What precisely is the non-habitual resident status (RNH, in Portuguese)?
Non-habitual resident status is available for persons who wish to move to Portugal and who have not been Portuguese tax residents in the previous 5 years. When assigned this status, people benefit from tax exemptions on certain types of foreign revenue during a 10-year period. They may also benefit from an autonomous tax rate on some types of employee and/or self-employment income obtained from specific activities classified as high value-added services (EVA, in Portuguese), according to an officially approved list.
Although the status is called “non-habitual”, do the respective benefits imply maintaining permanent residence in Portugal?
The so-called “non-habitual” resident concept may in fact lead to misinterpretations. I believe that the name was chosen to instil the idea that a beneficiary could not have previously been a tax resident in Portugal.
Therefore, once a person becomes a tax resident in Portugal, according to the criteria specified in article 16 of CIRS (personal income tax code), namely through permanent residence in Portugal, that person must maintain permanent residence to continue to benefit from the said status. A conflict may arise when a person, in addition to continuing to live and/or work in Portugal, also maintains a close liaison with other countries, thereby running the risk of being deemed a tax resident there too.
What is the difference between Non-habitual Resident Status and the Golden Visa Program?
Once again, the designation of Non-habitual Resident has also led to some misinterpretations. It has in some cases been mistaken for a residence visa, namely as an alternative to a Golden Visa. In fact, they are completely distinct situations that, nevertheless, may be potentially cumulative. That is, a beneficiary of Non-habitual Residence must legally reside in Portugal to become a tax resident. However, residents from the European Union, Iceland, Liechtenstein, Norway, or Switzerland merely need to schedule an appointment at their local city council to obtain the respective registration certificate. On the other hand, persons from third countries must obtain a residence visa that may be a Golden Visa or other type of document best suited to their needs.
In summary, Non-habitual Residence and Golden Visas are in no way related, since they are completely different situations. The former is used merely for tax benefits and the latter is a residence visa.
Who can benefit from Non-habitual Residence?
If the respective requirements are fulfilled, anyone can benefit and there are no restrictions based on nationality. Even a Portuguese citizen may request to be assigned this status.
If some person stops being resident for a 10-year period, can he/she return later and complete the assigned 10 years without counting his/her period of absence?
Persons cannot interrupt their residence and later start counting the period from the time they left Portugal. The period during which a person is absent from Portugal will necessarily be lost. At the most, it is possible to suspend that period, that is, if the person returns to Portugal within the 10-year period, he or she may still benefit from the remaining time.
What advantages can persons with a Non-habitual Residence status obtain regarding their foreign income?
A person with Non-habitual Resident status may be entitled to tax exemptions on some types of foreign income, although specific conditions are applicable to each category.
– Salary income if it is taxed in the source country, although independently of the rate;
– Self-employment income only if obtained from high value-added (EVA) activities;
– Income on capital (dividends, interest and royalties), property income and capital gains income from the sale of properties in accordance with the rules stipulated in the OECD model, interpreted according to observations and reservations formulated by Portugal, in cases not subject to a convention to eliminate double taxation signed by Portugal. These income sources cannot be obtained from privileged tax regimes that are clearly more favourable according to the ordinance in force.
What about advantages regarding income from a Portuguese source?
The only benefit available is taxation at the autonomous rate of 20% applied to high value-added activities performed by employees or self-employed professionals. Those activities are currently listed in portaria (ordinance) no. 2302019 of 23 July. This ordinance, contrary to the previous one, refers to the Portuguese Classification of Professions, and has no direct correspondence to Economic Activity Codes. Although this approach has made it more difficult to classify activities, it nonetheless broadened the range of eligible professions.
Can you give us some examples of eligible activities?
The list is in fact very extensive. Benefits are granted to activities such as directors in various sectors, information and communication technology specialists, creative artists, performing artists, among others.
To this end, it is particularly relevant for applicants to provide proof of their respective qualifications, which naturally vary according to the specific profession.
I highly recommend that applicants read Circular No. 4/2019 of 08/10/2019 that provides insights on this matter.
What about retirement pension income?
Currently, the coming into force of the 2020 state budget implies that retirement pensions from a foreign source are subject to a 10% tax. However, a transitory regime was also stipulated for previous beneficiaries and for persons who applied, according to the case, for non-habitual residence status until 31 March 2020 or 2021. These persons may choose either exemption or application of the new 10% tax rate.
What are your thoughts on controversial views held by some Northern European countries about retirement pension tax exemptions?
This regime is beneficial because it makes good use of double taxation agreements in which normally the state of residence has the right to tax retirement pensions from the private sector. Portugal, as a state of residence, obtained the exclusive right of taxation and, at the same time, granted a temporary tax benefit.
It just so happens that those Nordic countries are known for applying relatively high income tax rates, although part of that income may not be taxable in the source country if the said residents switch their tax residence to Portugal.
Later, due to pressure by Sweden and Finland, which threatened to revoke double taxation agreements, Portugal began applying a 10% tax rate on this income. However, since Portugal allowed persons who already benefitted from non-habitual residence status to maintain their exemption, the said countries have continued to fiercely oppose this system.
I sincerely believe that those objections also have political implications. The fact is that these countries also offer tax benefits for other types of income categories, and which I also view as appropriate. Thus, with all due respect, this reaction seems frankly exaggerated, especially because the respective benefits are of a temporary nature.
Lastly, does this regime continue to make sense?
Undoubtedly. The non-habitual residence status was introduced in 2009 and, despite some alterations, has proven to be very stable. This stability is particularly uncommon in the Portuguese legal system in which tax regulations are constantly changing.
I have personally witnessed the arrival of investors and talented persons who are clearly an asset for our country and who, without this incentive, would most likely not have come.
Additionally, beneficiaries of non-habitual residence status, by living in Portugal, clearly help the economy and, in one way or another, end up paying taxes in Portugal.