One of the most important tools in the toolbox of the tax advisor is identifying income from intellectual property. Tax planning that takes advantage of intellectual property is very common at big corporate level, but unfortunately, rarely utilised when it comes to individual taxpayers due to the niche expertise needed in both tax and intellectual property.
The two most important principles of taxation is tax residency and the source of the income. The NHR in Portugal exempts most types of foreign sourced income. This leads to a great deal of planning that focuses on using non Portuguese companies and taking dividends out of these companies as an alternative to incorporating in Portugal.
Such structures have risks that need to be mitigated as part of planning. These risks have to do with both the residency of the company and the sourcing of the income.
Companies that are managed from Portugal could be considered residents in Portugal.
Income generated from work in Portugal could be considered Portuguese-sourced.
Whilst foreign companies remain one of the most important pillars of tax planning, foreign-based structures that are not based on a genuine trade outside of Portugal require a high level of risk mitigation.
Intellectual property, however, can give rise to royalty income. Royalty income falls under the NHR and will not be taxed in Portugal if it is sourced in the other country and can be taxed in the other country. The vast majority of the double taxation treaties that Portugal is a party to provides for possible (very low) taxation of royalties so foreign royalties are almost always exempt from taxation in Portugal.
However, the truly great benefit of royalties is that the typical clause in the double taxation treaty sets out that the location of the payer has preference in determining where the income was source. This is in sharp contrast to income from work, which is sourced where the work is physically done.
The outcome is that if someone living overseas pays a person to use their intellectual property, the income is genuinely foreign sourced and issues of sourcing and residency should not arise.
It is very common in the course of trade that businesses own intellectual property - this could be brands, websites, copyrighted materials, software etc. However, small businesses tend to ignore the existence of such intellectual property rather than charge for using it. It is often the case that income that is classified as self-employment or employment income is actually wrongly classified and in fact, some of the income relates to intellectual property owned by the taxpayer. Identifying such intellectual property and assigning an appropriate value to it can be extremely powerful and open up exciting tax planning opportunities.