PORTUGAL: New tax regime for non-habitual residents ? second update
Following the previous two headlines on this subject [see archive], an administrative ruling was recently issued by the Portuguese Tax Authorities. As previously mentioned, several relevant practical problems for the application of the new tax regime remained unsolved, with the Tax Authorities apparently upholding that conditions were not gathered for a general application of the regime in 2009. These issues have now been clarified in light of its administrative ruling nr. 5/2010, of May 6, albeit not in satisfactory manner, as several aspects of it may be deemed contrary to Decree-Law nr. 249 of 23 September 2009 (the law enacting the new regime). The main doubt concerned the application of the regime to fiscal year 2009, as the Portuguese Tax Authorities were informally trying to uphold that the regime could only be applied on a case-by-case basis in 2009. This standpoint has now been officially confirmed, as the ruling expressly mentions that only individuals that became registered as Portuguese tax residents ?under the assumption that they would be covered by the regime? and after 23 September 2009 may be granted its benefits as regards this fiscal year. Both of these requirements may be viewed as illegal, as Decree-Law nr. 249 establishes that it is applicable starting from 1 January 2009 and the regime itself determines that its benefits must be granted automatically to all persons registering as a Portuguese tax residents and not having been taxed as such during the previous five years, regardless of any request by the taxpayer. The ruling creates an additional requirement: the potential beneficiaries are also requested to present a foreign certificate of residence establishing that they have suffered an effective tax burden abroad prior to their redomiciliation into Portugal. Several objections can be made to this requirement. The first of them is that Portugal has no sovereignty to control the conditions under which foreign States grant tax resident status. Secondly, the regime only requires taxpayers not to have been treated as Portuguese tax residents for the five years preceding the acquisition of this status and makes no demands concerning the previous tax residence. Therefore, in our view, no certification of a past tax residence may be demanded. This view is further enhanced by the fact that there is case law in Portugal declaring the illegality of administrative rulings requiring the presentation of foreign certificates of residence in the absence of a law so providing. Another issue concerning the application of the regime in 2009 regarded the 20% flat tax rate for employment and independent personal services income, as well as the exemption of foreign-sourced income derived from the rendering of independent personal services, taking into account that the Ministerial Order establishing the activities qualifying for its purposes was only published in 2010. The administrative ruling expressly clarifies that this flat rate will only be applicable from 2010 onwards. This, however, does not restrict the application of remaining aspects of the regime in 2009, namely the exemption of foreign-sourced income (with the exception of the said foreign-sourced income derived from the rendering of independent personal services). This position raises further doubts, as the law sets out that the benefits of the regime are granted for a 10-year period. It thus remains to be seen if this 10-year period will be taken into account in different ways, starting in 2009 for the benefits not depending on the Ministerial Order and in 2010 for those which are. Further practical issues dealt with by the ruling are: i) provisional withholding tax on employment income apparently will be levied at standard rates, thus creating excessive withholdings, as the latter are drafted in line with the general and progressive personal income tax rates (currently of up to 42%, but reaching 46,5% starting from January 1, 2011); ii) the above mentioned 20% flat tax rate in what concerns ?company?s senior personnel? will encompass only persons with management roles and powers to bind companies. A doubt that still remains is the application of the regime in 2009 in light of the currently existing tax return model, which has not been adapted for this purpose. Apparently an administrative claim following the submission of the tax return is necessary to accommodate some of its features. Unfortunately, the described ruling clarifies the application of the regime in a very unsatisfactory manner and still leaves some open issues. We trust that these difficulties will not prevent in the future a full and more widespread enjoyment of its vast opportunities.