Portugal Partly Clarifies Expatriate Tax Concessions

By ExpatBriefing.com Editorial 14 August, 2012

The Portuguese Revenue (IRS) issued on August 3rd a circular partly clarifying the situation of taxpayers applying for the special expatriate tax regime.

Back in 2009, Portugal implemented a special tax regime for expatriates living in Portugal, in the hope of attracting capital inflows. Individual taxpayers deemed to be “non-habitual residents” (residentes não habituais) could apply for the special regime if they were either High Net Worth Individuals (HNWIs) or “high value-added” employees or self-employed individuals, provided they had not been resident in Portugal for the five years preceding the application. The special expatriate regime involves a 10-year tax concession with a flat tax rate of 20% on income sourced in Portugal and an exemption on foreign income while maintaining eligibility to tax treaty benefits.

To qualify, however, the IRS initially required applicants to show documentation from a foreign tax authority confirming that they had been resident abroad, and that foreign-source income was “effectively taxed” in the source country, both during the years preceding residence in Portugal and during the years of residence in Portugal.

Tax advisers argued that these requirements were excessive, especially because they were not contained in the law.

With the newly published circular, the IRS clarified that it was no longer necessary to prove previous residence in a foreign country, thereby making the scheme available for 'perpetual travellers'. The IRS now requires only a declaration from the applicant, unless it has good reasons to believe this declaration is not correct. In that case, the IRS may request further evidence from the applicant.

While the case of HNWIs has not been clarified yet, “high value-added” employees or self-employed taxpayers are now no longer required to prove effective taxation in their former country of residence prior to becoming resident in Portugal. Furthermore, they will be liable to a final 20% withholding tax while being resident in Portugal, and will no longer pay the regular rate of income tax, forced to claim refunds from the IRS afterwards, as has applied until now.

Nevertheless, the tax treatment of foreign income under the special expatriate regime remains unclear, and the IRS still requires it either to be effectively taxed abroad, or, in the case of pensions, to be paid from an overseas entity. It makes sense, however, for Portugal's tax policy to play on the uncertainty as it is pursuing the double objective of attracting foreign capital inflows while maintaining the country's credibility toward its treaty partners.

Tags: Individuals | Expatriates | Tax | Investment | Pensions | Portugal | Law | Employees | Tax Authority | Withholding Tax |


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