PORTUGAL:New tax regime for non-habitual residents ? update
In September 2009 Portugal introduced a tax regime for non-habitual residents, providing for the exemption (with progression) of certain kinds of foreign-sourced income, on the one hand, and for a special 20% flat personal income tax rate on employment and independent personal services income from both domestic and foreign sources, on the other hand. In this latter case, the condition is that it is not exempt under the first rule. See
The regime is applicable for a 10-year period to individuals who become tax resident in Portugal starting from January 1, 2009, without having been resident during the previous 5 fiscal years.
The application of the 20% flat tax rate to employment and independent personal services income was made dependent on a Ministerial Order establishing qualifying activities. This Ministerial Order has been published on January 7, 2010 and, contrary to the initial expectations, does not include any sportspersons? activities. Nevertheless, the Ministerial Order envisages some artists: theater, dance, cinema, radio and television artists, singers, sculptors, musicians and painters. It is possible that the Ministerial Order may be revised, and possibly extended, at the end of this year.
Despite this restriction, all sportspersons will be able to enjoy the exemption of foreign-sourced income. Additionally, it may be possible to structure employment income derived by sportspersons within the scope of the Ministerial Order and, therefore, under the special 20% flat tax rate (instead of the 42% progressive personal income tax rate applicable in the highest bracket), via some tax planning, namely with rent-a-star companies.
Some practical problems remain in regard of the application of all of the features of the regime. For example, regarding the tax year 2009, the Portuguese tax authorities have not yet taken all the necessary steps to adequately implement the new regime. The Ministerial Order has only been published in 2010, as mentioned, the tax return form for 2009 income has not been adapted to the new regime and the rules governing provisional withholding tax on employment income have not yet been revised in order to take into account that the maximum tax liability in this respect will be 20% (and not 42%). This circumstance will generate excessive withholdings.
The Portuguese tax authorities apparently are trying to uphold that conditions were not gathered for a general application of the regime in 2009, and that it can only be applied on a requested case-by-case basis vis-?-vis that year. In view of these circumstances, the situation of individuals that became resident in Portugal during 2009 should therefore be duly appraised by a competent tax professional.
It is expected that in 2010 all the practical aspects to fully enjoy the regime will be implemented. The Portuguese tax community remains hopeful that it will be successful in attracting high net worth or income individuals to Portugal.