Over the last decade, Portugal has become a prime location for direct foreign investment, do business and for ultra and high net worth individuals to live.
Portugal’s geographical location and climates are two of its biggest assets. But these reasons do not account for the latest influx of investors.
In fact, the purpose of this article is to provide an overview of the two main reasons behind the new Portuguese residents – a visa scheme and a special income tax regime.
The Visa Scheme – Golden Visa
Simply put, the Golden Visa is a residency scheme for foreign individuals willing to invest considerable sums of money in Portugal to gain access to the Schengen Area.
Foreign citizens involved in investment activities may apply for a Golden Visa provided they undertake, at least, one of the following transactions/operations in Portugal:
• Capital transfer in excess of 1.000.000 Euros;
• Creation of, at least, 10 job positions; or
• Acquisition of real estate (with market value in excess of 500.000 Euros).
The mains benefits of this regime are the access to a permanent residence permit, the right to family regrouping, freedom of access to the European Union territory (Schengen Area) and the possibility to apply for Portuguese citizenship in accordance with the current legal provisions.
Even though both regimes are applicable separately most Golden Visa applicants fulfil the requirements to be taxed as a non-habitual resident.
The Tax Regime – Non habitual residency
In 2009, the Portuguese Government approved a tax regime (non-habitual residency) designed to attract high skilled individuals and investors to Portugal. It was design to allow Portuguese companies to provide better job offers (in terms of net remuneration) when in search for the best talent.
According to the reporter’s experience on the matter, this objective was not achieved. In fact, the regime turned out instead to be a great tax saving opportunity for pensioners and high net worth individuals. For this reason alone, it is not surprising that skilled labor comes in third place in terms of adherence to the program.
For the last two years, it is the regime of choice for non-EU/EEA citizens applying for a Golden Visa.
The requirements to qualify as a non-habitual resident are as follows:
• Not qualifying as tax resident in Portugal for the 5 years prior to residing in Portugal;
• Qualifying as a tax resident in Portugal;
• Request the granting of the non-habitual resident status.
Eligibility requires that a taxpayer were not deemed to be a tax resident in Portugal during the five years prior to his arrival in Portugal, but requires the applicant fulfills residency criteria in Portugal when it requests the non-habitual status.
The tax residency criteria are in harmony with the OCDE’s guidelines: either a presence in Portugal for more than 183 days or to have a dwelling in Portugal on 31 December of that year with the intention to use it as his/her permanent residence.
After the non-habitual residency is granted, there is no minimum stay requirement afterwards, but taxpayers have the right to be taxed as non-habitual residents for a 10 year period.
In terms of actual differences from the ordinary regime for residents, the NHR regime provides both exemptions and tax rate caps. Exemptions are applicable to specific types of income, mainly passive income such as dividends and interest.
Also, as a rule, foreign-sourced income will not be taxed in Portugal when it is was taxed abroad or might have been taxed according to a Double Tax Treaty. However, relying on the non-taxation rule by the Portuguese state demands an in depth analysis of all transactions and payments.
In a different way, tax caps are in place to benefit high value added scientific, artistic or technical activities. Income derived from such activities is taxed at 20%, plus a surtax of 3,5%.
In specific scenarios, the regime allows for nil taxation on pensions. There is no wealth tax and remittance of funds is tax free. Since, as a rule, there is no inheritance tax or gift tax, Portugal is a good jurisdiction to avoid tax leakage during the later stages of life.
The regime is not “off-shorish”, but constitutes a tax break for wealthy individuals to conduct business or receive income in a white listed jurisdiction with low taxes.
Portuguese companies and individuals may take advantage of EU nondiscrimination rules and EU Directives as well of Portuguese double tax treaties (more than 60) as well as investment protection agreements (more than 50).
Finally, Portugal has entered into more than 15 tax information exchange agreements signed and several Social Security agreements.
Opportunities for R&D companies
The regime provides a key opportunity for MNE’s to set R&D centers in Portugal, allocating top staff to a jurisdiction with a tax cap of 23,5%.
Recently, the Portuguese state reformed corporate taxation, providing new incentives for R&D and a broad worldwide participation exemption. To know more please read our topic on the matter.
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