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The approval of the budget in Portugal confirms that the NHR scheme will end for new applicants. The final version of the law is yet to be published. The budget also introduced a transitional scheme allowing people who started moving to Portugal in 2023 to apply for NHR in 2024. 

People with NHR status obtained in the past or until the end of this year

People with existing NHR status obtained until the end of 2023 - there will be no change for people with existing NHR status. There is still a little under a month to try and obtain tax residency in Portugal for 2023 if you don't have it yet. Anyone who became a tax resident in 2023 can still apply for NHR until March 2024.

There has been much confusion around some transitional arrangements (e.g. rental agreement signed before October 10 etc). It is important to understand that none of the limitations of the transitional arrangement apply to people who become tax residents in 2023.

Transitional arrangement - people who started a process of moving to Portugal in 2023 and move in 2024.

The transitional regime proposed by the government has been approved. This means that people who started moving in 2023 can still apply for NHR in 2024.

Transitional categories

There are 7 categories of people subject to the transitional arrangement: 

1. Promise of an employment contract signed until December 31, 2023, whose duties must take place within Portugal.

2. Lease in Portugal concluded until October 10, 2023;

3. Reservation contract or promissory contract for the acquisition of real estate concluded by October 10, 2023;

4. Enrolment or registration for dependents, at a school in Portugal, completed by October 10, 2023;

5. Residence visa or residence permit valid until December 31, 2023; 

6. Procedure, initiated by December 31, 2023, of granting a residence visa or residence permit, with the competent entities, in accordance with the current legislation applicable to immigration matters, namely through the request for an appointment or actual appointment for submission of the request for the granting of a residence visa or residence permit or, also, by submitting the request for the granting of a residence visa or residence permit.

7. Members of the households of people who meet the criteria above.

What about family of Portuguese tax residents who don't need a residence permit (like Portuguese or EU citizens)?

Oddly, whilst family members of people who applied for a residence VISA are included in the transitional program, family members of people who live in Portugal as a matter of right are not. We were hoping that this would be clarified but so far, this is not the case and therefore, we recommend people in this position to try to obtain tax residency this year.  

What if there are no meetings in the consulates?

We don't know. We hope that an email would be enough, but we cannot tell for sure.

How would the transition work?

It is reasonable to assume that the regulations supporting the transitional period will be late and confusing and will be applied inconsistently and unequally. We suggest packing a lot of patience. 

New scheme mimicking the NHR benefits 

The budget introduces a new tax benefits scheme that also includes a 20% flat rate of tax for income earned from work in Portugal and an exemption on foreign sourced income.

Based on what we know today (ahead of the publication of the new law), there are a few notable differences. The main two are that all pension benefits are out and pensions are to be taxed at progressive rates. Another difference is that the new scheme no longer examines the right to tax in the other jurisdiction. This means that it seems that foreign sourced capital gains are also covered by the new scheme.

Whilst the benefits are pretty similar, the conditions to fit into the scheme are different. A few small groups (Ph.D. research workers, certain people in the financial industry, university professors) continue to be eligible but otherwise the vast majority of people are not automatically eligible. 

At the same time, two new categories open up: 

(1) Startup workers or board members. 

(2) Categories of people working in Madeira/Azores to be defined by the respective local governments. 

Startups are subject to certain certification and will not cover merely people creating their own companies but we are excited by this opening - we believe that people making angel investments in startup companies and taking a board seat will qualify and we intend to support such people in the process of identifying and investing in such companies through a newly created wealth department at FRESH.

Working with FRESH's immigration department on a VISA to Portugal and trying to qualify for NHR

Our immigration and tax departments designed a service together that is meant to help those intending to move to Portugal in 2024 to secure a D7/D8 VISA and maximise chances to qualify for NHR. The service starts, like everything at FRESH, with tax advice, is followed by trying to book an appointment with the consulate before the end of the year, and follows up with the submission of a residency VISA, accompanying you to AIMA, enjoying a month-long concierge service when arriving to Portugal and applying for NHR.

To book the NHR gateway package with us, press here. 

There has been an assumption that an incentive for "Portuguese returning home" (or legally accurately, people who lived before in Portugal returning to Portugal after more than 5 years) that provides a 50% discount on income taxes from work for 5 years will be offered to people who never lived in Portugal before.

During the budget deliberation, an amendment reinstating the condition of having lived in Portugal before has been approved. 

Therefore, the "programma regressar" (50% for 5 years) will not be available for new tax residents.

The transitional regime proposed by the government has been approved. The final text of the approved budget has still not been published but we don't know of any changes in the transitional regime. The underlying idea is that people who were "planning their move to Portugal" in 2023 will still be able to move in 2024 and obtain NHR status.

Below is about what this proposal has and doesn't have. Once the budget passes, we will update this article to present more up-to-date information. 

The proposal lists 6 options as evidence of "planning the move":

1. Promise of an employment contract signed until December 31, 2023, whose duties must take place within national territory;

2. Lease contract or other contract granting the use or possession of property in Portuguese territory concluded until October 10, 2023;

3. Reservation contract or promissory contract for the acquisition of real rights over property in Portuguese territory concluded by October 10, 2023;

4. Enrolment or registration for dependents, at an educational establishment domiciled in Portuguese territory, completed by October 10, 2023;

5. Residence visa or residence permit valid until December 31, 2023; 

6. Procedure, initiated by December 31, 2023, of granting a residence visa or residence permit, with the competent entities, in accordance with the current legislation applicable to immigration matters, namely through the request for an appointment or actual appointment for submission of the request for the granting of a residence visa or residence permit or, also, by submitting the request for the granting of a residence visa or residence permit.

7. Members of the households of people who meet the criteria above.

What about spouses of EU citizens?

Oddly, the list above protects the spouses and children of 3rd country citizens who obtain residency in Portugal during 2023, but misses the family members of European Citizens. Since European citizens do not strictly require a residence permit or a VISA and therefore do not request one (but merely register), their non-EU spouses do not, literally, meet the criteria. Coupled with the fact that the new immigration agency AIMA does not currently have any availability for family reunification meetings, EU citizens are in flux.

We do believe, however, that this anomaly will be corrected. Hopefully, in time for the budget.

Yet another odd thing in this proposal is that some categories require creating a connection to Portugal until October 2023, a past date, whilst others are still open. Particularly, the broad inclusion of "request for an appointment" seemingly allows anyone to still fit in. It is unclear whether "request for an appointment" must be done via the online systems of Portugal or whether a mere email will suffice. And, if a meeting should be booked via the online system, what if meetings are not available and how can people from jurisdictions with busier consulates be treated differently to people in areas where meetings are available?

Indeed, the frantic way in which the NHR issue is being handled leads to more questions than answers. We will continue to follow up and keep you posted.

We strongly recommend joining our webinar which will take place after the budget and will hopefully answer some of the questions!

[Update]

The government has now announced its intention to introduce a transition scheme whereby people who indicated their intention to move to Portugal during 2023 in one of 6 ways will be allowed to apply for NHR in 2024. The proposed amendment is full of holes and excludes many people who clearly has such an intention whilst potentially opening the door for people with very little link to Portugal to still apply.

At Fresh Portugal, we intend to hold a Webinar immediately shortly the budget passes, on the 4th of December, when it becomes clear what is ACTUALLY the outcome of the budget.

Sign up here. 

[/Update]

In an interview with CNN Portugal, the prime minister of Portugal, Antonio Costa,  announced that the NHR scheme "no longer makes sense" and will "end in 2024". The budget proposal of October 10, 2023 confirmed that it is the government’s intention to end the regime at the end of 2023. The government has an absolute majority and the end of NHR is not a particularly disputed subject in Portugal, and, therefore, it is expected that the legislation will pass with the proposed language or very similar language. This raises many questions for people who are in Portugal, are planning to move to Portugal or are already in the process of moving.

What does the end of NHR mean?

NHR, the Portuguese Non-Habitual Resident tax regime is one of the best-kept “not so much of a secret” secrets of Europe. It is an incredibly beneficial tax regime that has been making Portugal, an otherwise a high tax country, an attractive choice for people who earn income from a fairly long list of activities that Portugal considered desirable or for people with holdings and investments and other types of income from sources outside of Portugal.

A small group of very high qualified expats (R&D roles with a Ph.D. and equivalents and a few other extremely qualified groups) will continue to benefit from NHR-like benefits (we are still studying the details). 

In addition, the proposed budget law includes an amendment of a regime that previously applied to Portuguese citizens returning home but is now amended to include anyone who had not been a tax resident in Portugal in the last 5 years. Under the amended regime, those moving between 2024-2026, will be offered a 50% reduction of the sliding scale normal tax rates for employment and self-employment (but no reductions on foreign income or pension) for a period of 5 years.

We advise treating this new "candy" with a pinch of salt. It is possible that the amendment was designed to attract Portuguese living overseas who have never lived in Portugal and if this is the case, the proposal could be amended before the budget is approved and reinstate the condition of past tax residency (it would be illegal under EU law to limit a benefit only to Portuguese nationals).

The normal Portuguese tax rate to income related to work is a sliding scale of 14% to 48%. Portugal also has solidarity tax for people with higher incomes, up to 5%. Finally, income from work is subject to social security at a rate of 21% for self-employed and a total of 34.75% for employees (11% paid by the employee and 23.75% by the employer).

Other types of income, such as rental from overseas properties, dividends and interest are taxed at lower rates, typically between 25-28%. Right now, under NHR, they are not taxed in Portugal at all.

The overall tax in Portugal will therefore be considerably higher for people who earn high incomes and are no longer allowed to enter the NHR scheme.

What about double taxation treaties? Am I not protected under the treaty?

Most people moving to Portugal come from countries that signed a double taxation treaty with Portugal. Many people believe that such a treaty means that they will only be taxed in one country even without NHR. Unfortunately, double taxation treaties do not prevent taxation in both countries. Double taxation treaties have two purposes: first, to allocate taxation rights between the countries and second, to create a tax credit mechanism, whereby tax paid in one country will be credited in the other country.

This means that a person moving to Portugal will not need to pay the maximum tax in Portugal in addition to the maximum tax in the other country. Instead, for nearly all types of income, the person will pay first to the country that is given the first right of taxation by the treaty but then pay the remainder to the other country if its tax rates is higher. In practical terms, this means that if a person is subject to tax in Portugal and another country, that person will pay the higher of the two taxes (which is nearly always the tax in Portugal). Under NHR, many of these types of income were exempt from tax in Portugal altogether.

When is it coming to force?

According to the budget proposal, NHR ends on 31/12/2023. The proposal is likely to pass as-is or with some changes.

People who met the conditions at that date should still be able to apply before 31/03/2024. There is ambiguity as to whether someone holding a residence VISA will also need to meet the other NHR conditions in order to apply or whether such people will be grandfathered.

In view of the ambiguity, we recommend anyone who wants to be part of the NHR scheme to apply before the end of the year.

EU Citizens

EU residents can still make it to NHR on time. First the EU citizen should associate a Portuguese address with their NIF. To do that, the EU citizen should first obtain a CRUE certificate, which is the European confirmation of residency in Portugal. CRUE normally takes a few days to obtain and a 15 Euro fee.

However, the address requirement for a CRUE varies between municipalities. Some require a long term rental contract, whilst others (notably Lisbon and Cascais) will accept a declaration from the person that they live at a specific address.

People who completed an immigration process and have a residency card

An address can be changed based on the address on the residency card. That address should match the one from the rental contract / purchase deed. After changing the address, it is possible to apply for NHR.

People who started an immigration process and have a SEF meeting booked

According to the Finançes instructions, a SEF meeting that has been been booked should be sufficient for changing the address. These instructions are not always followed, but normally a booking confirmation of a SEF meeting + rental contract is sufficient for changing the address and applying for NHR.

People with a VISA but not a SEF meeting or residence card

While our reading of the current proposed language suggests that having a VISA issued on or before the end date should be sufficient to create a right to apply for NHR once the other conditions for applying are met, there is significant ambiguity as to how Finanças may ultimately interpret this requirement and, practically, how it will implement procedures for applying for NHR that comply with the law.  Further, the current language is not final and may well change before the budget is approved.

People with a Golden Visa

There is some ambiguity in the proposed law as to whether a golden VISA will be sufficient. We recommend trying to become a tax resident based on the golden VISA and moving to plan B failing that.

“Plan B” - People who do not yet have a VISA, but have a Portuguese rental contract and NIF 

For people willing to come personally to Portugal, it is possible to utilise a specific immigration route to obtain tax residency even without a SEF meeting. This requires making an appropriate application, a considerable amount of work, and also requires a rental contract in Portugal and a NIF number.

It is important to remember that this VISA is meant for people with a tie to Portugal in the form of a business or a work contract. Whilst is is possible to base the application on a business that is being started, this process should not be abused and it should be used by people genuinely intending to live in Portugal and operate a business (a local business or freelancer activity). 

Is it worth it to rush?

For most people earning an annual income of over 30,000 Euros from a high value activity and primarily those with foreign sourced income,  NHR can save you tens and sometimes hundreds of thousands of Euros over 10 years.

For people who are not in high value activities and do not have any foreign sourced income, the new regime could in fact be more beneficial than NHR. 

What if you change your mind after becoming a tax resident and decide to go back to your country of origin? 

NHR status is not lost. It will be reserved for you for 10 years from the first year of NHR application. However, it is important to remember that all requests need to be made in good faith. It is okay to become a tax resident and go back to your country, but it would be problematic to artificially become a tax resident only in order to revert to one's country shortly after that. 

Impact on other immigration routes

We cannot anticipate with full certainty how the expression interest process impact other immigration processes, but we are prepared to support you in your immigration process going forward and deal with issues if and when they arise.

How does Fresh Portugal help?

We have designed an accelerated tax residency package. 

We charge a relatively small fee to analyse your documents, give you tax advice and consider your options. We now charge 550 Euros for that. 

If you decide to apply for accelerated tax residency, we will prepare and file the application on a full “no success no fee” basis. We charge 3,200 Euros for an individual or a couple if we successfully obtain NHR status (1,600 Euro if we succeed for 1 person out of a couple), payable upon receipt of the confirmation of NHR status. 

Book here:
https://freshportugal.com/book_service/accelerated_tax_residency 

In an interview with CNN Portugal, the prime minister of Portugal Antonio Costa had announced that the NHR scheme "no longer makes sense" and will "end in 2024". 

This raises many questions to people who are in Portugal, are planning to move to Portugal or are already in the process of moving. We decided to write this post to tell you what we know and what we don't know about this anticipated change. We will update it as we find out more. 

We will also discuss it in our upcoming webinar on October 12, 2023.

Is it actually going to happen? 

We cannot know for sure until the end of the legislative process, but probably yes. The socialist government has a majority and making a vague announcement followed by a change of legislation has been the typical way in which this prime minister operated in the past. 

When will NHR go away? 

The PM said "2024". This does not mean that on 1 Jan 2024, the NHR program will be gone. It is actually more likely that the program will persist through the entire 2024, since legislative changes take time. However, there is a possibility that the legislation will be rushed as part of the budget and the program will indeed by cancelled on Jan 1, 2024, but it will be hard for the government to achieve and open to legal attacks. We estimate that the program will end sometime in the middle of 2024, but we could be wrong.

Will it fully go away?

That is the biggest enigma. When the prime minister announced the end to the golden VISA program, public pressure eventually made him go back on his word and keep some of the golden visas routes alive. With the NHR, the prime minister mainly complained about the reduced tax on pension income. It is fairly likely that the anticipated loss of skilled labor will lead to some walking back and keeping parts of it. It is unfortunately impossible to tell.

What about people who already have NHR status?

People who already have the status are unlikely to be affected. This would be a violation of a constitutional principle in Portugal and the prime minister himself noted that "whoever has the status will keep it". 

I'm already in Portugal and am a legal resident. Should I apply for NHR as soon as possible?

Yes. Considering the risk, that would be the safest and smartest thing to do.

I'm in Portugal but not yet a legal resident. What should I do?

To the extent possible, you should try to rush in view of the uncertainty. 

I wanted to move to Portugal but haven't yet started the process. Should I continue?

It is likely that if you start the process now, you will still make it to Portugal and be part of the NHR regime. However, there is no certainty. If you tend to procrastinate, we advise against waiting. If you don't abandon your plan, you should rush.

What if I'm going to miss the deadline? Should I still move to Portugal?

We will be here to advise on the best strategy in a world with or without NHR. 

Need individual advice? Book here:

https://www.fresh-portugal.com/services/tax-consultation-if-you-want-an-understanding-of-how-expat-taxes-work

Tax residency is a crucial consideration for individuals who move to a new country, as it determines which country has the right to tax their worldwide income. Portugal has become an increasingly popular destination for expatriates. Yet, the question of "when does a tax residency start actually start?" remains nuanced and elusive.

• First, we should understand what tax residency actually is.
• Second, we need to understand the legal definition pertaining to obtaining tax residency. 
• Third, we need to understand the Portuguese self-declaration system, when it applies and when it does not.
• Forth, we will discuss what happens if someone is a tax resident in more than one place. 
• And Fifth, we will discuss losing tax residency.

1. What is tax residency?

Tax residency is the legal status that determines where an individual or entity is subject to taxation. It is not solely determined by the number of days spent in a country; various factors, including ties to the country, economic interests, and intentions to reside, can also play a role. Different countries have different criteria for establishing tax residency and in many cases, it could be unclear where a person is tax resident.

Importantly, tax residency is different to legal residency. A person can be a legal resident but not yet a tax resident. A person can also be a tax resident, but not a legal one (such as in the case of illegal migrants - they may not have the right to live and work in Portugal, but they are still obliged to pay taxes). However, legal residency and tax residency interact as will be explained below.

2. Portugal's legal criteria for becoming a tax resident

In Portugal, the legal criteria for becoming a tax resident is based primarily on meeting one of the following tests:

1. The 183-Day Rule: if an individual spends 183 days or more in Portugal during a calendar year, they are generally considered tax residents for that year. 

2. Having a home (or "habitual residence") - even people who don't meet the 183-day threshold can still be considered a tax residents if they have a "habitual residence" in Portugal. This means having a permanent home available in Portugal and the intention to maintain and occupy it as their main residence. This criterion can be subjective and depends on various factors such as family ties, professional activities, and social connections in Portugal.

Residents who meet said criteria for a particular year should be considered tax residents for the entire year based on the law. Alas, the legal criteria does not reflect the practical treatment.

3. The self-reporting system 

The criteria described above is, as a matter of fact, not practical. 

The first option (183 days) cannot be determined because Portugal is part of the Schengen borderless travel area and people can leave and return to Portugal without any passport control. It is therefore impossible to know if a person has been in Portugal for 183 days in a given year.

The second option requires knowing the psychological state and mental intentions of people, since the criteria requires knowing if people intend to maintain a home.

Due to the difficulty to determine presence and intentions and also for practical reasons, Portugal in fact rarely relies on the legal criteria for tax residency. Instead, if relies on people's own declaration. People coming to Portugal are required to register as tax residents with the tax authorities within 2 months of obtaining their permanent home. The registration is done by associating a Portuguese address with their NIF number. 

In practice, the authorities treat the date that the NIF has been associated with a Portuguese address as the date of tax residency in the vast majority of the cases. So, although that date is hardly ever consistent with the legal definition, it prevails in practice. Furthermore, Portugal allows people to report a partial tax year that starts from that day and only declare the income from that date in a given year. This could create both anomalies and tax planning opportunities. 

So is the legal definition meaningless in practice? Unfortunately not. At times, the Portuguese tax authorities will backdate the tax residency dates and apply what it believes to be the legal definition. This is known to happen primarily in the following situations:

• When people buy a home in Portugal and pay primary residency tax rates. We assume that this is because paying such taxes is seen as an admission of an intention to occupy as a primary home.
• To the date of the SEF appointment. We assume that this is because obtaining legal residency normally requires staying in the country for 183 days so people are assumed to do so.
• To a date reported by a Portuguese employer as a day that a person took a job in Portugal. This happens even when people have not been legal residents when they took a job, so it is very important that employers use non-resident codes, but employers often do not.  

As you can see, the important date is normally the date of the NIF with the Portuguese address but not always, and taxpayers are better off being careful trigger a backdating action.

4. What happens if a person is a tax resident in more than one place?

The criteria in different countries differ and it is possible that someone is considered a tax resident in Portugal based on Portuguese law and in another country based on the law of that country. 

Portugal has a network of double taxation treaties with various countries to prevent individuals from being taxed twice on the same income. These treaties often contain provisions that can override the domestic tax rules of either country, affecting how tax residency is determined. In the event of a clash, the tax treaty should be consulted and there would normally be "tie breaker" rules helping to identify where a person is a tax resident.

5. Losing tax residency

Many people are worried that if they do not spend 183 days each year in Portugal, they will lose their tax residency and thus their access to NHR benefits. 

This is a common misconception. The 183 days and habitual residence rule are meant to determine when a person becomes a tax resident. Once a person becomes a tax resident, tax resident is not normally lost even when a person travels extensively. Tax residency is lost if a person both does not meet the criteria in Portugal and meets the criteria in another country. In other words, a digital nomad based in Portugal who became a tax resident by self-registering (and normally, meeting the criteria in a given year) will normally continue to enjoy NHR benefits unless he settles in a new country and meets the criteria there. 

Needless to say, that residency rights can be impacted by extensive travel, but these are a separate issue to tax residency.

In Conclusion

Most people become tax residents in Portugal from a practical perspective when they associate a Portuguese address with their NIF. 

In some specific cases, the authorities will seek to overrule the date of the NIF and apply a different date based on a number of known (and perhaps unknown triggers).  

The legal definition of 183 days / habitual residence is vague and it may not apply if it is overcome by a double taxation treaty with another country. 

And finally, tax residency is not normally lost unless a person moves to a new country. 

It is important to remember that each individual's situation is unique, and seeking professional advice is recommended to ensure a smooth transition.

As the tax payment deadline approaches, it's essential to explore the available payment methods. Instead of paying the full amount upfront, you can opt to request an installment plan from the Tax Administration. Your request will be reviewed and decided upon.
This online request can be initiated through your Finances Portal. If your IRS debt is under €5,000, follow these steps:

Log in to the Finance Portal using your NIF number and password. Search for "Prestações" (installments) and select "Planos prestacionais" (installment plan). Choose "Simular/Registar Pedido" (simulate/make request) and select the IRS assessment you wish to pay in installments. Then click "Simular". Choose the condition "Sem apresentação de garantia" (without presenting collateral) and click "Confirmar" (confirm). Select the number of installments.Under "Razão Económica" (economic reason), state the reason for the request. In the field "Justificação do motivo indicado anteriormente" (justification for the reason indicated above), provide a brief explanation in Portuguese. 

Finally, click "Registar o pedido" (submit the request). If your debt exceeds €5,000 but can still be paid within 12 months, no collateral is required. Alternatively, you can make partial payments to reduce the debt to €5,000 and then proceed with the installment plan, which can extend up to 36 months.

If you can't adhere to these terms, and need an extended time to pay, you must present collateral along with your installment plan request. This collateral can be in the form of a bank guarantee, real estate, mortgage, or shares:
a)bank guarantee or guarantee from an institution legally authorized to provide it.

b) Surety bond or collateral issued by legally authorized insurance institutions

c) Mortgage. The guarantee should be provided for the amount of the debt and default interest, counting up to the date of the application, plus 25% of the sum of those amounts.

To proceed with this request, follow the same steps in the Portal. After selecting "Simular/Registar Pedido," indicate the type of collateral you intend to present, and then specify the number of installments.

After submitting the request, send a copy of the collateral to the Tax Office through e-balcão. You have 15 days to provide the original guarantee document to the Tax Office where you are registered.

To find out your competent Tax Office, log in to your Finances Portal, select the "Posição Integrada" (integrated position) option under My Area, and click "Dados Gerais de Identificação" (General Identification Data). There, you will find your competent Finance Service code.

Lastly, note that even if your debt is under €5,000 and no collateral is required, your request will be accepted only if you've met two additional requirements: timely submission of the declaration and absence of any other tax debt with the Portuguese Tax Authority.

The tax season is over now and as the leader in filing expat tax returns, we plan to soon publish some of our insights.

However, before that, we should be addressing something that came up quite a lot during the tax season - the cost of filing a tax return.

A bit like the Tardis, Portugal is sometimes bigger on the inside. From the outside, it seems like a relatively small country, but inside, there are a few completely different worlds and it's not just the Portuguese and expats but it's also different groups within the expat community. 

A little while ago, we left a post in the FB group that suggested that charging a few hundreds of Euros for a tax return is taking advantage of people and indeed, many people in Portugal are perfectly happy to do their own tax returns or pay a local accountant 30 or 50 or 100 Euros and feel that this is the right price for the task of filing a tax return. From their perspective, charging 400-700 Euros as we do (or more) is outrageous. 

At the same time, not a single one of the 150 people who used us to file a tax return this year considered the price to be anything other than reasonable.

During the tax season, we did not want to engage in too much of a debate and we are aware that this could be a heated subject, but we felt that the case for paying hundreds of Euros for a tax return need to be made for the future, so we are making it here.

These are the primary arguments:

1. getting taxes right is important.

Most procedures in Portugal would let you correct errors. If you mess up a form for exchanging a driving licence or even an immigration form, you will normally have an opportunity to correct the error. 

If you make an error in your taxes, you have a limited time to submit an amended return, there is normally a fine and an increased chance of an audit. If you miss the deadline, there is nothing you can do anymore.

So, getting taxes right in the first time is more important than any other administrative process.

2. Sometimes you can't get it right 

Importantly, getting the taxes entirely right is sometimes not possible. The NHR has many grey areas and the form is lacking on some points. This means that there are points where rather than submitting your taxes in only one way (as is the case for most nationals), there are multiple ways and you need to run a risk assessment and understand the risk-benefit analysis of each option. 

This is a nuanced and difficult exercise that needs to be understood and communicated very carefully. Local accountants will rarely be skilled in communicating nuance and possibilities even if they understand them well. Instead, they will tell their clients "let's see what happens" or "maybe it will work" which leads to anxiety and feeling of lack of control

3. Enforcement is minimal but when it happens, it is brutal

One of the reasons that very low quality services exist in Portugal is the low rates of audits. Many mistakes are never identified. Unfortunately, many mistakes lead to automatic assessments of high tax rates but some do not and these could go unnoticed for years. 

However, when a case is picked up for an audit, the authorities can be very aggressive. Since we also have a litigation department, we see the cases that are picked up and have seen people receiving tax assessments of hundreds of thousands of Euros. Many if not most of the people who engage with the tax authorities after an audit end up leaving Portugal.

4. Expat taxes aren’t normal taxes. Taxes are normally handled by accountants, but expat taxes are business for lawyers or very specialised accountants.

We see this ALL THE TIME – people looking for a local accountant to submit their taxes, assuming that just because they could use any accountant in their original country, they can do the same for expat taxes and failing to understand the complexity and nuance of the NHR system. 

The NHR system is so complex that each stream of income is treated differently and each source country is treated differently. US expats are exempt from capital gains on securities whilst everybody else isn’t. Canadian government pension is taxed in Portugal, whilst American and British isn’t. US board members generate foreign-sourced income, whilst British board members do not. 

Filing NHR taxes correctly requires understanding Portuguese tax law, following the most recent jurisprudence and being able to read and understand complex double taxation treaties. It also often requires collaboration between a qualified professional in Portugal and one in the US, UK or another country. This means that the pool of competent professionals who know how to do it correctly is narrow.

5. Failing to read the cultural cues.

Most expats come to Portugal with expectations engrained in their culture that the person who they speak to will tell them what they know and what they don’t know and refer them if needed to someone else. 

However, this is not how Portuguese service culture works. 

The Portuguese professionals are very polite and avoid conflict. 

They will rarely say “no” to work directly. They will take the work but if they encounter difficulties, they will normally address it by  making themselves unavailable and fail to respond to messages. 

Expats are often puzzled when not receiving a reply on the same day and are not sure what to do. In reality, a long pause in communication is normally an indication of a problem that is not being communicated directly.  

6. A 30 or a 100 Euro fee is paid to type the form. It's impossible, even for a small local firm, to do anything more than that. 

As experts in expat taxation, we are obsessed with figuring out the correct answer to every question. Some returns bring no new points but occasionally, we come across complex matters - income obtained on board ships out of territorial water, income obtained from the United Nations, income by pilots, employment income split between jurisdictions. When we do - we can spend hours researching the law and jurisprudence, we have panels of experts and external advisors and we dig in until we get to the bottom of it. Charging properly for our work allows us to do that.

What does a professional charging 30 Euros for a tax return do when coming across a complex matter? They aren't paid for research - they are paid for completing the form, so they would either disappear or make up an answer and hope not to get audited. 

7. Lawyers are better when things go wrong

Lawyers and accountants can both help clients with tax returns. For normal tax returns, accountants are a sensible choice, but for expat tax return, lawyers have the edge. 

The reason is that lawyers are better in dealing with grey areas and are also that they can have your back if there is a disagreement. If the tax authorities fail to accept your position, accountants would fold and refer you to a lawyer, but lawyers can take your position to arbitration or to court and continue to argue it. Having access to the judiciary allows lawyers to take bolder positions and defend them and this could be critical to tax rates. 

Importantly, all advice from lawyers on tax matters is confidential, whilst advice from accountants is not. This means that the tax authorities could demand to receive a copy of the advice given by accountants, whilst they cannot do the same for legal advice. 

8. Many returns aren't as straight-forward as clients think

Many people believe that their tax returns are simple and straight forward, but in reality, even pension income is tax differently depending on source and country and nearly all NHR tax return are fairly complex, certainly in comparison to a standard tax return in Portugal. 

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It is clear to us that many people are struggling and are not in a position to pay hundreds of Euros. We hope to offer means-based support next year. In the meantime, we urge you to read our information and guides on the site - these are all free of charge. 

For other who can afford it, we hope that we have now made the case clear why it is good to be investing in doing taxes properly. We don't expect to convince everybody, but we believe that it is important to articulate our position.

We also take this opportunity to remind everyone that we are now taking super early bird bookings for our next year's tax return service in Portugal only or Portugal and the US. 

Portugal, like many other countries, has a requirement for individuals to file an annual tax return and classify their income.

It is for the taxpayer to make their best effort to classify their income correctly and the tax you owe depends on how you report it, so long as your report is uncontested by the tax authorities. 

The considerable movement of many expats to Portugal in recent years has inadvertently created some complex tax questions, with some income streams being rather hard to classify. 

One such complex income stream is distributions from a ROTH IRA for American taxpayers. 

ROTH IRAs are US retirement saving instruments that allow taxpayers to frontload the payment of tax to a type of investment account that can then be allowed to grow tax free. The taxpayer therefore pays tax on an amount that is released to the ROTH IRA at an early stage and then benefits from ongoing capital growth within the ROTH IRA. This is opposite to most private pensions, where the contributions to the pension provide a relief from taxation when they are made, whilst tax is payable when the money is received. 

Portugal does not offer any guidance on the taxation of ROTH IRA and to understand how they should be taxed requires an analysis of the Portuguese legislation. 

First and foremost, it is important to understand that a ROTH IRA is a type of savings account that becomes accessible during retirement. Under Portuguese law, this is precisely the definition of pension. Pensions in Portugal are subject to a flat tax rate of 10% during the Non-Habitual Residency (NHR) year and progressive rates apply thereafter. Portugal does not offer an equivalent product to ROTH IRA and the taxation should be analysed on the basis of Portuguese law. 

However, not all the income received from a ROTH IRA is pension. Article 54 of the Portuguese IRS code states that if an annuity scheme includes a portion corresponding to the reimbursement of capital, that portion is not taxable. This provision makes sense since it involves returning money to the taxpayer that was already taxed. 

The Portuguese law further states that if it is not possible to identify the capital reimbursement within the total payment received, 85% of the payment is deducted as an assumed capital reimbursement. Since in most cases, the capital growth is considerably larger than 15%, it would have been lucrative for taxpayer to attempt to argue that it is not possible to identify the capital reimbursement, but in fact, it is normally possible and the correct treatment is to treat all moneys paid from the ROTH to the taxpayer as capital reimbursement as non-taxable amounts and the money paid from capital growth as pension, taxable at 10% during NHR and progressive rates afterwards. 

This leads to another question – does the taxpayer have the flexibility to classify the return of capital or capital growth within the IRA as one or the other, so long as an amount lower than the total capital initially converted has been returned to the taxpayer? Our view is that the answer to this question is positive, but whether it is better for the taxpayer to treat all the initial amount as capital return or not depends on the individual circumstances of the taxpayer. For example, if the taxpayer intends to leave Portugal after the NHR period comes to an end, it would make sense for the taxpayer to classify all distributions as capital return and only start classifying distributions as capital growth once the entire initial amount has been returned. 

However, if the taxpayer intends to stay in Portugal and is in risk of progressive taxation that is higher than 10%, it is better for the taxpayer to classify the earlier distributions as pension and wait until a later time to classify the remainder as capital return. 

A more aggressive interpretation would be to attempt to apply the 85/15 rule despite the ability to identify the total amount of capital growth within the ROTH IRA because such application cannot be made in respect to specific payments. Such an interpretation is literally possible and could be helpful for taxpayers. 

In the absence of clear instructions from the authorities, it is for taxpayers to choose a reasonable manner to report their income. Ideally, in the future clear guidelines would be provided to help individuals accurately report their ROTH IRA income and fulfill their tax obligations. 

In conclusion, there are a number of ways to report ROTH IRA income in Portugal, but the guiding principle is that capital return is not taxable and capital growth is taxable as pension income.

Introduction

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.

The tax filing season will shortly start. 

At Fresh Portugal, we file more tax returns for expats than any other company in Portugal. 

Despite our very best efforts to make our own tax return service affordable, some people have told us that they cannot afford our tax filing service priced at 700 Euro. We therefore decided to put together a guide to help people better understand how taxes in Portugal work and how they should file their tax return. 

As you will see below, the main issue with filing a tax return is not filling the form. The hard part is classifying the income. It is not always obvious or easy to understand what a certain type of income is and therefore we provide some guidance below. 

Those filing themselves or using neighborhood Portuguese accounting firms are welcome to use this guide to review how their income should be classified. Ready? Here we go! 

Principles

• Apply for NHR!

The NHR scheme is not automatically granted for recent residents in Portugal, there is an administrative deadline to follow, which is March 31^st of the following year in which you became a tax resident in Portugal. 

• Getting familiar with Modelo 3

You can go into the IRS form – Model 3. You can find the digital form on your Finances Portal. The important thing to know about how to fill the Mod 3 form is that the burden of classifying and matching the income with the existing types provided by Portuguese law is entirely yours. 

You can check the types of income provided by the Portuguese tax law on articles 2 to 11 of the IRS Code. 

You will see categories A to H income: 

A: employment income
B: self-employment income
E: capital income
F: income from property (rental)
G: capital gains
H: pension income 

After correctly classifying and matching your types of income to the Portuguese classification, you have to identify whether the income is Portuguese sourced or foreign-sourced. 

A lot of people make mistakes at this point, because the decisive criteria here for the most important income types – employment and self-employment income - is not where your clients are, but where you do the work from. 

And finally, to access the 20% flat rate for employment and self-employment income, you have to identify if you have a high value activity. Portugal have changed this list over the years according to the professions most needed in the country. We have the current list of high value activities at another post of our blog. 

• Common pitfalls:

 Here are a few mistakes that we see frequently: 

• You don’t have to hold a high value profession to be eligible to the NHR. The only criteria you have to meet is not being a tax resident in Portugal for the last 5 years and inform the country where you were a tax resident before coming to Portugal.
  
  
• Also, if you have been a tax resident just for a portion of the first year, you don’t need to declare the income incurred in the entire year. Also, if you have to file a partial declaration for the year and want to file together with your partner, you have to make sure your tax residence dates match.
  
  
• Portugal has an accrual tax accounting system, different from the American system, so for example, you don’t need to report bonuses when received if it was incurred in the past years (when you were not a tax resident in Portugal).
  
  
• Another typical mistake has to do with profit from a US LLC. Such profits are normally classified as self-employment income in the US, but in Portugal, the only known decision on the matter deals with this income as capital income.
  
  
• As mentioned before, is very common to misunderstand foreign-sourced income with Portuguese income when your client base is outside Portugal or the company you work for is a foreign entity. The place where the work is done from that defines where the income is sourced.
  
  
• Along with the domestic laws and the NHR rules, you always have to analyse the Double Taxation Treaties between Portugal and the country you have business with. The double taxation treaty leads to different outcomes depending on what country the income comes from.
  
  
• Finally, it is important to be consistent between jurisdictions, so that the information you submit on both returns match as much as possible.

Classifying income

The below tables show how we normally classify income and could give a good indication to you and/or your accountant.

Kindly note that we are not responsible to how you choose to classify your income when working with other firms!

• Income from other companies (UK, EU, but not black-listed)

• Employment income

• Self-employment income

• 
  
• 
  
• Capital income (dividend, interest)
  
  

• Property income
  
  

• Capital gains (securities)
  
  

• Pension (any retirement savings)
  
  

• Using MyTaxes.pt

Fresh Portugal created a tax calculator with the most common foreign income types, leaving the classifying work with us.

Fresh Portugal's primary focus is optimising the benefits awarded by the NHR regime to expats coming to Portugal. 

However, the NHR benefits are subject to a harsh deadline imposed by the tax authorities in Portugal. 

The deadline

A tax resident must apply to obtain NHR status until the 31st of Marth, during the year following the year of becoming a tax resident. 

In other words, if someone becomes a tax resident during 2022, they should apply for NHR status until 31/03/2023. Or at least, so say the authorities.

One may remember that the tax residency date is normally based on self-declaration - the date that the person associated an address in Portugal with their NIF. 

However, the tax residency date can be backdated by the authorities if the relevant taxpayer met the legal definition of a tax resident prior to that date - i.e. if the tax resident stayed in the country for longer than 183 days in a prior year or had a primary residence. 

The primary residence rule can theoretically be applied to rental properties, but in practice the authorities normally treat a residence owned by the tax payer where taxes of a primary residence have been paid as an admission that the intention is to occupy the residence is a primary residence.

Deadlines missed due to Catch 22 

Joseph Heller's mythical novel Catch 22 is remembered for multiple paradoxes where you cannot do one thing without doing the other first and you cannot do the other before doing that one thing. 

Since tax residency can be backdated, so can the deadline for NHR, so a sensible strategy would be to apply for NHR as soon as possible rather than wait to the last minute to avoid any risks of backdating.

However, the authorities add a further paradox - they normally do not let people change their address to a Portuguese address before obtaining a residence permit. In other words, they say "you cannot register as a tax resident before you are legally registered as a resident". 

On a first glance, this appears like a reasonable statement, but in fact, this statement is entirely false. Tax residency has to do with the physical presence of a person in a country and that person's duty to pay taxes. Being in a country illegally does not in any way take away the person's duty to pay taxes and it is therefore no coincidence that there is nothing in the tax residency legal definition about legal residency. The two things are unrelated concepts. 

However, in practice, the authorities normally prevent registration from people who are not yet legal residents. Furthermore, the ever growing waiting time for SEF appointments leads to a paradox - it could take many month before legal residency can be registered, but the tax residency could be backdated once this happens.

If is therefore possible for someone to miss the NHR deadline at no fault of their own - simply due to the waiting times at SEF. 

Strategy 1 - set the record straight

One strategy to addressed the said missed deadline is to convince the authorities that the taxpayer's tax residency had in fact began in a later year. This is a common strategy when people arrive in Portugal and register at the end of a calendar year. 

This is better done by disputing the initial refusal of NHR. A further deadline of 15 days is set out for that. 

The golden evidence to shift tax residency is a legalised tax residency certificate from the other country. However, these could take a while so it is often wise to first obtain the certificate and then apply for NHR, so that the negative outcome could be disputed straight away. A further procedure of amending the records is also available. 

Strategy 2 - dispute the legality of the denial

It may come as a huge surprise to readers, but the NHR law does not in fact set any deadline to apply for NHR. The deadline has been set by authorities in separate ordinances which many experts (and us amongst them) argue, is illegal as the executive cannot take away a right given by the legislator. 

One would consider whether taking away a benefit publicly advertised to attract people to Portugal for a mere few days formal delay of submitting an online form presents a reasonable outcome. Even those opposing the NHR regime for ideological or political reasons would normally admit that in-so-far as the regime exists, it is unfair and unreasonable not to apply it consistently to the entire group that it covers, even if such people believe that the rights given to this groups are unfairly given.

And indeed, taxpayers have now disputed tax assessments denying NHR treatment to people who missed the deadline a number of times. Such disputes have been made in arbitration courts, so these were specific tax assessments and may not be respected by the authorities for future years, but the emerging trend is clear - the arbitration courts did not believe that it is acceptable for the authorities to deny NHR status due to the missed deadline.

This understanding of the arbitration center in Portugal can be attested in the decisions of the arbitral pronouncements "Processo nº 188/2020-T"; "Processo No. 777/2020-T"; "Processo No.: 815/2021-T"; "Processo nº 319/2022-T".

The position of the CAAD in these decisions has been consistent - regarding the matters of the tax regime applicable to non-habitual residents, the registration referred to in paragraph 10 of article 16 of the IRS Code assumes a merely declarative nature and does not constitute the right to be taxed under such regime.

This means that the registration does not condition the application of the regime, only the criteria established by Law serve this purpose.

It is unfortunate that the authorities continue to deny NHR treatment due to missed deadlines but taxpayers have a path to resist. Please free to consult us.