Taxing matters: Living and investing in Portugal
Nuno Nogueira Pinto assesses the legal and tax benefits of acquiring residence in Portugal and the country’s Golden Visa
According to the Global Peace Index, Portugal is the fourth safest place in the world. Combined with a sunny Mediterranean climate, a fabulous gastronomy, a diverse geography and an attractive tax regime with no tax on wealth and inheritances when the beneficiary is the spouse, descendant or ascendant, Portugal is a remarkable choice of residence.
The Non-Habitual Resident (NHR) regime is provided for in the PIT (IRS) Code since 2009 and aims to attract investment to Portugal, as well as qualified professionals, pensioners and high net worth individuals to invest in Portugal.
The Non-Habitual Resident
The NHR regime allows for a special tax regime with reduced tax rates or even with personal income tax (PIT) exemption. The regime is both applicable to foreign citizens and Portuguese citizens who have lived abroad.
It is based on the granting of a non-renewable 10-year period NHR status to a person who transfers their effective residence to Portugal. According to Portuguese law, a person who stays in Portuguese territory for more than 183 days in any given year is considered to have residency in Portugal. If that person stayed in Portugal for a shorter period, but can prove the intention to maintain and occupy a house or apartment as habitual residence, they may also be considered a Portuguese resident.
Taxation will depend on the sources of income, as there are specific taxation rules depending on whether we are dealing with income obtained in Portugal or income obtained abroad. On the one hand, it depends on whether the income arises from dependent work (IRS Category A) or self-employed work (IRS Category B), from passive income (capital income, real estate income and capital gains) or pensions. The following are also key considerations:
· Pensions: until recently, pensioners under NHR regime were exempt from personal income tax. However, they currently pay a rate of 10 per cent, which is still quite advantageous compared to the rate arising from the application of the general regime.
For pensioners who benefitted from non-habitual resident status prior to 1 April 2020, when the State Budget Law introduced the 10 per cent rate, they can continue to benefit from tax exemption of pensions until the end of the respective 10-year period.
· Income from employed work: NHR regime may also have clear advantages, such as the taxation of income earned in value-added activities at the reduced rate of 20 per cent. Income from dependent employment (IRS Category A) earned abroad by persons benefiting from the NHR regime may be exempt from IRS, provided they are taxed in the source country.
· Income from self-employed work: in turn, income from self-employed work (IRS Category B), namely the provision of high added value services, of a scientific, artistic or technical nature or from intellectual or industrial property, may also be taxed at a reduced rate of 20 per cent or even be exempt from IRS, as long as they can be taxed in the source country or can be taxed in the source country, in accordance with the OECD Model Tax Convention on Income and Capital.
There are two major advantages of self-employed income over employed work income. On the one hand, even if there is no convention to avoid double taxation, income from self-employed work can be exempt, provided the source country is not on the list of tax havens and the income is not considered to be obtained in Portuguese territory. On the other hand, it is not necessary for the income to have been taxed in the source country, but it still can be taxed in the source country (that is, the mere possibility of taxation is sufficient and it is not required an effective taxation to exempt this income in Portugal).
Capital, real estate and capital gains
This income may also be exempt from PIT as long as the candidates can be taxed in the source country (under the convention to eliminate double taxation) or may be taxed in the source country, in accordance with the OECD Model Tax Convention on Income and Capital (in light of the interpretation, observations and reservations made by Portugal).
Once again, this income can be exempt from IRS even if there is no convention to avoid double taxation and it is not necessary for the income to have been effectively taxed in the source country, the mere possibility of taxation being sufficient.
As a rule, income benefitting from the exemption regime is subject to aggregation for the purposes of determining the IRS rate to be applied to other income.
Alongside with the NHR regime, the Residence Permit for Investment Activities (ARI), commonly known as Golden Visa, is a visa program that exists since 2012 and allows non-EU citizens to obtain a residence permit, for the purposes of carrying out an investment activity.
In addition to the residence permit, the Golden Visa allows the beneficiary to enter Portugal and the Schengen area without a visa, to reside and work in Portugal (provided they remain in Portuguese territory for a period of seven days in the first year and 14 days in subsequent years) and, moreover, to acquire Portuguese nationality, through naturalisation, provided the requirements set forth in the Nationality Law are fulfilled.
The investment activities granting access to the Golden Visa regime are as follows:
· The transfer of capital in an amount equal to or greater than €1m (€1m as of 1 January 2022);
· The creation of at least 10 jobs;
· The acquisition of real estate with a value equal to or greater than €500.000;
· Acquisition of real estate, whose construction has been completed for at least 30 years or located in an urban rehabilitation area and carrying out rehabilitation works of the acquired real estate, in a global amount equal to or greater than €350.000;
· Transfer of capital in an amount equal to or greater than €350.000, applied in research activities carried out by public or private scientific research institutions, integrated in the national scientific and technological system (€500.000 as of 1 January 2022);
· Transfer of capital in an amount equal to or greater than €250.000, which is applied in investment or support for artistic production, recovery or maintenance of the national cultural heritage;
· Transfer of capital in an amount equal to or greater than €350.000 (€500.000 as of 1 January 2022) for the acquisition of participation units in investment funds or venture capital funds aimed at capitalizing companies incorporated under Portuguese law, whose maturity, at the time of investment, is at least five years and at least 60 per cent of the value of the investments is carried out in Portuguese companies;
· Transfer of capital in an amount equal to or greater than €350.000 (€500.000 as of 1 January 2022) for the constitution of a Portuguese company or for the reinforcement of the share capital of an already incorporated Portuguese company, with the creation or maintenance of five permanent jobs.
The Golden Visa regime will be amended on 1 January 2022. In addition to the amendments of the investment amounts referred to above, it will no longer be possible to invest in real estate in the metropolitan areas of '‹'‹Lisbon, Porto and in almost the entire Algarve region. The amendments to the regime will not affect the Golden Visa applications submitted until 31 December 2021 nor the renewals of the Golden Visas already granted.
Nuno Nogueira Pinto is a lawyer at Espanha Associados in Lisbon, Portugal espanhaassociados.pt