The story of the Portuguese non-habitual resident (NHR) tax scheme is one of success; which has, unlike some others, benefited virtually everyone involved, writes Lisbon-based Gonçalo Figueira, a senior associate at Edge International Lawyers.
Not least the Portuguese economy and society; where an influx of high net worth, highly qualified, cosmopolitan new tax residents have helped bring a new dynamic to the housing market, new employment, new restaurants, cafés, bookshops, art galleries and to the streets in general.
All without becoming a burden, in terms of expense, to the Portuguese budget; as most NHRs have private health insurance and enrol their children in international private schools.
Country coffers not impacted
Even in terms of tax revenue generated, the impact has been quite positive; as NHRs have contributed to indirect taxes such as VAT, real estate and vehicle; while landlords have been forced to declare their rental income for tax purposes.
Realistically there has not been a loss of personal income taxes, as NHRs weren’t paying any tax before they relocated to Portugal and, most certainly, without the tax incentive the majority of existing NHRs would not have moved to the Iberian country at all.
As appealing as the safety, weather, wine and gastronomy are; they wouldn’t, in isolation, have made thousands of people move to the country.
But hélas (alas); politics, both internal and international, is not always guided by reason or facts.
The ruling party in Portugal, together with a highly-qualified team at the Ministry of Finance (led by the head of the Eurogroup, who steered Portugal to its first budget surplus since 1973), realised that the full exemption on pension income was starting to become a thorny issue.
Formal requests were made by Finland and Sweden to change the treatment of pensions in their double taxation treaties with Portugal, which would make retirement income taxable in the country of source instead of the country of residence.
As a result, it was imperative to prevent other countries from following the same route.
Ultimately, after some years of brainstorming, internal and external debate and all sorts of rumours; a clever draft amendment was presented to parliament.
The proposals should manage to stop (or reduce) the criticism from other parties in Portugal and other countries, as all qualifying income will now be subject to some tax, (even if very low) either at source or in Portugal.
Good news for UK expats
The draft amendments are as follows:
- A rate of tax of 10% on foreign pension applying to new NHRs with no minimum tax;
- NHRs acquiring the status before the law comes into force would fall under the existing rules. This means UK expats already benefiting from the status will keep in full their current benefits until the end of the 10-year period;
- Consequently, existing NHRs would be “grandfathered” under the existing legislation; and,
- Existing NHRs could choose to have the new rules applied to them.
The proposals also appear to broaden the definition of the types of income which can benefit from the 10% rate, for example pre-retirement income which was previously treated as salary.
They even open up the possibility of applying under the existing rules if, at the date of entry into force of the new law:
- the NHR application has been submitted and is still pending; or
- the applicant can be considered as a tax resident for tax purposes and if this applicant submits the NHR application on or before 31 March 2020 (for the tax year 2019) or before 31st March 2021 (for the tax year 2020).
Finally, the proposals adjust the treatment of self employment and some royalties for NHRs, and the conditions under which these sorts of income can also benefit from an exemption, specifically where this income is generated in the exercise of a high added value activity and taxed at source.
Not set in stone yet
The vote will take place on 6 February, so the final text could still be adjusted.
In our view, if these proposed changes are confirmed and, in particular, combined with the new automatic enrolment of high added value activities; NHRs will gain long-term stability.
They will also consolidate the NHR’s international reputation as the best programme of its type, when looking to other white list jurisdictions, while attracting an even larger number of high net worth individuals, qualified professionals and retirees to Portugal.
This article was written for International Adviser by Gonçalo Figueira, a senior associate with Edge International Lawyers.