For those looking for a new life in the sun, Portugal has seen a marked increase in popularity in recent years. This is driven not only by its all-year-round good weather, safety and friendly locals but by the generous tax breaks the government offers new residents.
Non-Habitual Residence (NHR) is well entrenched and was introduced in 2009, with modifications in 2020. It aims to attract new residents to Portugal who can contribute to the country’s economic health by spending or bringing high-valued skills.
Here we will cover the main aspects of NHR but as with most things, careful planning is necessary to make the most out of the opportunity.
You should plan well in advance, even before your move to Portugal. There could be tax breaks and exemptions in your home country that are not available in Portugal. Poor planning might result in unnecessary tax e.g. UK tax residents can withdraw/surrender ISAs free of tax, but Portuguese residents will have to pay 28%.
During NHR you should ensure that your income and wealth is structured in a way that will allow you to take advantage of all the tax break NHR has to offer. This might involve some restructuring and careful timing, so it is best to start planning well in advance.
After NHR, you will be subject to taxes under the ‘normal’ rules. This can be a shock to some who might see their tax rates soar – the standard scale rates are between 14.5% and 48%.
The effectiveness of your position is determined by the planning you have implemented during the first two periods.
Having said this, Portugal is still a tax-advantageous place to be after NHR: there is no wealth tax; gift and succession tax does not apply between spouses or children; gift and succession tax does not apply to non-Portuguese assets.
Anyone can apply for NHR as long as they have not been tax resident in Portugal in the previous 5 years.
You must also already be a resident to apply.
You must make your application by the 31st March following your arrival in Portugal e.g. if you became resident in Portugal on 1st April, you must apply by the following 31st March (12 months). If you became resident on 1st March, you would have 1 month until the next 31st March.
NHR gives the holder generous tax breaks for a period of 10 years.
*for those that applied before this date the tax rate is 0%.
Whilst NHR is beneficial for most people, there are some instances where it is not advantageous and can result in more tax! How well the scheme works for you will be dependent on how your income and wealth are structured.
If you hold assets in jurisdictions that Portugal deems to be a tax haven e.g. Guernsey, Jersey, Isle of Man, income and gains are punitively taxed at 35% and will not benefit under NHR.
You can apply online yourself, but it is recommended that you work with a lawyer or accountant to ensure your application is successful.
In all cases, it is best to speak to a qualified professional to ensure you are properly positioned to make the most of the NHR opportunity.
The above information has been provided by Mark Quinn who is a qualified Tax Adviser and Chartered Financial Planner at the Spectrum IFA Group (www.spectrum-ifa.com).
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