How to Save on Tax with Portugal's Non-Habitual Residency Scheme
Initiated in 2009, the Non-Habitual Residency scheme in Portugal offers significant tax advantages over a ten-year period for the employed or self-employed as well as expat retirees.
In the article below, Dan Henderson from Blevins Franks provides insights into the tax savings possible via the NHR scheme. Blevins Franks are cross-border tax and wealth management experts, providing services for Britons all across Europe. In Portugal, Blevins Franks has offices in Cascais (near Lisbon) and in the Algarve.
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Save tax with Portugal's non-habitual residency scheme
By Dan Henderson, Partner, Blevins Franks
Portugal offers new residents a range of special tax benefits under the non-habitual residency (NHR) scheme. You may have considered moving to Portugal for a change of lifestyle, but Britons moving to Portugal can also enjoy ten years of tax advantages.
What is non-habitual residency?
The Portuguese government aims to attract high value industries and people and so in 2009 it introduced the non-habitual residency regime (NHR) which is a highly attractive tax break for your first ten years in the country.
If you are employed (including self-employed) in Portugal, you could benefit from a flat 20% income tax rate which is a generous saving on the usual rates that reach up to 48%. You can qualify for this rate if you are a company director or work in one of the pre-defined high value-added professions in areas such as science, the arts or technology.
The NHR scheme is also attractive to non-employed expatriates and retirees. With NHR some of your foreign source income could be completely free from Portuguese tax, or taxed at a reduced 10% rate.
Low-tax benefits of NHR
If you qualify as a non-habitual resident, the investment income that you receive from abroad is exempt from Portuguese taxation for ten consecutive years, provided it may be taxed in the country under tax treaty rules.
British expatriates could therefore potentially receive UK rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income completely tax free. Gains made on UK shares, however, do not benefit from the NHR exemption since they are not taxable in the UK when paid to Portugal residents.
Note that tax-exempt income may be taken into account to calculate the tax rates applied on your Portuguese source income (exemption with progression).
How will my pension be taxed as a non-habitual resident?
Portugal has exclusive taxing rights on UK pensions under the UK/Portugal double tax treaty, but most income, including from private pensions, company pensions and the state pension, will be taxed at just 10% under NHR.
However, UK government pensions - including local authority, army, police, teaching, fire service and some NHS pensions - will always remain taxable in the UK and not Portugal, so do not fall under the NHR regime.
If you take your non-government UK pension as regular income, you can generally do so without being taxed in UK and at the 10% rate in Portugal. You need to take care to ensure that the pension would generally be considered to be a pension by the tax authorities or, if certain conditions are not met, it could be seen as an investment instead. It is best to take qualified financial advice on this.
How do I qualify as a non-habitual resident?
All foreign nationals can in many cases qualify for NHR if they have not been resident in Portugal within the previous five calendar years.
You will need to register as a non-habitual resident with the Portuguese tax authorities and this status is then valid for 10 years. You must meet Portuguese residency rules to be eligible, and continue to do so each year.
Although Brexit itself did not affect Britons' eligibility, domestic tax rules are always subject to change. It is also possible that the UK government may negotiate special exemptions to increase taxation of Portuguese-resident nationals.
If you have recently arrived in Portugal, or are thinking about making a permanent move here, register for NHR with the Portuguese tax authorities as soon as possible to lock-in today's benefits.
There are other tax benefits in Portugal
If you do not qualify for NHR, Portugal can still be a highly tax-efficient home.
UK pension income outside the NHR regime attracts the usual Portuguese income tax rates from 14.5% to 48% and investments are liable to a flat 28% rate. There are ways to enjoy very favourable tax treatment on your investments. If you do qualify for NHR, you may further benefit from combining these structures with the regime rules. For example, you could potentially sell a UK property without capital gains charges and reinvest in a tax-efficient life insurance bond.
Rates on Portugal's real estate, wealth tax are relatively low and it only affects those whose ownership of Portuguese property is worth more than €600,000 (€1.2 million for couples). Portuguese inheritance tax (stamp duty) is also limited; at just 10%, it only applies to Portuguese assets, and spouses and children are exempt.
The best course of action for you will depend on your individual circumstances and aims. Whatever your situation, it is sensible to take personalised advice from a cross-border specialist, sooner rather than later, to make sure you take full advantage of current opportunities in Portugal.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
You can find other financial advisory articles by visiting our website here
(this article was originally published by Blevins Franks in 2021).
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