The following collaborative article was written by Ricardo Jesus, Private Wealth Manager at Chase Buchanan, a leading firm renowned for its expertise in comprehensive wealth management and tax solutions.
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Discover Portugal's Non-Habitual Residency Program
Portugal's Non-Habitual Residency (NHR) program has emerged as a beacon of opportunity for individuals seeking a favorable tax regime within a high-quality lifestyle.
The NHR program was initiated in 2009 by the Portuguese government to attract skilled professionals, entrepreneurs, and retirees from around the world. It offers an attractive tax regime for a duration of 10 years, providing a significant advantage for those who move to Portugal, in comparison to its normal tax regime.
Eligibility Criteria & Necessary Steps
US citizens seeking to benefit from Portugal's NHR program must meet specific criteria:
Should not have been a tax resident in Portugal for the previous five years.
Must register as tax residents in Portugal and submit necessary documentation, including proof of accommodation and valid residency visa.
To register as tax residents, an individual must spend over 183 days in Portugal within a 12-month period or have a residential accommodation as a habitual abode.
Activating NHR Status: Gaining NHR status is not automatic and involves a sequence of formalities:
Obtaining a Portuguese taxpayer number (NIF).
Formalizing tax residency in Portugal by providing required documentation.
Requesting access codes for the Tax Authorities' website.
Submitting an application for the NHR status.
In certain cases, additional evidence might be requested to affirm an individual's effective tax position in Portugal. The deadline for requesting NHR status is March 31 of the year after establishing tax residency.
Tax Benefits for US Citizens
Exemption or Reduced Rates on Foreign Income
- Foreign-sourced Income Exemption: Certain types of foreign income like royalties, interest, dividends brought into Portugal can be exempt from Portuguese taxation under the NHR program.
- Flat Tax Rates on Eligible Income: Income derived from eligible professions can benefit from a flat tax rate of 20% in Portugal. This reduced rate applies to specific professions, such as high-value-added activities or intellectual property-based businesses.
- Pension Income: Individuals with NHR before 2020 have an exemption from Portuguese taxation on foreign-sourced pension income. Individuals with NHR after 2020, are taxed at a flat 10% tax rate in Portugal. This includes income from US Social Security, private pensions, and other retirement plans.
Compliance with US tax obligations: Pension income received from US sources may still be subject to US taxation, depending on the specific nature of the pension and the US tax laws. Individuals should engage financial advisors well-versed in international tax laws to optimize their financial planning. Understanding the tax implications in both Portugal and the US is crucial for effective wealth management and tax compliance.
Understanding Double Taxation
Portugal has a comprehensive Double Taxation Agreement with the United States. This agreement ensures that income earned in Portugal by US nationals is not subject to double taxation. Taxes paid in Portugal can be credited against US taxes, reducing the overall tax burden for US citizens availing themselves of the NHR program.
Post-NHR Status
Upon the completion of the ten-year period, individuals revert to standard Portuguese tax rules. This system includes progressive income tax rates that vary depending on the level of income earned. It is advisable for individuals approaching the end of their NHR period to reassess their financial strategies. This includes reviewing income sources, potential tax liabilities, and optimizing their financial planning considering the shift back to regular tax rules.
NHR Termination in 2024 & Transitional Regime
NHR regime will be revoked with effect from January 1, 2024, onwards. However, individuals becoming tax residents of Portugal until December 31, 2023, can apply for the NHR regime until March 31, 2024.
A grandfathering regime will be applicable, so those who are interested to move to Portugal under the NHR regime must take immediate action. Individuals who become tax resident of Portugal until December 31, 2024 can apply for the NHR regime until March 31, 2025, provided they meet the grandfathering regime requirements.
Practical Advice for Aspiring Applicants
For US citizens considering the NHR program in Portugal, it is crucial to consult with financial advisors proficient in international taxation. Understanding the nuances of tax regulations and planning for long-term residency in Portugal are key factors for a smooth and successful integration into the Portuguese tax system.
FAQs – Americans in Portugal
Q: What are the grandfathering regime requirements?
A: To the taxpayer who becomes a resident for tax purposes by December 31, 2024 and who declares, for the purposes of registering as a non-habitual resident, to have one of the following elements:
Promise or employment contract, promise or secondment agreement signed by December 31, 2023, whose duties must take place within national territory;
Lease contract or other contract granting the use or possession of property in Portuguese territory concluded until October 10, 2023;
Enrollment or registration for dependents, at an educational establishment domiciled in Portuguese territory, completed by October 10, 2023;
Residence visa or residence permit valid until December 31, 2023;
Procedure, initiated by December 31, 2023, of granting a residence visa or residence permit.
Q: Is my Social Security benefit taxed in Portugal?
A: Typically, yes, according to the Double Taxation Agreement between Portugal and the US, Portugal has the first right to tax your Social Security payments. Social Security is not considered a government pension in the context of the Double Taxation Agreement. During the NHR period, Social Security would be classified as a pension at taxed at a flat 10% tax rate in Portugal. If your US liability exceeds this 10% rate, then you would owe the excess tax payment to the US.
Q: How will my 401k or IRA distributions be taxed in Portugal?
A: According to the Double Taxation Agreement, Portugal has the primary right to tax 401k and IRA distributions, meaning you will pay income tax in Portugal on distributions from these plans. During the NHR period, these can be classified as pension distributions and taxed at a flat 10% rate in Portugal. If your US liability exceeds this rate, then you would ow the excess tax payment to the US.
Q: Is my Roth IRA or Roth 401k still considered tax-free in Portugal?
A: No, Portugal does not recognize the tax-free nature of these accounts and distributions can be considered taxable.
Q: Should I move my investment accounts to Portugal when I move?
A: We typically advise clients not to move their investment accounts over to Portugal when they move. There is no equivalent to an IRA or Roth IRA in Portugal, and these cannot be rolled over into a European account. Any distribution to a European account from these plans is a taxable event.
For taxable brokerage accounts, there are very few local investment options that are tax efficient for Americans. Considering that Americans must always adhere to IRS rules around taxation of investments, we cannot typically invest in European mutual funds or ETFs without significant US tax consequences. As a result, it is easier and more tax efficient to maintain US custodied investment accounts. The US financial system is also cheaper, more transparent, and has more investment options.
Q: Is there a wealth tax in Portugal?
A: No, there is no wealth tax in Portugal.
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