Can Portugal’s Non Habitual Residency (NHR) program help you optimize your global tax obligations? In today’s episode, we take a closer look at how the program works. Let’s get into the details below…
Portugal needs no introduction as a safe, relaxed and scenic Plan B destination. Boasting a temperate climate and a low cost of living, the country is also increasingly becoming a “Plan A” destination for remote workers and digital nomads.
(Sovereign Confidential members: Earlier in July we released a 29-page Sovereign Confidential Case Study on how our very own marketing manager recently gained residency in Portugal – without the need to invest there or marry a local. Packed with boots-on-the-ground insight into living in Portugal, combined with a detailed look at the D7 residency requirements, this is essential reading if the country is on your radar.)
Also, if you’re considering a move to Portugal, the country’s popular NHR program needs to be on your radar. For your first ten years as a new Portuguese resident, the NHR regime can help you exclude certain types of your income from taxation in Portugal.
(You will generally become a tax resident in Portugal if you spend 183 days or more there during any calendar year.)
In fact, the ability to apply for this program is one of the key reasons for the massive popularity of the country’s Golden Visa program.
PLEASE NOTE: The taxation of foreign residents in Portugal is a very nuanced topic, and you would do well to discuss your specific situation with a knowledgeable Portuguese tax advisor. SMC members, reach out to us if you’d like a referral for our vetted Portuguese tax specialist.
Why Portugal makes sense from a tax perspective
Beyond the scope of the NHR regime, there are a couple of Portuguese tax advantages we need to mention straight off the bat:
First, Portugal does not have a wealth tax. That’s important if you have a substantial net worth and plan to live in the country. (In contrast, many of Portugal’s neighbors, such as France and Spain, do have this.)
Second, Portugal will not tax your assets when you die – provided that you pass them on to your spouse or closest relatives (e.g., your children, grandchildren or parents).
And third, any of your crypto gains are tax-free in Portugal (for the moment, at least – although this may well change in future), provided that you are trading or investing for your own benefit, and that you don’t make a profession out of it (i.e. you’re not running some crypto-related business).
But in other aspects, you need to be careful.
When it comes to your income, Portugal is typically a very tax-heavy place.
The country’s income tax reaches a nose-bleeding 48% for earnings of only around €80,000 per year. And your worldwide income will be subject to it, too.
How the NHR program can help
Fortunately, these standard conditions don’t necessarily have to apply to you, thanks to the Non Habitual Resident (NHR) regime that Portugal offers to all new residents.
(To be eligible, you must not have been a Portuguese tax resident for at least five years before applying).
The good news is that most investment income earned outside of Portugal – such as dividends, interest, royalties and rental income – can be tax-free under the NHR regime.
At the same time, the program won’t really help you alleviate capital gains taxation (as is applicable to selling stocks, for example). Those will generally be taxed at a flat rate of 28%.
Crypto gains, again, are currently tax-free.
Furthermore, active businesses can benefit under the NHR, too.
Dividends that you receive from your active businesses are generally not taxed in Portugal under the program – which is another very compelling selling point.
Next, public pensions, such as 401k or Social Security benefits, are taxed at a flat 10% by Portugal.
And if your pension is already taxed in your home country, this can count as a credit towards your Portuguese tax liability. You won’t have to pay tax twice on the same amount.
Under the NHR, your taxation of Portugal-sourced income can benefit as well. The local tax authorities will tax your local income at a flat 20% (instead of up to 48%), but only if your profession is one of their approved list of “high value-added activities”.
The exact list (on page 5, in Portuguese) is long and changes periodically, but in general, all the usual suspects belong to it: doctors, dentists, engineers, tax consultants, teachers, investigators, professors, business executives and various IT specialists.
A word of caution if you’re a business owner or self-employed…
With the NHR, the devil is in the details.
Especially if you’re self-employed or running your own business, the nature of your income will be important, as well as what country this income is earned in. For example, Portugal will tax your dividends if the company is based in one of the many countries blacklisted by Portugal.
And as of today, 80 countries and territories are on the list, including most of the world’s no-tax or low-tax jurisdictions, such as Hong Kong, the UAE, Gibraltar, Panama, Puerto Rico, etc.
For the scheme to work, your company will need to be based in the EU or another “fiscally compliant” jurisdiction. And in most cases, it means paying at least some tax in these countries.
You also need to be worried if you – as a Portuguese resident – are a company’s single owner and employee. Similarly, even if you have employees all over the globe, but the company’s effective management entity (i.e. you, running the company) is located in Portugal, that may also pose a problem.
In these cases, the Portuguese authorities may consider the company to be based in Portugal and not elsewhere, with all local tax rates applicable. Again, proper planning will be required in these cases to make sure you will not be breaking any rules.
Keep in mind that, apart from taxation in Portugal, you will also need to consider tax obligations in the country where the income is produced.
You will need to work with tax professionals in both countries.
Additionally, US citizens will always have a third piece of the puzzle to worry about – the IRS. You will always be subject to US taxation and reporting requirements, no matter where you live. (Unless, of course, you renounce your US citizenship…)
With proper structuring, the Non Habitual Resident program can help you effectively optimize your global tax obligations – especially if you’re sitting on unrealised crypto gains. And on top of that, the quality of life in Portugal is nothing to be sneezed at either.
But the current program benefits may not be around forever.
So if you can benefit from it, take action today.