While living in Portugal as a British expat can be an attractive proposition due to the tax-friendly environment offered by Portugal's Non-Habitual Residence (NHR) regime, the taxation of dividends from UK companies can be more complex than initially anticipated.
In this blog post, we will explore the tax implications for British expats in Portugal receiving dividends from UK companies, highlighting the challenges of split-year taxation, returning to the UK within five years, and the risks associated with a UK company being deemed tax resident in Portugal due to effective management being located there.
Understanding the Tax Environment in Portugal:
To comprehend the tax implications for British expats in Portugal, it is crucial to understand the NHR regime, which was introduced in 2009 to attract foreign professionals and high net-worth individuals. The NHR status provides tax exemptions on foreign-sourced income (including dividends) and reduced tax rates on certain Portuguese-sourced income for ten years. It is important to note that this tax scheme is only available to those who have not been Portuguese tax residents in the five years preceding their application.
Taxation of Dividends from UK Companies:
Under the NHR regime, dividends received from UK companies are generally exempt from Portuguese taxation, as long as they are not sourced from a tax haven. The UK is particularly attractive as it normally does not impose a withholding tax on dividends paid to a non-resident despite having the right to do so.
Risks of Split-Year Taxation:
When relocating to Portugal, a British expat's tax year may be split between the UK and Portugal, resulting in a 'split year.'
This occurs when an individual leaves the UK in the middle of the UK tax year (which normally starts, inconveniently, from early April).
Under the split-year treatment, income received during the UK part of the tax year is subject to UK tax, while income received during the Portuguese part of the tax year follows the rules of the NHR regime.
This general rule does not apply to dividend income. Dividends paid to a non-resident in a split year cannot be considered excluded income and is therefore taxed in the UK fully.
Returning to the UK within Five Years:
Another potential risk for British expats in Portugal is the "temporary non-residence" rule. This UK tax rule affects individuals who return to the UK within five complete tax years of leaving. If a British expat receiving UK dividends returns to the UK within this time frame, they may be subject to UK tax on the dividend income received while they were non-residents, even if the dividends were exempt from Portuguese tax under the NHR regime.
The Risk of UK Company Deemed Tax Resident in Portugal:
British expats should also be cautious of their UK company being considered a tax resident in Portugal by virtue of its effective management being located there.
According to the double taxation treaty between the UK and Portugal as well as domestic Portuguese legislation, a company can be deemed tax resident in the country where its "place of effective management" is situated.
Consequently, dividends paid by a UK company deemed tax resident in Portugal may be subject to Portuguese taxation instead of being exempt under the NHR regime.
This risk can be mitigated in various ways, including by ensuring that strategic decisions and board meetings take place in the UK and that the majority of the company's directors are UK tax residents. Maintaining accurate documentation is essential to support the company's tax residency claims.