Do I Qualify for the NHR scheme?
Do I qualify for the NHR scheme?
There are many questions and confusions regarding the Non-Habitual Resident (NHR) special tax status, mainly in what concerns its nature, requirements and implications.
The NHR tax status is a special tax status to which some Portuguese Tax residents may apply. In order to be eligible for the NHR tax status, you should already hold a residence permit or have a right to reside in Portugal, as well as a title to the use of a residential property in Portugal (by either buying, renting or borrowing it). This is essential for you to register as a Portuguese Tax Resident.
In fact, the two essential requirements for you to be able to apply for the NHR tax status:
- Becoming a Portuguese Tax Resident; and
- Not having been one for the 5-year period prior to your application.
This means you need to apply for the NHR tax status per reference to the year you become a Tax Resident (until the end of March of year following the arrival year)– otherwise you will fail to comply with the second essential requirement, thus forfeiting your right to apply – and your status as Tax Resident must be clear before Portuguese Tax and Customs Authorities (PTA), which might not be evident if you have remaining ties with your previous tax residence. In case there are doubts with regards to your effective tax residence, tax advice should be sought.
With the introduction of the NHR tax status in 2009, Portugal sought to attract highly qualified professionals, by granting them a reduced flat tax rate on listed professional income obtained in Portugal and, as a way of avoiding double taxation, granting a tax exemption on several types of foreign sourced income.
In its 12 years in force, the NHR regime was only adjusted once, in 2019, with the introduction of a reduced 10% flat tax rate on foreign pensions’ income and the update of the list of eligible high added value activities eligible for the abovementioned benefits.
Will my worldwide income be tax exempt?
In terms of specific tax benefits, each case requires a proper analysis.
The NHR rules depend on:
- In Portugal, the income’s qualification under the Portuguese PIT Code and the tax rule determining if this type on income should be considered for the NHR status’ purpose. The NHR status benefits are different considering each type of income – salary, self-employment income, pensions, dividends, capital gains, royalties, etc. –, and its source: domestic vs. foreign (if foreign, from which country or state).
- The special rules will depend on the specific provisions applicable to the case under the Double Taxation Treaty (DTT) signed between Portugal and the country of source, regarding each type of income. If no DTT is in force, the OECD Model Tax Convention will be applicable.
- In order to correctly apply the DTT’s (or the OECD Model Tax Convention’s) provisions, it may be relevant to understand the tax qualification of the income subject to analysis, under its source country’s domestic legal provisions.
We can thus conclude that, in order to assess the concrete taxation of an income stream, it is necessary to undertake a careful analysis of the source of income, the taxation at source, the qualification of the income in Portugal for tax purposes, as well as the applicable international law. This may result in a complex analysis, which you should consider prior to relocation.
There are further aspects to be considered in applying international tax rules, such as
CFC rules, place of effective management rules and specific tax dispositions applicable to income obtained in countries, territories or regions with privileged and more favorable taxation or derived from trusts.
Based on a rigorous analysis of each situation, the NHR tax regime may result in a significant incentive to relocate to Portugal. Our Team shall be delighted to assist you in every step of your relocation and is fully equipped to do so.
Sofia Cordovil
Tax Consultant
