Portugal is currently a popular migration destination due to its ranking as the fourth most peaceful country in the world, its exceptional quality of life, and desirable weather. Portugal is also attractive for its lenient tax system. Although you must pay income tax on your foreign income if you reside in Portugal for more than 183 days, if you reside in Portugal for less than 183 days out of the year, you may qualify for the Non-Habitual Residency tax scheme which offers foreigners certain tax breaks. Let’s take a look at what all of this means for you, and unpack Portugal’s tax system for foreigners.
Why move to Portugal?
As a member of the European Union, Euro Zone, and Schengen area, Portugal provides an ideal entry point for establishing a business presence in Europe. It also offers an appealing residency program for foreign nationals, which includes exemption from taxes on foreign income. This program has special regulations for both Portuguese employment and self-employment income, and it is valid for 10 years with straightforward eligibility requirements. If you are a digital nomad, investor, entrepreneur, or high net worth individual, you could be living your best life in Portugal with its tax breaks for foreigners and the opportunity to obtain Portuguese citizenship and a European Union passport after five years, through the Golden Visa Programme.
What are we talking about? That would be the Portuguese NHR Tax System for Foreigners
The Non-Habitual Residency (NHR) tax scheme in Portugal was implemented in 2009 to provide tax advantages for non-Portuguese residents. This scheme allows individuals (who have not been tax residents in Portugal in the past five years) to apply for NHR status to gain either tax exemptions or a fixed 20% tax rate on their foreign-sourced income for up to ten years.
This flat rate can also apply to self-employment or profession-specific income sourced in Portugal. Such NHR rates are highly favourable compared to normal Portuguese income tax rates, which can be as high as 48%.
This scheme, effectively offering tax breaks for foreigners, makes Portugal an attractive destination option for digital nomads, retirees, and anyone looking to live and work in a beautiful and welcoming country while holding onto more of their income.
In order to qualify for the NHR regime, applicants must have the right to reside in Portugal either by being either an EU, EEA, Swiss citizen or through visa schemes such as the Portugal Golden Visa. They should not have been a tax resident of Portugal for the five years prior to their arrival in the country.
What happens if you don’t qualify for the NHR tax scheme in Portugal because you reside in the country for more than 183 days out of the year? Until you can cease your South African tax residency, you will need to turn to the Double Tax Agreement that exists between South Africa and Portugal for tax relief. Foreigners who wish to earn income in Portugal are required to register as taxpayers before they can start. Portugal’s tax structure comprises federal taxes and council taxes, which are determined by considering both an individual’s income and assets. Portugal’s tax year runs from the 1st of January to the 31st of December, in line with the calendar year.
It is important to point out that while South Africa has two tests to determine tax residency, it’s much simpler in Portugal. You will be considered a tax resident of Portugal if you meet either of these criteria:
- You have spent more than 183 days in total in Portugal in a 12-month period.
- Even if you have stayed in Portugal for less than 183 days, if you have any form of accommodation in Portugal during a 12-month period that demonstrates your intention to use it as your primary place of residence, it will be considered as your habitual place of residence.
- If you meet these criteria, you will be regarded as resident from the first day of your presence in Portugal until your departure.
Does Portugal have Double Tax Treaties in place?
Portugal has signed a treaty with numerous countries worldwide (including South Africa) to prevent double taxation (you can find the list here) and discussions currently are underway to create similar agreements with additional countries. Essentially, a Double Taxation Agreement allows for the offsetting of taxes paid in one country against taxes owed in the other, effectively preventing double taxation by means of a tax credit.
FinGlobal: tax specialists for South African expats
Maintaining tax compliance in two jurisdictions after you’ve emigrated can be tricky. Until you can formalise your tax exit from South Africa, it’s important to know what to expect from a tax perspective, given that SARS will expect you to still file a tax return and declare your foreign income. FinGlobal can assist with ensuring that you remain on the right side of the South African Revenue Service. We can help with all manner of tax issues, right from tax clearance to tax refunds and advice on the application of double tax treaties, eventually through to tax emigration, we can make your transition from one tax residency to another as smooth and seamless as possible.
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