Portugal’s golden visa (GV) scheme has been extremely successful. In return for relatively low levels of investment in Portugal, permanent residency is granted. This ordinarily leads to citizenship after five years. Importantly for many, there is no requirement to spend more than a few days per year in Portugal to maintain the residency under this scheme.
Generally, it is necessary to live full time in a particular country during the required qualifying period for citizenship. Indeed all other forms of residency in Portugal only normally lead to citizenship if the resident has lived full time in Portugal for most of the five-year qualifying period. The GV is therefore highly attractive for anyone who wants to qualify for citizenship, but stay in their home country while doing so.
The most popular route for obtaining a GV has been through residential property investment in the metropolitan centres of Lisbon and Porto and the prime coastal areas, particularly the central Algarve. This inevitably led to a property bubble and it was announced that, from the end of last year, only property investment in less popular and less populated areas will qualify for GV status. In these areas the minimum required investment can be as low as €280,000.
The second most popular GV investment route was a minimum investment of €350,000 in qualifying investment funds. This route remains available but the minimum amount has been increased to €500,000.
There are good reasons to act fast. Several European Union member states are seeking to impose penalty taxes on citizens who emigrate to other member states that impose lower taxes. Any such move would be contrary to current EU legislation which permits freedom of movement and establishment within the EU but it is always possible for the EU to change its own rules.
It is already the case that many EU member states impose an exit tax on anyone leaving their country for a non-EU nation. These typically operate by assuming that there has been a ‘deemed sale’ of all assets owned by the individual who is emigrating and then applying a capital gains’ charge accordingly. There is now pressure to introduce something similar for those citizens emigrating to lower tax member states.
The mood music is getting louder. The global community is attempting to reduce tax competition and harmonise taxes. It has already instituted a global minimum corporate tax of 15% and it is not at all far-fetched to think that the world generally (and the EU in particular) might introduce something similar for individuals. Generally, such taxes could not be charged retrospectively and so would not affect those who have already made the move.
It’s no great surprise that Portugal has attracted so many new immigrants. Portugal has one of the more enviable European climates, 800 kilometres of coastline, excellent food and wine, captivating culture, intriguing art and architecture, fascinating history, welcoming people, good health care, low crime and high affordability.
And, of course, Portugal is a full member state of the EU; so legal residents of Portugal can travel freely and visa-free throughout the EU under the Schengen arrangements. In addition, the ‘Non-Habitual Resident’ (NHR) tax benefits can be obtained by new residents. It is clear why Portugal is so popular a destination, and why Lisbon is the ‘hottest’ city on the planet.
Any new resident who has not been tax-resident in Portugal in any of the previous 5 years can obtain NHR tax status. With careful structuring this gives the NHR a 10 years of very low or no tax on Portuguese source income and capital gains. NHRs used to be taxable only on their Portuguese-source income. Last year, however, the NHR regime was amended and new NHRs must now pay 10% tax on their pension income.
The NHR name itself is counterintuitive because to maintain this special tax status it is necessary to spend more than six months in Portugal in each tax year. In other words, to be considered a non-habitual resident the applicant must be habitually resident! Remember, NHR is not an immigration status. It is a tax status granted to new residents. Applicants must be legally resident in Portugal through one of the Portuguese immigration channels – the GV or otherwise – before they can apply.
The tax effect of NHR status has not generally been well understood and NHRs who have not properly read the small print could find themselves with substantial tax liabilities. The general rule is that income and capital gains that have been subject to tax outside Portugal will not be subject to tax in Portugal. This is hardly an advantage because bilateral international tax treaties would generally produce the same result.
However, many NHRs hold their assets in offshore structures that pay no tax. Income or gains received from or rolled up within those is subject to tax in Portugal. Portugal amended its Controlled Foreign Corporation (CFC) regime to reflect the EU Anti-Tax Avoidance Directive in 2019. As a result, profits or income or gains belonging to an entity that is resident in a ‘black-listed’ jurisdiction, or in most jurisdictions that apply ‘low or no’ taxes, will be imputed to, and taxable on, the Portuguese NHR. In other words, income that has not already been taxed will be taxable in Portugal at rates of up to 48% – whether received or not – so most traditional offshore corporate and trust structures cannot assist NHRs.
Indeed, these types of structures are now automatically reported to the Portuguese tax authorities under the international Common Reporting Standard (CRS), so any planning that relies on such structures remaining undiscovered will be doomed to failure.
To obtain NHR tax benefits it is necessary to show that overseas profits either have been taxed or are liable to tax in a ‘non-blacklisted’ jurisdiction. Structures in Cyprus and Malta can be particularly useful here because both jurisdictions are EU member states, are ‘low’ rather than ‘no’ tax and have signed tax treaties with Portugal. Careful use of structures from these jurisdictions can and should result in very low levels of tax being payable there and in no further tax being payable in Portugal.
It is also important to remember that it is possible to become liable for tax in Portugal without being legally resident in Portugal. For example, any EU national can spend as much time as they want in Portugal without applying for residency because EU law permits freedom of movement within the EU without limitation. But the Portuguese tax authorities will consider you resident if you spend 183 days or more in Portugal within a 12-month period or make frequent visits and have accommodation available in Portugal.
On the face of it, there would seem to be little point in applying for NHR status unless you are not planning to be tax-resident in Portugal. However, Portugal is already under pressure from the rest of the EU to further limit the tax advantages under the NHR scheme. No tax-advantageous scheme lasts forever, and neither will this one. At some stage it will be closed to new applicants.
We therefore believe that anyone who thinks they may move to Portugal or who might spend sufficient time there to be considered tax resident should consider applying for NHR status immediately to lock in the NHR benefits before they are further eroded or abolished.
So let us now return to the GV. Obviously, the GV is less important for EU citizens because they already have a right to live in Portugal without formal immigration and without investment. For them, the driver to emigrate to Portugal is NHR status. This has indeed attracted many new residents from the (pre-Brexit) UK, Scandinavia and France in particular.
GV status means that the successful applicant is a legal resident of Portugal but not necessarily a tax resident. Those who live in Portugal will be tax resident; those who don’t, will not be. And for the former category, GV status can of course be combined with NHR to provide a 10-year beneficial tax regime.
So, there it is: two exceptionally advantageous schemes that have been extremely successful in attracting investment into Portugal, and with good reason. Act now before they lose their sparkle.
