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Global Citizen • Most Popular

Pay Zero Income Tax With Non-Habitual Residence in Portugal

How to pay zero income tax with non-habitual residence in Portugal

Update February 2023: Portugal has announced it is canceling its Golden Visa program. For information on alternative Golden Visa programs or advice on obtaining residency in Europe contact our team

Dateline: Valencia, Spain

I don’t spend much of my time in Western Europe for a reason; but I’m currently in Spain and I just might visit Portugal in the coming days, as well.

It’s been almost seven years since I was last in Portugal and quite a bit has changed since then. Seven years ago, the US was only barely coming to grips with the Great Recession, Barack Obama had just been elected as a result of the financial collapse and Europe was not far behind in the global financial crisis.

Things weren’t looking too good.

In the time since I was last here, Portugal created its Golden Visa program in an effort to resurrect its economy. As a result, real estate in some areas almost doubled. Prices soared as investors from China came in droves to buy properties and, overall, the real estate market has largely been revived.

The Golden Visa Program still exists as an option for people who want an EU passport without having to do much work or needing to move anywhere. It just goes to show that when a country is pro-business and pro-investor, good things happen — even if they do it out of desperation.

Next door here in Spain, they have their own Golden Visa program, but it is nowhere nearly as attractive and no one does it unless they’re already buying property here.

In fact, we’ve spoken before about why residency in Spain is unattractive. It’s the same issue that the majority of EU residency programs have: when you get a residency in most EU countries, they’ll often want you to live there … and, when you live there, you’re taxed, and not just on your local income, but on your worldwide income.

So, for Americans and Australians and others like them who are trying to get their second passport while improving their tax situation, it’s a tough location for planting flags.

However, there are one or two countries in the EU where you can get a passport and enjoy certain tax benefits on your worldwide income as an entrepreneur. 

Portugal is one of those rare exceptions.

Portugal’s Non-Habitual Resident Tax Regime

Portugal has what is called a non-habitual residence (NHR) tax regime. In effect, it is a program that allows qualifying individuals the opportunity to become tax residents of a “white-listed” jurisdiction and still legally eliminate their taxes on most foreign-source income.

The tax residency is good for 10 years and does not come with the typical obligation that you visit or live in Portugal part of the year to maintain your tax resident status there.

The biggest draw of the program is the opportunity to reduce your income tax to zero.

This is possible, in part, due to Portugal’s 71 double taxation treaties. According to the regime, as long as the source country of your income has the power to tax your income (regardless of whether or not they actually apply the tax), Portugal will not tax your foreign-sourced income.

The list of income sources that will not be taxed under this set-up includes foreign-source self-employment, royalties, eligible occupations,  dividends, capital gains, and investment or rental income. 

However, under the recently amended law, pensions remitted to Portugal are now taxed at 10%, even if you are a non-habitual tax resident. While less beneficial than zero tax, a 10% tax on foreign pension income is still lower than that charged in many other countries and is a significant reduction on the usual Portuguese income tax rates ranging from 14.5% to 48%. 

It is important to note that capital gains from the sale of securities will be taxed (provided that it comes from Portuguese sources), as will income sourced from any blacklisted tax haven that does not have a double tax treaty with Portugal.

Finally, if you happen to have Portugal-sourced income, it will be taxed at a flat rate of 20%.

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How Can I Get Non-Habitual Residence in Portugal?

To qualify for the non-habitual residence program, you must either be a citizen or a resident of Portugal. Residency can be achieved through the Golden Visa program. 

In both cases, you cannot have been a tax resident in Portugal at least five years prior to your application to become a non-habitual resident.

You become a tax resident either by spending 183 days or more per year in Portugal or by establishing a “place of abode” there (purchased or rented) that you intend to keep and occupy habitually.

In order to own or rent a property in Portugal, you will need a Portuguese taxpayer’s number. The Portuguese tax number is provided by a local tax office upon presentation of the required documentation.

Once you obtain Portuguese residence, you have until March 31st of the following year to apply for your NHR status. To apply, all you have to do is fill out a request and supply an official document stating that you were not a tax resident of Portugal in the five years previous to your arrival.

If tax authorities have doubts about your claim, they will demand further documentation to prove your prior residence. If not, the process really is that simple.

As mentioned before, though, you must be a resident in order to apply, but you do not have to live in Portugal for any period of time after obtaining your NHR status. You can even break your tax resident status for more than a year and still maintain your non-habitual residence.

To learn more about the utility of having a tax residence, you can read our article on, What is Tax Residence and Why Does it Matter?

Is Portugal’s NHR Tax Scheme A Good Option?

This program is a good opportunity for those who want to live in Europe but don’t want the residency obligations that force you into becoming a tax resident in a country where you are taxed on your worldwide income.

This is especially beneficial for someone looking to get European citizenship and the tax strategies available to citizens of countries with residential-based taxation without having to pay taxes during the time they must spend in the country to qualify for naturalization

And it doesn’t hurt that Portugal has a powerful passport.

While Portugal began both its Golden Visa and non-habitual residence programs in the crux of the global financial crisis, the effects of being pro-business have been a boon to the Portuguese economy and have a good chance of being available in the coming years.

Even so, you shouldn’t design your offshore plan with the hope that such a program will be available at some vague future date when necessity hits or you finally get around to doing it.

As we have already seen with the new 10% tax on pensions, nothing stays tax-free forever, at least not in Europe. 

All the more reason to take action now.

If this sounds like your opportunity, don’t wait forever before you decide to act.


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