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Portugal. The Man are an indie band whose most famous track is ‘Feel it Still’. It is true to say that this song is heavily ‘inspired’ by the Marvelette’s ‘Please Mister Postman’.
So, the question is whether Portugal’s Non-Habitual Residence (“NHR”) status is anything to ‘write home’ about?
We recently looked at this very option for a shareholder director client. He was looking to move abroad, leaving two other UK based directors looking after the UK trading business.
What is NHR Status?
The original NHR regime was introduced by Portugal in 2009 to attract high value individuals to Portugal. It is perhaps fair to say that this was one of the earlier shots in the post financial-crash battle to attract the internationally mobile and wealthy individual.
The regime has been slightly altered by recent legislation but many of the main benefits still apply.
The principal feature of the regime is that an individual may benefit from a special tax regime for 10 consecutive years if he or she qualifies as a tax resident in Portugal. In addition, they cannot have been a Portuguese tax resident in any of the five years prior to residence being established.
Where the regime applies, then any Portuguese source salary or self-employed income derived from a list of eligible professions would be subject to a final flat rate tax of 20%.
An individual may benefit from a special tax regime for 10 consecutive years
Things get even more interesting when it comes to Non-Portuguese income. Most categories of such income (including self-employed income, real estate income, interest, dividends and capital gains on property) will not be subject to tax in Portugal for years in which the NHR regime applies as long as certain conditions apply.
Practically speaking, it is likely that any dividend received by our client from his UK business will not be taxable in Portugal and, of course, the UK will not seek to tax these dividends under basic principles (though one needs to be conscious of the temporary non-residence rule). As such, assuming current rules continue, he will be able to enjoy this income free of any additional taxes.
As a result of these rules, Portugal became an attractive destination for UK pensioners. Although under general principles, UK pension income is taxable in the UK, the relevant double tax treaty provides that Portugal will generally have taxing rights. Under NHR rules as originally enacted, this mean the pensioner would not pay any tax on the income received in Portugal.
However, the rule has been amended such that new applicants will have to pay a flat 10% rate on all their foreign pension income. That said, depending on the individual, this could represent a significant saving.
Disestablishing UK tax residence
Perhaps surprisingly, up to as a recently as 2013, whether one was UK resident or non-UK resident was largely determined on piecemeal case law. However, since then, we have had a statutory residence test (“SRT”). Although far from being ‘simple’, it will often deliver greater certainty than the previous system.
The SRT can be thought of as a road map. The first stage is to determine whether one satisfies the ‘Automatic Overseas’ tests (“AO Tests”). If one does qualify as being ‘automatically overseas’ then, unsurprisingly, one is non- UK resident. No further steps need to be taken. As such, satisfying one of these tests can be desirable.
If one does not meet one of the AO tests then you move to the next leg. This step will determine whether one satisfies the Automatic UK Tests (“AUK Tests”). If one of the tests is satisfied, then the individual is UK resident. Again, one would then look no further.
If neither of the automatic tests are satisfied, then it is only then that one needs to consider whether one has ‘sufficient ties’ to the UK. The sufficient ties test is essentially a ‘day counting’ exercise and then comparing against the number of ties. The rule of thumb is that the more ‘ties’ one has to the UK then the less days one can spend in the UK without becoming UK resident.
In our client’s case, it was possible for us to satisfy one of the Automatic Overseas tests. However, in some cases, one might be left tallying the ‘ties’ the client has to the UK and working out how many days they may visit the UK in any one tax year.
Establishing Portuguese residency & NHR Status
There are people better placed than me to advise on the required steps to establish residency in Portugal and register for NHR.
However, in broad brush strokes, it is usually first necessary to obtain what is referred to as a NIF number which is required before one can rent or purchase a property.
Subsequently, one must register as a resident in Portugal and obtain a certificate to that effect (CREU). It is only then can one apply for NHR status. An application must be filed up to 31 March of the year following the one in which the individual becomes tax resident in Portugal. So, in the case of our client, by 31 March 2021. Of course, Brexit also throws up some potential difficulties once the transitional rules fall away with effect from 1 January 2021. So local advice is essential.
So, in summary, for our client it was certainly to write home about. He now is the proud owner of a property in the Algarve and is a member of the NHR club.
However, I stress that this exercise fitted in with the client’s own objectives. Advising someone to become resident in a foreign country to mitigate tax is a drastic step. Generally speaking, one is going to have stay non- UK resident for five years. Without wishing to state the obvious, this is a long time.
Clearly, one needs to take UK tax advice and take local legal and tax advice. In this case, we worked with an excellent Portuguese advisory firm.
If you do decide to take advantage of the NHR status, don’t forget to send us a postcard.