With UK tax rates on the rise, many people are considering a move to sunnier (and more tax-friendly climes). Portugal has a non-habitual resident (NHR) tax regime which gives individuals the opportunity to avoid or minimise income tax on categories of income and capital gains for 10 years.
Under this regime, most non-Portuguese income will not be taxed in Portugal. For example an NHR can receive dividends from a UK company free from tax. The reason for this is quite technical but it boils down to the fact that the UK-Portugal double tax treaty gives the UK the opportunity to tax dividends paid to a Portuguese resident individual (although it does not do this).
Non-Portuguese capital gains and income – usually exempt from Portuguese tax
1. Dividends (no UK tax either)
3. Real estate income
4. Capital gains from disposal of real estate.
Also, under this regime, offshore pensions are subject to a flat rate of 10%. This will typically include UK self-invested personal pension plans (SIPPs).
Conditions for NHR status
The individual needs to become Portuguese resident and cannot have been resident in Portugal in the last five years. Residence can be achieved by living more than 183 days in Portugal during a 12 month period beginning or ending in the year of application for NHR status, or alternatively by owning a property with an intention to occupy it as the principal and usual place of residence.
Jim leaves the UK on 6 April 2021 and moves to Portugal and successfully applies for NHR status. In June 2022 he pays himself a £2m dividend. This will be tax-free. Two years later he sells the company for £12m. This is not so ‘clever’ as the disposal will be subject to tax as normal in Portugal at a flat rate of 28%.
Forbes Dawson view
Portugal can be an attractive jurisdiction, particularly for individuals who will receive significant non-Portuguese dividend income. In particular, it may be worth considering as a ‘stepping stone’ when moving to a less friendly jurisdiction. However, significantly, there is no concession for share disposals which will suffer a higher tax rate for NHRs than UK residents – and some further planning may be required here. Anybody who leaves the UK will also need to consider ‘temporary non resident rules’ which will often revisit charges on individuals who return to the UK before five years is up.
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