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.
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:
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.
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.