income, pensioners and specialized professionals.
In general, according to CIRS art.16, people who, in the year to which the income relates, are considered to be tax residents:
a) There are more than 183 days there, consecutive or interpolated, in any 12 month period beginning or ending in the year in question;
b) Having stayed there for a shorter time, they have, on any day of the period referred to in the preceding paragraph, housing in conditions that suggest the current intention to maintain and occupy it as their usual residence;
When a taxpayer is considered as a non resident, he is only subject to IRS taxation if he obtained income in Portugal and must submit the IRS declaration as a non resident.
If you are considered a non resident and have not earned income in Portugal, you will not have to submit your personal income tax return.
When taxpayers no longer reside in a country, they must communicate the change within 60 days to the Tax Authority and if the absence lasts for more than six months, they must appoint a tax representative.
However, this obligation only occurs if the country is not part of the European Union.
To calculate the income tax (IRS) of residents in Portugal, the sum of all income obtained during the year (combination) is made, and this value will guide the rate that will be applied.
These rates are progressive, that is, the higher the income obtained in the year, the higher the rate (%) to be applied.
For non residents in the country, who also have income in Portugal, the tax (IRS) will be charged on income that was obtained only in Portugal at a fixed rate, instead of a progressive rate.
Rental income, for example, has the same rate for residents (if they do not include) and for non residents.
The IRS declaration is filed online, but we advise you to hire a specialist to properly fill out your IRS declaration.
A citizen who is considered a non habitual resident acquires the right to be taxed as such for a period of 10 consecutive years from the year, inclusive, of his registration as a resident in Portuguese territory.
In general, all income obtained in Portuguese territory will be taxed at a single special rate of 20%, if the option for its aggregation is not exercised, and almost all income obtained abroad will be exempt from tax (there was a change in 2020 that we will highlight below).
For example, if you have income classified in category A, as a dependent worker, resulting from activities listed in the list of professional activities, then your contractor must pay withholding tax at the rate of 20%.
The benefit of the NHR Portugal is levied on the IRS, on income earned by individuals, with taxation depending on their tax status.
Going further, with regard to income obtained from a foreign source, the IRS tax exemption method may be applied.
Income from foreign sources, whether income obtained in dependent employment (category A), self-employed (category B), capital income (category E), real estate (category F), derived from capital gains (category G) or pensions (category H ), in general, the exemption method applies, being totally tax free (we will talk about the change in 2020 below), if they meet certain conditions, such as taxation in another country, in accordance with the double taxation agreement entered into by Portugal with that other country.
Retirees are great beneficiaries of the tax exemption method, however, it is necessary to analyze the existing bilateral agreements between Portugal and the country from which the foreign source of income originates.
So, rental incomes, investment incomes and capital gains are not taxed in Portugal if they come from a foreign source and you are a non habitual resident in Portugal.
It is taxed at normal progressive rates unless it comes under the eligible profession categorization.
This income is also subject to social security contributions unless the individual in question already pays into another social security system.
Optionally it is taxed at a flat rate of 20%, but the taxpayer can choose to pay usual progressive rates if they are less.
Tax exempt if it is from an eligible profession and comes from a country with a DTA, or in the absence of a treaty under the OECD model tax convention (provided the country is not a tax heaven).
Usual progressive tax rates apply if employment does not fall under the list of eligible professions, but if employment falls under eligible NHR professions, an optional tax rate of 20% is applicable, although usual progressive tax rates can also be applied if this comes to less.
As mentioned above, the status of non habitual resident applies to those who fulfill certain requirements regardless of the citizen’s nationality.
Basically, this regime can be applied to new residents in Portugal who hold assets, who have the status of highly qualified worker or who are pensioners.
Thus, we understand that the objective of this regime is to attract non resident professionals qualified in activities with high added value or intellectual, industrial or knowhow property, investors and retirees to Portugal.
As we said, one of the requirements is the need to fit into a list of activities based on Ordinance No. 230/2019 of 07/23/2019, which brings the updated table of activities that are considered of added value for the market of work in Portugal.
Until January 1, 2020, the activity analysis was based on the economic activity code (CAE), however, with this recent change for you to substantiate the request for the NHR regime, you should consider the Classification code Portuguese of Professions (CPP).
The NHR Portugal list of professions and the respective CPP codes by which you can substantiate the request are:
I – Professional activities (CPP codes):
112 – General Director and Executive Manager of Companies;
12 – Directors of administrative and commercial services;
13 – Production and specialized services directors;
14 – Hotel, catering, commerce and other services directors;
21 – Specialists in physical sciences, mathematics, engineering and related techniques;
2261 – Doctors, dentists and stomatologists;
231 – Professor of university and higher education;
25 – Specialists in information and communication technologies (ICT);
264 – Authors, journalists and linguists;
265 – Creative and performing arts artists;
31 – Technicians and professions in science and engineering, intermediate level;
35 – Information and communication technology technicians;
61 – Market-oriented farmers and skilled workers in agriculture and animal production;
62 – Skilled market-oriented forest, fishing and hunting workers;
7 – Skilled workers in industry, construction and craftsmen, including in particular skilled workers in metallurgy, metalworking, food processing, wood, clothing, crafts, printing, precision instrument manufacturing, jewelers, artisans, workers in electricity and electronics;
8 – Operators of installations and machines and assembly workers, namely operators of fixed installations and machines.
221 – Doctors;
Workers included in the above mentioned professional activities must have at least level 4 of qualification of the European Qualifications Framework or level 35 of the International Standard Classification of Education or have five years of duly proven professional experience.
II – Other professional activities:
Administrators and managers of companies promoting productive investment, as long as they are assigned to eligible projects and with contracts for the concession of tax benefits entered into under the Investment Tax Code, approved by Decree-Law no. 162/2014, of 31 October.
Foreign source income is tax exempt under the NHR regime or taxed at a flat rate of 20% if it falls under the list of eligible professions.
However, there is a need to fulfill other requirements. Let’s go to them.
Not having lived in Portugal in the last 5 fiscal years, regardless of nationality (including the Portuguese), apply for the status on the correct date and remain resident in Portuguese territory.
It is important to note that the application for registration for Non Habitual Resident status must be made by March 31 of the year following that in which you became a resident in Portugal.
Therefore, if you start your residency during the year 2022, you will have until March 31, 2023 to apply for the NHR Portugal Regime.
Thus, the non habitual resident can acquire the right to be taxed at a lower rate than the normal rate practiced in the country, for a period of 10 consecutive years, starting from the year of registration as a tax resident in Portugal.
This 10 year period is non-extendable and, throughout the period of application of the benefit, you must always remain resident in Portuguese territory.
Non habitual resident NHR status is granted by the Portuguese tax authorities.
In order to benefit from the NHR it is important to do things in the right order and not to rush.
To obtain the NHR status it is necessary to:
Check that one can benefit from the NHR status ;
Get a NIF (Tax Number);
Form and file the applications ;
Report your income in Portugal.
The first step is securing residency status in the country, so, you must have to be legal in Portugal,
EU/EEA/Swiss are allowed to register for residency without a visa, but they need to register at their local town hall.
Non EU citizens must first obtain a residence permit to be allowed to settle in Portugal.
The constitution, filing and monitoring of the application for NHR status can be complicated and difficult to access when one does not master the language and even less the subtleties of the Portuguese administration.
As a rule, the application for registration as a non habitual resident should only be made after becoming a resident in the Portuguese territory.
Thus, you can apply through the Finance Portal on the internet.
So, before applying as a non habitual resident, you must be considered, for tax purposes, to be resident in Portugal and the application for registration can only be made after you are living here.
Another requirement is that you must not have been considered resident in Portugal in any of the five years preceding the year in which you intend to start taxation as a non habitual resident.
After submitting your request, you can consult the Finance Portal to find out if it was granted or rejected.
Then, you can print the proof of this decision.
If your application has been rejected, you will be notified by the Tax and Customs Authority of the decision so that you can present your allegations and the corresponding supporting documents.
Taxpayers must always have their annual dossier proving activity available to submit to Finance, whenever requested.
Remember that the authority may do so for up to five years after sending the declaration, that is, after the 10 years of validity, it must keep the dossier for the next five years.
If you are unable to prove or do not hold all the information eventually requested by the Finances that prove the legitimacy of the exercise of the activity, the benefit may be canceled and the difference in the IRS of 20% for the full rate may be charged by assessment with additional fines and interest throughout the benefit period.
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