Portugal: Introduction of 20% income tax rate and new tax regime for non-habitual residents

Portugal has per Decree-Law Nr. 249 of 23 September 2009 introduced a new income tax regime for non-habitual resident individuals. The tax regime will be available to individuals who became resident of Portugal from 1 January 2009, without having been resident in Portugal during the 5 years before that moment.

Qualifying individuals are those who have become residents of Portugal under the Portuguese income tax legislation. The regime consists out of two elements: a part applying to passive income and a part applying to active income.

Passive income
Foreign sourced passive income will be exempt (with progression) from Portuguese income tax. Passive income includes interest, dividends, capital gains and other income from capital, income from immovable property and pensions.
Condition for the exemption with progression is that the income may under a tax treaty concluded by Portugal be taxed in the source country. Actual taxation is not required, except for pensions. Passive income that is sourced in a country with which Portugal has not concluded a tax treaty may also be exempt (with progression) if:
– such income would under the OECD Model Tax Convention be liable to tax in the source country (as interpreted by Portugal, including its reservations on the articles and its observation on the Commentary to the OECD Model); and
– the source country is not included in the Portuguese black list of tax havens.

Active income
Active income may also be subject to a specific tax regime. There are rules regarding income from employment, independent personal services and royalties.
Foreign source employment income will be exempt with progression if it is effectively taxed in another country under the application of a tax treaty concluded by Portugal (or under the OECD Model Convention etc, see under passive income).
Regarding foreign source income of independent personal services and royalties there is no actual subject to tax condition. However, in the case of the independent personal services the exemption may only apply to income derived from certain high value added activities of a scientific, artistic or technical nature. These categories will be further defined in a Ministerial Decree.

Income from employment or independent personal services of a Portuguese source will be subject to a special tax rate of 20%. This rate will only apply to defined ?high value-added activities of a scientific, artistic or technical nature?. This rate may also apply to foreign source income from independent personal services of the same nature in case the exemption does not apply.

Option to be taxed under the normal regime
Taxpayers qualifying for the above regime will have the option to be taxed under the normal rules for Portuguese residents. In such case the exemption with progression for foreign-source income will be replaced by the ordinary credit method, which is the normal method for the avoidance of international double taxation in Portugal.