Special Tax Regime for Second Homes/Property Owners In Portugal

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Over the years, Portugal has become and continues to be one the most favored destinations for real property investments and for good reasons, too. For one thing, the country boasts of a fantastic location where people from all over Europe can fly in within a couple of hours, an enviable social and political stability, and a rich culture filled with great architecture, joyous festivals, and friendly people.

For another thing, the country provides for many opportunities to live a good quality of life even on a budget. This is partly due to the nation’s membership in the European Union, the Euro Zone and the Schengen Agreement although we must say that the country’s wonderful climate is also part of the package.

Thus, individuals, families and corporate entities are buying up land in Portugal for their own reasons. These properties are seen as for-profit investments, for personal enjoyment and for retirement purposes. Whatever the reason, the Portuguese government is constantly striving to attract high net worth and high value-added individuals and corporations to invest in the country.

In this regard, the Portuguese government has introduced a law establishing the Special Tax Regime for Non-Habitual Residents. Its ultimate aim is to reinforce the Portuguese economy’s competitiveness in the global arena.

This special tax regime is applicable to individuals who comply with the following criteria:

  • Become tax residents of Portugal with the requirement being that said individual either actually stayed in the country for a minimum of 183 days per year or holds permanent habitation premises as of 31 December of the applicable year.  
  • Had not been subject to payment of personal income tax for the 5 preceding years but has paid income taxes in a foreign country for the same period applied.

Upon submission of documentary requirements related to the abovementioned criteria and after approval, the individual will then be recognized as a Non-Habitual Resident. Said individual is then entitled to the rights and responsibilities of the tax status for ten (10) consecutive years with the option to renew after the period has expired.

In terms of the income taxes levied on Non-Habitual Residents, the income earned is divided into two categories, namely, those obtained within Portugal and those earned outside of Portugal.

On one hand, income obtained within Portugal will be levied a reduced flat tax rate of 20%. Said rate is applicable on both fixed salaries and professional/business incomes, which are respectively Categories A and B under the country’s tax system. However, the salaries and/or business income must arise from scientific, artistic and technical activities, all of which are considered high value-added endeavors.

Under this special tax regime, professionals like engineers and architects, doctors and dentists, accountants and auditors, corporate directors and company managers, and investors can avail of the flat rate. Highly skilled technicians are also included in the classification. The Portuguese government has published the complete list of individuals who can avail of the special tax regime.

On the other hand, income earned outside of Portugal may be exempted from the country’s regular tax laws albeit terms and conditions apply. In the case of a double taxation treaty, the income earned should be subjected to taxation in the country of origin. In case there is no such treaty in effect, the income may still be exempted from Portuguese taxes but specific requirements should be complied with.

Of course, there are other considerations when it comes to taxation of non-habitual residents in Portugal. The country has no wealth taxes and no inheritance tax in effect since 1 January 2004. Instead, stamp duty is applied at a 10% flat rate on the estate’s taxable value.

An exemption to the tax is available, however, for spouses, children and parents. This means that the heirs are not obligated to pay for taxes at all arising from the transfer of property upon the death of the original owner.

With such tax arrangements, it is then no wonder that Portugal is as near to a tax haven as possible to non-habitual residents and yet still be able to provide the wonderful country its just due.

Published in: Taxation