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Portugal’s non-habitual residence (NHR) regime – 10 years of tax benefits
By Stephen Rankine, Private Client Manager, Blevins Franks
Portugal’s non-habitual residence regime offers new residents very attractive tax advantages. Some foreign income will be exempt from Portuguese tax; foreign pension income benefits from a special fixed low tax rate, and local ‘high value’ employment is also taxed at a lower rate than usual.
You may consider moving to Madeira for a healthier, more relaxed lifestyle, but living in Portugal also offers much wider appeal, giving new residents the opportunity to enjoy a decade of generous tax breaks through the non-habitual residence (NHR) regime.
What is non-habitual residency?
‘Non habitual’ simply means that this regime is open to people who have not lived in Portugal in recent years.
The NHR was in fact introduced by the Portuguese government in 2009 to attract ‘high value’ foreign residents to live in Portugal. It therefore offers reduced tax rates and some tax-free exemptions for your first ten consecutive years in the country.
What are the tax benefits?
A reduced tax rate on high value Portuguese employment income
Most NHR tax advantages apply to foreign income, but if you are employed in Portugal in a ‘high value activity’, you can benefit from a flat 20% income tax rate on this employment income. This is instead of the scale rates of tax that range from 14.5% to 48%.
You must work in one of the pre-defined scientific, artistic or technical professions to qualify.
Tax-free foreign income
Tax residents normally pay Portuguese tax on their worldwide income. However, the non-habitual residence regime provides the opportunity to receive foreign income completely free of further Portuguese tax.
In general, income from investments (including dividends and interest), royalties, rents, employment etc. from a foreign source will be exempt from tax (but with progression) in Portugal, provided the foreign state has taxing rights.
This can apply even if the income is not actually taxed in the home country. For example, UK dividends escape Portuguese taxation under NHR because they are taxable in Britain under the UK/Portugal double tax treaty. In practice, however, the UK’s ‘disregarded income’ rules can eliminate UK tax liability for non-residents. As a result, you could end not paying tax in either country on UK dividend income.
In summary, under the NHR, British expatriates can potentially receive most UK rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income tax-free.
NHR and capital gains tax
When foreign assets are sold, if the double tax treaty gives taxing rights to Portugal, the gain is taxable in Portugal. If the gain may be taxed in the source country, it is exempt with progression in Portugal.
For UK assets, this means that gains made on UK shares remain fully taxable in Portugal, even if you are a non-habitual resident. However, gains made on the sale of UK real estate are exempt from tax (with progression) under the regime.
What does ‘exempt with progression’ mean?
While the foreign income is not directly taxed in Portugal, it can be taken into account to calculate the tax rates applied to your income that is taxable in Portugal.
This can push you into higher income tax bands, increasing the effective rate of tax levied on
income directly taxed in Portugal.
How is foreign pension income taxed under the NHR?
Although foreign pension income is no longer tax free under the non-habitual residence regime, it does benefit from a flat 10% tax rate.
Considering the income tax rates start at 14.5% and reach as high as 48%, the 10% tax is still a significant advantage, particularly favourable for those with higher pension income.
Note that UK government service pensions are an exception as they remain taxable in the UK only.
Are you eligible for non-habitual resident status?
People of any nationality (including non-EU/EEA citizens) can potentially qualify for NHR if they have not been resident in Portugal within the previous five calendar years.
You have until 31 March of the year after you become tax resident in Portugal to apply, so don’t miss this opportunity.
You need to meet Portuguese residency rules and have a Portuguese taxpayer number (NIF) to register.
What happens after 10 years?
Once you have been tax resident for 10 years, the NHR status and benefits fall away. You will be liable to tax on your worldwide income and gains at the full tax rates.
So as you approach your 10 years, contact your Blevins Franks Portugal office for advice on effective, compliant, tax planning for Portugal. And make sure you’ve made the most of your NHR status. For example, you could potentially sell a UK property without capital gains charges and reinvest in a tax-efficient life insurance bond. Give yourself plenty of time before the 10-year deadline, in case you have to re-structure your assets.
Likewise, get in touch if you’re undecided whether to remain in Portugal, return to UK or move to pastures new. With offices in the UK, Portugal, Spain, France, Cyprus and Malta we are genuine cross-border specialists. We’ll be happy to help you weigh up the tax implications in each country and, if you do decide to leave, guide you on the most tax-efficient time to sell assets and change residence.
What other tax benefits are there in Portugal, besides NHR?
If you do not qualify for non-habitual residence, or your NHR period has ended, Portugal can still be a highly tax-efficient home.
For example, with careful planning and specialist advice, there are opportunities to enjoy extremely favourable tax treatment on capital investments.
Portuguese inheritance tax (stamp duty) is very limited; at just 10%, it only applies to Portuguese assets, and spouses and children are exempt.
Portugal does have a wealth tax of sorts, but it only applies to property and rates are relatively low. It will only affect you if you own Portuguese property worth more than €600,000 (€1.2 million for couples).
Overall, Portugal has much to offer Britons looking for a relaxing – and tax-efficient – move to sunnier climes. Ultimately, the best course of action for you will depend on your individual circumstances and aims. Blevins Franks is a cross-border specialist advice and wealth management company and we have been helping our clients relocate to Portugal for more than 45 years. We will provide personalised, regulated advice to ensure you do what’s best for you and your family by taking full advantage of suitable opportunities in Portugal.
The 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 take personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
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