rpba newsletter - the non habitual tax resident regime - 25.03.2015

The Portuguese Non-Habitual

Tax Resident Regime

Julho 2014

1

Decree-Law nr.

249/2009, of

September 23,

created a new

Personal Income Tax

regime for NHR

individuals.

A. The non-habitual tax resident

regime

1. The Decree-Law

Decree-Law nr. 249/2009, of

September 23, among other

measures directed at improving

Portuguese international

competitiveness, such as the

approval of the Tax Code for

Investment (“Código Fiscal do

Investimento”), created a new

Personal Income Tax (“Imposto

sobre o Rendimento das Pessoas

Singulares”, hereinafter “IRS”)

regime for NHR individuals.

This status would apparently be

granted to individuals who became

resident for tax purposes in

Portugal starting from January 1,

2009 without having been so in the

five years preceding its acquisition.

NHR individuals may enjoy such

status for a ten-year period, after

which they will be taxed under the

standard IRS regime.

Portuguese tax residence for IRS

purposes, in a given fiscal year,

may be acquired via a number of

different ways, such as:

a) Staying for more than 183 days

in the Portuguese territory,

whether these days are

consecutive or not, in any 12-

month period beginning or

ending;

b) If staying for a shorter period,

having in the Portuguese

territory, on any day during the

period referred above , a

dwelling under circumstances

that lead to the presumption of

an intention to hold and occupy

it as a place of habitual abode;

March 2015


Tax Resident (NHR) Regime

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Tax Resident Regime

Julho 2014

2

c) Being, on the 31st of December, a

crew member of a ship or

aircraft at the service of an entity

with residence, head office or

effective management in

Portugal; or

d) Being a member of a household

where one of the spouses is, on

the 31st of December, a

Portuguese tax resident.

The new tax regime targets non-

resident individuals who are likely

to establish a permanent or a

temporary residence in Portugal.

The regime includes three different

sets of rules, (i) one of them

applicable to foreign-sourced

passive income (interest,

dividends, certain royalties, other

income from capital, capital gains

and income from immovable

property), similar to non-

domiciled taxation regimes such as

the ones of the United Kingdom

and Switzerland, (ii) another

applicable to pensions and (iii) the

remaining to active income, in this

case encompassing income derived

both from foreign and domestic

sources, following expatriate,

rectius impatriate, taxation regimes

such as the ones existing in Spain

and France.

Under the first set of rules, passive

income derived by NHR residents

will be IRS exempt (without

progression except in the case of

capital gains on real estate, where

the income being exempted must

be taken into account in order to

determine the tax rates applicable

to non-exempt income) in Portugal,

provided that it may be taxed in the

source State under the rules of a tax

treaty entered into by Portugal or,

if no treaty exists, that (i) it may be

taxed in the source State according

The new tax regime

targets non-resident

individuals who are

likely to establish a

permanent or a

temporary residence

in Portugal.






Tax Resident Regime

Julho 2014

3

The passive income

included in this

regime comprises

interest, dividends,

certain royalties,

other income from

capital, capital gains

and income from

immovable property.

to the rules of the OECD Model Tax

Convention on Income and on

Capital, as interpreted in the light

of the Portuguese reservations on

its articles and of the observations

on its commentary; (ii) it is not

considered to arise from a Portuguese source under the IRS

Code territoriality rules; and (iii)

the source State, region or territory

is not included in the Portuguese

tax havens’ blacklist.

The regime requires only a

potential liability to taxation in the

source State under the rules of a tax

treaty or of the OECD Model Tax

Convention, no effective taxation

being thus required.

The second set of rules relates to

pension income, where actual

taxation on the source State under

the rules of a tax treaty or,

alternatively, no connection of the

income with the Portuguese

territory under the territorial scope

rules of the IRS Code, is required in

order for the exemption (with

progression) to be applicable. This

last rule exempts pensions which

are not paid by entities with

residence, head office, effective

management or permanent

establishment to which the

payment relates to in Portugal.

The third set of rules will be

applicable to active income

deriving from employment,

independent personal services and

also to certain royalties.

Under it, foreign-sourced

employment income will be

exempt from IRS (with

progression, except insofar as it

derives from certain high value

added activities of a scientific,

artistic or technical nature, as

defined by Ministerial Order),

provided that it is taxed in the






Tax Resident Regime

Julho 2014

4

source State according to the rules

of a tax treaty entered into by

Portugal or, if no treaty is in place,

that it is taxed in the source State

and that it is not considered to arise

from a Portuguese source under

the IRS Code territoriality rules.

Income from independent personal

services and royalties will be

exempt (with progression, except

insofar as it derives from certain

high value added activities of a

scientific, artistic or technical

nature, as defined by Ministerial

Order) if it may be taxed in the


of a tax treaty entered into by


that (i) it may be taxed in the source

State according to the rules of the

OECD Model Tax Convention on

Income and on Capital, as

interpreted in the light of the

Portuguese reservations on its

articles and of the observations on

its commentary; (ii) it is not

considered to arise from a

Portuguese source under the IRS




tax havens’ blacklist.

Effective taxation is therefore only

required in regard of employment

income. However, the independent

personal services exemption will

only be applicable to income

derived from certain high value


artistic or technical nature, as

defined by Ministerial Order.

High value added activities’

income deriving from employment

or independent personal services

of a domestic or foreign source (the

latter if it does not qualify for the

mentioned exemptions), are liable

to autonomous taxation at a special

20% flat rate and not to the

High value added

activities’ income

deriving from

services of a

domestic or foreign

source (if not

exempt) are liable to

autonomous

taxation at a special

20% flat rate.






Tax Resident Regime

Julho 2014

5

general and progressive IRS rates

(whose higher bracket is of 48% for

tax year 2015; moreover, taxpayers

with taxable income above the

limit of the higher bracket - € 80.000

for 2015 - are liable to an additional

rate of 2,5% on income exceeding

such amount and of 5% on income

exceeding € 250.000 during the tax

year), provided that it derives from



nature.

NHRs deriving foreign-sourced

income that will be IRS exempt

under both these sets of rules will

be allowed to opt, in its regard, for

the credit method, the standard

method for the elimination of

international double taxation in

Portugal. Whenever this option is

exercised, the income will be taxed

under the standard IRS regime,

being liable either to progressive

rates of up to 48% (plus 2,5% on

taxable income above € 80.000 and

5% on taxable income above €

250.000 during 2015) or to special

lower flat rates, depending on its

nature. The option for credit must

be exercised on an all-or-nothing

basis, meaning that opting for the

credit method in regard of one

category of income will imply that

the option is extended to all

remaining categories of income

and the exemption method

completely forfeited.

Additionally, NHRs deriving

income taxed at the special 20% flat

rate may also opt for the

progressive IRS rates (of up to 48%,

plus 2,5% on taxable income above

€ 80.000 and 5% on taxable income

above € 250.000, during 2015) in its

regard. This option is also

exercised on an all-or-nothing

basis. If exercised in regard of one

category of income it will imply

that all the remaining categories of

income will be subject to the said

progressive rates, with application

of the credit method and forfeiture

of the exemption method.

2. The Ministerial Order

Ministerial Order nr. 12/2010, of

January 7, defined the “high value


artistic or technical nature”

qualifying for the regime. The main

feature to be highlighted from this

Order is the fact that

sportspersons’ activities are not

included in its scope, contrarily to

what was initially expected and

thereby departing this regime from

the well-known and so-called

Spanish “Beckham Law”.

Nevertheless, the Ministerial Order

encompasses a wide range of

professions and activities, as

follows:






Tax Resident Regime

Julho 2014

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Portuguese English

1 - Arquitectos, engenheiros e técnicos similares:

101 - Arquitectos;

102 - Engenheiros;

103 - Geólogos.

1 - Architects, engineers and similar technicians:

101 - Architects;

102 - Engineers;

103 - Geologists.

2 - Artistas plásticos, actores e músicos:

201 - Artistas de teatro, bailado, cinema, rádio e

televisão;

202 - Cantores;

203 - Escultores;

204 - Músicos;

205 - Pintores.

2 - Visual artists, actors and musicians:

201 - Theater, ballet, film, radio and television

Artists;

202 - Singers;

203 - Sculptors;

204 - Musicians;

205 - Painters.

3 - Auditores:

301 - Auditores;

302 - Consultores fiscais.

3 - Auditors:

301 - Auditors;

302 - Tax Consultants.

4 - Médicos e dentistas: 4 - Doctors and dentists:






Tax Resident Regime

Julho 2014

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Portuguese English

401 - Dentistas;

402 - Médicos analistas;

403 - Médicos cirurgiões;

404 - Médicos de bordo em navios;

405 - Médicos de clínica geral;

406 - Médicos dentistas;

407 - Médicos estomatologistas;

408 - Médicos fisiatras;

409 - Médicos gastroenterologistas;

410 - Médicos oftalmologistas;

411 - Médicos ortopedistas;

412 - Médicos otorrinolaringologistas;

413 - Médicos pediatras;

414 - Médicos radiologistas;

401 - Dentists;

402 – Analyst Doctors;

403 - Surgeons;

404 – Board doctors in ships;

405 - General Practitioners;

406 - Dentists;

407 - Dentist Doctors;

408 - Physiatrists;

409 - Gastroenterologists;

410 - Ophthalmologists;

411 - Orthopaedists;

412 - Otorhinolaryngologists;

413 - Paediatricians;

414 - Radiologists ;






Tax Resident Regime

Julho 2014

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Portuguese English

415 - Médicos de outras especialidades. 415 - Doctors in other specialties.

5 - Professores:

501 - Professores universitários.

5 - Teachers:

501 - University professors.

6 - Psicólogos:

601 - Psicólogos.

6 - Psychologists:

601 - Psychologists.

7 - Profissões liberais, técnicos e assimilados:

701 - Arqueólogos;

702 - Biólogos e especialistas em ciências da vida;

703 - Programadores informáticos;

704 - Consultoria e programação informática e

actividades relacionadas com as tecnologias da

informação e informática;

705 - Actividades de programação informática;

706 - Actividades de consultoria em informática;

7 - Professional services, technicians and similar:

701 - Archaeologists;

702 - Biologists and experts in life sciences;

703 - Computer Programmers;

704 - Software consultancy and activities related

to information technology and information

technology;

705 - Computer programming activities;

706 - Computer consultancy activities;






Tax Resident Regime

Julho 2014

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Portuguese English

707 - Gestão e exploração de equipamento

informático;

708 - Actividades dos serviços de informação;

709 - Actividades de processamento de dados,

domiciliação de informação e actividades

relacionadas; portais Web;

710 - Actividades de processamento de dados,

domiciliação de informação e actividades

relacionadas;

711 - Outras actividades dos serviços de

informação;

712 - Actividades de agências de notícias;

713 - Outras actividades dos serviços de

informação;

714 - Actividades de investigação científica e de

desenvolvimento;

715 - Investigação e desenvolvimento das

ciências físicas e naturais;

707 - Management and operation of computer

equipment;

708 - Activities of information services;

709 - Activities of data processing, hosting

information and related activities; Web portals;

710 - Activities of data processing, hosting

information and related activities;

711 - Other information service activities;

712 - Activities of news agencies;

713 - Other information service activities;

714 - Scientific research and development;

715 - Research and development of science

physical and natural;






Tax Resident Regime

Julho 2014

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Portuguese English

716 - Investigação e desenvolvimento em

biotecnologia;

717 — Designers.

716 - Research and development in

biotechnology;

717 - Designers.

8 — Investidores, administradores e gestores:

801 — Investidores, administradores e gestores

de empresas promotoras de investimento

produtivo, desde que afectos a projectos elegíveis

e com contratos de concessão de benefícios fiscais

celebrados ao abrigo do Código Fiscal do

Investimento;

802 — Quadros superiores de empresas.

8 - Investors, administrators and managers:

801 - Investors, administrators and managers of

companies promoting productive investment, if

allocated to eligible projects under tax benefit

contracts awarded under the Tax Code for

Investment;

802 - Senior employees of companies.






Tax Resident Regime

Julho 2014

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3. The Administrative Rulings

The Portuguese tax authorities

issued a ruling in May 6, 2010

(Administrative Ruling nr. 2/2010)

dealing with practical aspects of

the regime, namely its application

in 2009 and the requirements to

obtain the NHR status.

Concerning the application of the

regime in 2009, Portuguese tax

authorities therein assume the

position that the features

depending on the definition of the

qualifying activities (the 20% flat

tax rate for employment and

independent personal services’

income, as well as the exemption

for foreign-sourced independent

personal services’ income) are only

applicable starting from fiscal year

2010.

The remaining features of the

regime (the exemptions for other

types of foreign-sourced income)

were deemed applicable in 2009.

This position raised serious doubts,

as the law sets out that the benefits

of the regime are granted for a ten-

year period. It remains to be seen if

this ten-year period will be taken

into account in different ways,

starting in 2009 for the benefits not

depending on the Ministerial

Order and in 2010 for those which

are.

In regard of the requirements to

obtain the NHR status, the ruling

took the position that for those

becoming Portuguese tax residents

in 2009 the regime would only be

applied on a case-by-case basis,

and to:

a) taxpayers registering as tax

residents “under the assumption

that they would be covered by the

regime”; and

b) doing so after 23 September

2009, the publication date of the

Decree-Law approving the regime.

Both of these requirements may be

viewed as illegal, as the Decree- Law clearly establishes that it is

applicable starting from 1 January

2009.

A second ruling has been issued in

August 3, 2012 (Administrative

Ruling nr. 9/2012).

Among other minor features (all

already clearly established by law),

this ruling has changed the tax

authorities’ position concerning the

requirements to obtain the NHR

status. Under the new ruling, it is

sufficient that a taxpayer adds to its

application to the regime a






Tax Resident Regime

Julho 2014

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It is sufficient that a

taxpayer adds to its

application a

statement under

which he solemnly

declares that he or

she did not fulfil the

conditions to be

considered a

Portuguese tax

resident in the five

preceding tax years.

statement under which he

solemnly declares that he or she

did not fulfil the conditions to be

considered a Portuguese tax

resident in the five preceding tax

years, either under our domestic

law or by effect of a tax treaty

entered into by Portugal.

This ruling partially revokes ruling

nr. 2/2010, which (illegally)

required taxpayers to present upon

application foreign certificates of

residence and certificates

establishing that they had suffered

an effective tax burden abroad in

the five tax years preceding their

redomiciliation into Portugal.

This change renders new

applications to the regime

significantly less burdensome and

will also unblock previously

submitted applications whose

decision was being delayed by the

lack of any of the mentioned

documents, as ruling nr. 9/2012

expressly states that it is applicable

to pending applications.

Finally, it must be noted that, vis-à-

vis activity code 802 - senior

employees of companies, ruling nr.

2/2010 has adopted a very

restrictive view, which has

remained unchanged by ruling nr.

9/2012. According to this view,

only persons with management

roles and powers to bind

companies may fit into this

category, which is an

incomprehensible position, as

usually only members of corporate

bodies (maxime, members of the

board) have such powers and the

concept of “senior employees of

companies” must naturally differ

from that of “investors, directors

and managers”.






Tax Resident Regime

Julho 2014

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Ruling nr. 2/2010 has also clarified

that those employed in companies

fully or partially owned by the

Portuguese State, Autonomous

Regions and Municipalities and

those in charge of a Portuguese

permanent establishment of a non-

resident company also qualify for

activity code 801 - investors,

administrators and managers of

companies promoting productive

investment, provided of course

that such companies and

permanent establishments have

entered into tax benefit contracts

under the Tax Code for Investment

and that the activity of such

persons is allocated to the specific

projects giving rise to the tax

benefit contracts.

4. State Budget Law for 2012

Law nr. 64-B/2011, of December 30,

which approved the State Budget

Law for 2012, has introduced a new

20% withholding tax rate for

domestic source employment or

independent personal services

income deriving from high value


artistic or technical nature.

This rate, applicable from January 1,

2012 onwards, means that NHRs

with domestic source income of

these categories are, from that date

on, no longer liable to the standard withholding tax rates of up to 44,5%

for employment income

(depending on the amount of the

income and on their personal and family circumstances) and of 25%

for independent personal services income. This solved the previous

problem of the tax paid in advance

The State Budget

Law for 2012

introduced a 20%

withholding tax rate

for domestic source

employment or

independent personal

services income

deriving from high

value added activities

of a scientific, artistic

or technical nature.






Tax Resident Regime

Julho 2014

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during the year being higher than

the final tax due, as such income is

liable to a special 20% flat tax rate

and not to the general and

progressive rates of up to 48% (plus

2,5% on taxable income above €

80.000 and 5% on taxable income

above € 250.000 during 2015), as

mentioned in point 1. above.

5. Amended State Budget Law for

2012

Law nr. 20/2012, of May 14 - the

Amended State Budget Law for

2012 -, introduced a term for the

submission of applications to the

NHR regime.

Under the changes introduced to

the IRS Code, applications must

now be submitted until March 31 of

the tax year following that in which

Portuguese tax residence is

acquired.

It has been expressly established in

the Amended State Budget Law for

2012 that such term was previously

non-existent, which means that

applications previously denied on

the grounds of being

extemporaneous and still pending

appreciation, namely due to the

submission of administrative

appeals, will now be decided

favourably. It is also possible that

cases of applications previously

denied on the grounds of being

extemporaneous and already fully

decided (i.e., where no appeals are

pending) might again be submitted

to the Portuguese tax authorities,

although this should be

approached with care.

6. State Budget Law for 2013

The State Budget Law for 2013

(Law nr. 66-B/2013, of December

31) introduced two changes to the

regime.

One of them was that taxable

income of individuals became

subject to an extraordinary surtax

of 3,5% in 2013, applicable to the

employment or independent

personal services income deriving

from high value added activities of

a scientific, artistic or technical

nature obtained by NHRs liable to

autonomous taxation at a special

20% flat rate, as well as to any non-

exempt income liable to the general

and progressive IRS rates.

In the case of employment income

deriving from high value added

activities of a scientific, artistic or

technical nature, the 3,5%

surcharge was added to the 20%

withholding tax rate introduced by

the State Budget Law for 2012. In

the case of independent personal

services income of the same nature

the surcharge was only levied






Tax Resident Regime

Julho 2014

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The State Budget

Law for 2013

introduced an

extraordinary surtax

of 3,5%.

upon the submission of the yearly

tax return.

The second aspect of State Budget

Law for 2013 was a change to the

wording of paragraphs (3), (4) and

(5) of article 81 of IRS the Code,

which establish the conditions for

the exemption of (i) employment

income; (ii) independent

professional services income

obtained through high value

added activities, royalties, capital

income, rental income and capital

gains; and (iii) pension income,

respectively.

This change is, in our opinion,

irrelevant, in all cases, as it does not

amend the already previously tax

exempt status of such items of

income.

However, as far as pension income

is concerned, it has the intention to

put an end to an abusive

interpretation by the tax

authorities of the second condition

of paragraph (5) of article 81 of the

Code, according to which the non-

taxation of non-Portuguese

sourced pensions applies only in

cases where no tax treaty exists.

This interpretation has no

sustenance, as the tax exemption

for foreign sourced pensions is

clearly applicable to pensions

sourced in States with which

Portugal both has and has not

entered into a tax treaty. Moreover,

it makes no sense to sustain this

position, as it would imply that

foreign pensions earned by NHRs

which had not been taxed at source

would be exempt if they originate

from tax havens but would be

taxable if they originate from States

with a tax treaty entered into with

Portugal.






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Other additional problems have

also arisen in the application of the

regime, especially deriving from

the poor adaptation of the IRS

return form to some of the regime’s

features. Namely, the tax return

form seemed to require that

pensions are taxed abroad in order

for them to be IRS exempt under

the regime (which, we stress again,

is not legally required) and the

electronic filing system seemed to

have been configured in a way that

raises difficulties in the application

of the regime to passive income,

such as capital income, rental

income, royalties and capital gains

on real estate.

The tax authorities’ interpretation,

together with the poor drafting of

the IRS return form, raised

practical and important doubts on

the application of the regime

concerning pensions which were

not fully clarified with the very

subtle change deriving from the

State Budget Law for 2013.

The effects of that change have

been debated. As the new wording

was enacted without retroactive or

interpretative effect, it remained

doubtful whether the tax

authorities would accept to apply

the exemption for pension income

to pensions received until

December 31, 2012 and sourced in

States with which Portugal has

entered into a tax treaty.

7. Other developments in 2013

It was expected that an

administrative ruling would be

issued by the Secretary of State of

Tax Affairs or the Director-General

of Taxes in the aftermath of the said

legislative change, in order to fully

eradicate the existing doubts.

The tax authorities’

interpretation and

the poor drafting of

the IRS return form

have raised practical

and important

doubts in the past on

the application of the

regime concerning

pensions. However,

the regime is now

fully applied by

Portuguese tax

authorities.






Tax Resident Regime

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17

However, the expected

clarifications emerged more

prosaically, with the issuing in

December 2012 of tax assessments

for taxpayers under the regime and

with no foreign sourced pension

income, and with the issuing in the

end of March 2013 of tax

assessments for taxpayers with

foreign sourced pension income.

Tax assessments for taxpayers

under the regime were pending

issuance since its inception, which

was previously a source of major

concern as regards its practical

application. The regime clearly

then became fully applied by

Portuguese tax authorities.

The said assessments were,

however, incorrectly issued as

regards foreign sourced capital

income, rental income, royalties

and capital gains on real estate, as

these were deemed taxable even

when the requirements for their

exemption – (a) possibility of

taxation at source according to the

rules of a tax treaty entered into by


(b) that (i) it may be taxed in the


of the OECD Model Tax

Convention on Income and on

Capital, as interpreted in the light

of the Portuguese reservations on

its articles and of the observations

on its commentary; (ii) it is not

considered to arise from a

Portuguese source under the IRS




tax havens’ blacklist - were

verified.

In certain cases taxpayers were

forced to submit administrative

appeals against assessment bearing

such mistake, in order to be fully

protected.

This problem was also solved at the

end of 2013. Pending appeals were

decided in favour of taxpayers and

Portuguese tax authorities have

issued corrective tax assessments

replacing all assessments suffering

from this mistake, even those not

under appeal.

8. Changes to the procedure to

register as tax resident in

Portugal

Decree-Law nr. 14/2013, of January

18, changed the rules applicable to

the registration of taxpayers. Non-

Portuguese nationals are now

required to obtain a valid residence

permit or residence card in order to

register as tax residents in

Portugal, something which was

previously not required, at least in

theory.






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Registering as a tax resident in

Portugal is a requirement to be

granted the NHR status, which

means that those wishing to apply

for the regime must now: (i)

register as non-resident taxpayers;

(ii) obtain residence permits (for

non-EU nationals) and residence

cards (for EU nationals); (iii) in

order to register as tax residents;

and (iv) only then apply for the

NHR status

9. State Budget Law for 2014 and

subsequent developments

The State Budget Law for 2014

(Law nr. 83-C/2013, of December

31) once again approved a 3,5%

extraordinary surtax, applicable in

the exact same terms as the one in

force during 2013.

Moreover, Ministerial Order nr.

365/2013, of December 23,

approved a new IRS return form,

applicable to returns submitted as

from January 1, 2014 concerning

income obtained in preceding tax

years.

Following the clarifications of 2013

in regard of pensions and passive

income, the changes introduced to

the form clarify that only foreign-

sourced employment income must

be effectively taxed by the State of

source in order to qualify for the

NHR exemptions. In fact, the form

now expressly states that (i) all

foreign sourced pensions and (ii)

foreign sourced passive income

that is liable to tax at the State of

source is tax exempt in Portugal,

regardless of effective taxation

abroad.

Registering as a tax

resident in Portugal

is a requirement to

be granted the NHR

status.






Tax Resident Regime

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19

10. Expected changes for 2015 - the

IRS Code Reform

The Commission charged with the

2014 IRS reform, which entered

into force on January 1, 2015, had

proposed to the Government the

enactment of significant changes to

the NHR regime, directed at

increasing its attractiveness.

The most relevant proposed

change was a widening of the

exemptions for foreign-sourced

income to encompass: (i) all

passive income (interest,

dividends, royalties, other income

from capital, capital gains on any

foreign asset, including shares, and

income from immovable property),

regardless of the liability to

potential taxation at source under

an existing tax treaty or the OECD

Model Tax Convention; and (ii)

independent personal services

income of any kind, provided that

it is potentially liable to taxation in

the source State under the rules of

a tax treaty or of the OECD Model

Tax Convention.

Moreover, the Commission also

proposed the inclusion of

actuaries, airline pilots and

directors and managers of all

companies, regardless of their activity sector and of the existence

of a tax benefit contract with the

Portuguese State, in the list of high value added activities of a


nature which qualify non-exempt employment and independent

personal services income for the

special 20% flat rate.

This inclusion would operate

through an amendment to the

Ministerial Order mentioned above

in point 2.

The changes

introduced to the

form clarify that

only foreign-sourced

employment income

must be effectively

taxed by the State of

source in order to

qualify for the NHR

exemptions.






Tax Resident Regime

Julho 2014

20

Finally, the Commission also

proposed the abolishing of an

existing withholding tax, applicable to cases where exempt

foreign-sourced income derived by

NHRs from securities is paid

through Portuguese entities, as in

practice the withholding was

rendering the exemption

ineffective in such cases.

11. Effective changes for 2015

Despite high expectations, only the

last of the mentioned changes

proposed by the Commission

charged with the 2014 IRS Reform

was approved.

However, additions to the list of


scientific, artistic or technical nature

which qualify non-exempt

employment and independent

personal services income for the

special 20% flat rate does not

require legislative action, but only a

change in the Ministerial Order

approving the list, and therefore

may simply be approved by the

Minister of Finance.

Additionally, there have been

changes to more general aspects of

the IRS Code which may impact the

NHR regime. The most relevant is

the option granted to NHRs

deriving foreign-sourced income

that will be IRS exempt to opt for

progressive rates (of up to 48%, plus



above € 250.000, during 2015) in its

regard.

In fact, whereas in the past this

option had to be exercised on an all-

or-nothing basis, meaning that if

exercised in regard of one category

of income all remaining categories

would be subject to the said

progressive rates, with the credit

method being applied and the

exemption method forfeited in

regard of all of them, it is now

possible to opt for the progressive

IRS rates on a per-income category

basis.

This means that it is now possible to

have income from one category

taxed under the IRS progressive

rates, with the credit method being

applicable, and the remaining ones

still benefiting from the applicable

exemptions or special rates.

The main advantage of this option

is that the application of the

progressive rates enables the carry-

forward of losses (between 5 and 12

years) in the categories of income

where it is applicable. As the

application of the progressive IRS

rates to a category of income in

which losses are registered in a

given year and in regard of which

the carry forward of losses is






Tax Resident Regime

Julho 2014

21

available in general terms no longer

implies the forfeiting of the

exemption method in regard of the

remaining categories of income, this

option, together with an also new

possibility to carry forward existing

excess foreign tax credit (during 5

years), may prove beneficial with

regard to income not encompassed

by the NHR exemptions.

The option for the credit method

with regard to exempt income

remains available, but it is still

applicable on an all-or-nothing

basis, meaning that, when exercised

in regard of one category of income,

income of all categories will be

taxed under the standard IRS

regime, being liable either to

progressive rates of up to 48% (plus



above € 250.000, during 2015) or to

special lower flat rates, depending

on its nature. This option also

implies that the credit method will

be applied to income of all

categories and the exemption

method completely forfeited.

The consequences of the options for

the IRS progressive rates and for the

credit method may be summarized

as follows:

Option for the

IRS progressive

rates

Per-category

basis

Credit method

applicable to

categories

where the

option was

made

Exemption and

special rates

retained on

remaining

categories

Option for the

credit method

All-or-nothing

basis

Exemption lost

on all categories

of income

Special rates

retained on

remaining

categories,

whenever

applicable

Finally, the State Budget Law for

2015 (Law nr. 83-C/2013, of

December 31) has once again

approved a 3,5% extraordinary

surtax, applicable in the exact same

terms as the one in force during

2013 and 2014.

12. Other tax features and

planning opportunities

Law nr. 15/2010, of June 26, has

abolished a long standing IRS






Tax Resident Regime

Julho 2014

22

exclusion for capital gains on

shares held for more than 12

months.

This has relevant consequences for

the NHR regime, as its tax

exemption for capital gains had

been built with that exclusion in

mind and in such a way that it is

only applicable if the income may

be taxed in the source State under

the rules of a tax treaty entered into

by Portugal (or, if no treaty exists,

according to the rules of the OECD

Model Tax Convention on Income

and on Capital, as interpreted in

light of the Portuguese

reservations on its articles and of

the observations on its

commentary).

This implies that most capital gains

(maxime on foreign shareholdings

and other securities) will remain

taxable in Portugal as both

Portuguese tax treaties and the

OECD Model Tax Convention

establish in this case that the

residence state has exclusive

competence to tax.

Additionally, several other

attractive features remain for the

Portuguese taxation of individuals.

Firstly, several capital gains are

excluded from IRS taxation, such

as those on:

a) shares and quotas, acquired

before 1 January 1989;

b) real estate, except land for

construction, owned before 1

January 1989;

c) a taxpayer's personal and

permanent residence insofar as

the sale proceeds are reinvested

in another personal residence in

the Portuguese, European

Union or European Economic

Space territory (in the latter case

Most capital gains

(maxime on

foreign

shareholdings and

other securities)

remain taxable in

Portugal.






Tax Resident Regime

Julho 2014

23

if there is an instrument providing

for exchange of information

between the tax authorities of both

States in terms similar to the ones

in force within the European

Union).

Contributions made by the

employer to pension funds and life

and health insurance schemes are

not regarded as employment

income provided that certain

conditions are met.

Finally, since 1 January 2004 close

family (spouses, children,

grandchildren, parents and

grandparents) is exempt from

Stamp Tax on gifts and

inheritances. Other situations

involving the gratuitous disposal

of Portuguese assets are taxed

through a 10% Stamp Tax.

However, the disposal of foreign

assets (even towards Portuguese

residents (such as the disposal of (i)

shares in companies whose head-

office, effective management or

permanent establishment is in the

Portuguese territory, and of (ii)

credit and other patrimonial rights

over individuals or companies

resident, with head-office, effective

management or a permanent

establishment herein) are not liable

to this type of taxation.

B. Endnotes on the current status

of the regime and on its

predictable developments

The tax regime for NHRs seems to

be effective in the attraction to

Portugal of high net worth

individuals, increasing demand in

the domestic market, and fostering

increased fiscal revenue, namely in

regard of real estate and

consumption taxes, from

individuals that otherwise would

not be taxpayers in Portugal.

The NHR regime

seems to be effective

in the attraction to

Portugal of high net

worth individuals.






Tax Resident Regime

Julho 2014

24

The current Government, in office

since June 2011, announced the

intention to attract investors and

qualified workers and researchers

into Portugal in the Government

Programme, although this has not

been specifically linked with the

NHR regime and, as far as

investors are concerned, may be

tied more clearly to the Golden

Visa Program. It also announced

the intention to implement a

specific program to boost the

attractiveness of Portugal as a

destination for northern European

retirees - the Retirement in the Sun

(“Reforma ao Sol”) Program.

Although this Program never came

to light, the NHR regime gathers

political support, also aimed at the

return of highly qualified

Portuguese nationals currently

domiciled abroad.

In this regard, as from January 1,

2014 no relevant doubts remain on

the application of the NHR regime,

which means that it may be fully

and unrestrictedly enjoyed by

those wishing to move to Portugal.

***

Proper legal advice is

recommended before any decision

is taken to become a Portuguese tax

resident, and more so if one wants

to profit from the NHR status.

RPBA has an in-depth knowledge

and expertise on this regime.

Visit our microsite to know more

about the NHR regime. You can

also check our concise

presentation on this subject.

To book a consultation or to obtain

our professional fees on this subject

please e-mail us (Pedro Ribeiro de

Sousa): [email protected]

March 25, 2015

Ricardo da Palma Borges

Pedro Ribeiro de Sousa

Disclaimer: Although great care

has been taken when drafting this

Information Note, Ricardo da

Palma Borges & Associados

(RPBA) - Sociedade de

Advogados, R.L. does not accept

any responsibility whatsoever for

any consequences arising from

the use of the information

contained herein. The

information is provided solely for

general purposes, cannot be

regarded as legal or other advice

and was last revised on the stated

date.





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