Individual Taxation in Portugal

Europe’s best kept secret*

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Why Portugal is your top tax choice

Portugal is part of the European Union, the Euro Zone and the Schengen area. Having a stable economy and social structure, Portugal provides a competitive economic environment, combined with a low profile and low international exposure. The country is investing in becoming a premium tourism and real estate location, as well as one of the leading EU countries in R&D and new technologies. Portugal provides an excellent quality of life for the modern investor or businessman. The tax regime for individuals is very attractive, surpassing in some ways the better-known non dom UK and lump sum Swiss regimes, as well as the Spanish and French expatriate regimes. The low effective tax burden, further enhanced by the new regime for non habitual residents, the free remittance of funds, the friendly residence permit regime (allowing for free movement within Schengen zone) and the possibility to apply for Portuguese nationality and, consequently, a EU passport, make Portugal a very competitive location. As a result of its traditional liberalism and multicultural approach, Portugal maintains very close links with Africa (Angola), China (Macao), South America (Brazil) and USA (Azores). Consequently it is not a surprise that Portugal is becoming a top choice for Ultra and High Net Worth Individuals who wish to take residence in the European Union. The new special tax regime for non-habitual tax residents, with a flat income tax rate of 20% for some Portuguese employment source income and a tax exemption for almost all foreign source income further increases the attractiveness of Portugal for the UHNWIs, and shows the Portuguese commitment to attract the best talent as well as wealthy individuals and their families.

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PricewaterhouseCoopers The Portuguese tax system offers a number of advantages compared with other European countries, including the U.K., Switzerland, France and Spain. Together with relatively low nominal tax rates for individuals, including generous tax exemptions for non habitual residents, Portugal offers interesting tax planning opportunities in relation to wealth, gift and inheritance taxes as well as business and rental income, capital gains , dividends and interest, as well as pensions. Wealthy individuals and their families, whether of Portuguese nationality or not, should look closely at what Portugal has to offer for the planning of their income and wealth as well as for a successful transmission to the next generation. • No inheritance or gift tax burden and no wealth tax. • No taxation on capital gains from disposal of shares. • Reduced or deferred taxation on dividends and other capital income, if not exempted under the non habitual resident regime. • Madeira preferential but fully regulated regime (in line with EU law) is also available to all Portuguese residents.

Examples of Portuguese tax planning opportunities include: 1. Since 2009 a 20% flat rate for some Portuguese income and an exemption for almost all foreign source income is available to non habitual residents. Full tax exemption for gifts or inheritances to spouse, descendants or ascendants. Inheritance or gift to other individuals will be either not taxable orsubject to a low flat 10% stamp tax rate. 2. A full capital gains tax exemption is available for shares held for a period of at least twelve months. 3. No wealth tax and free remittance of funds either to Portugal or abroad. Nil taxation on dividends with proper planning or otherwise a 20% withholding flat tax rate will apply. Tax credit for international double taxation may be available. 4. Structured products (including unit links) may further significantly reduce the effective tax burden on capital invested. 5. A company incorporated under the Madeira International Business Center tax regime may be subject to a maximum 5% corporate income tax rate on foreign source income, up to 31st December 2020, being fully

integrated into the Portuguese and European Union legal frameworks and available to all Portuguese residents, as the regime is fully co-operative and not ring fenced. 6. Furthermore Madeira has the EU’s lowest VAT rate (14%), leading to interesting planning opportunities for e-commerce, yacht registration, etc. 7. Portuguese companies including Madeira International Business Center companies may take advantage of EU non-discrimination rules and EU Parent/Subsidiary Directives on mergers, dividends, interest and royalties, as well Portuguese double tax treaties (with minor exclusions regarding Madeira companies). 8. Portugal has signed more than 50 double tax treaties, including with Malta and Macao, offering interesting tax planning opportunities in a tax friendly environment. 9. The information in this leaflet is based on legislation in force at November 3rd, 2009. However, the information is general in nature and, therefore, we recommend that you seek professional advice before making any decision in this area. The information in this leaflet based on legislation in force at November 3rd, 2009. However, the information is general in nature and, therefore, we recommend that you seek professional advice before making any decision in this area.

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New Tax Regime for Non Habitual Residents Portugal introduced in 2009 a new voluntary Personal Income Tax (PIT) regime for Non Habitual Residents aiming to attract to the Portuguese territory talent in high value added activities and ultra and high net worth individuals and families. This regime boosts the Portuguese competitiveness both on new technologies and other high value sectors and to the Ultra and High Net Worth Individuals (UHNWI’s) and their Families, as it is considered more advantageous than the UK and Swiss regimes for UHNI’s as well as the French and Spanish regimes for expatriates. The new regime is available to all individual becoming tax resident in Portugal if they were not Portuguese tax residents in the 5 previous years, and the status is granted for a period of 10 (renewable)consecutive years.

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To be considered as a tax resident the individual should remain more than 183 days in Portugal during the relevant fiscal year or should have a dwelling in Portugal at 31st December of that year with the intention to hold it as his habitual residence. Non Habitual Residents will be subject to a reduced 20% PIT rate both on Salaries and Business and Professional income of a Portuguese source arising from high added value activities of a science, artistic or technical nature. Non Habitual Residents will be PIT exempted on salaries of a non Portuguese source if such salaries were subject to tax in the country of source under an existing Double Tax Treaty or, if no Tax Treaty exists, were subject to tax in another jurisdiction, and are not considered as Portuguese source income under domestic rules. Business and professional income of a non Portuguese source relating to high added value services of a scientific, artistic or technical nature, as well as from intellectual or industrial property or industrial, commercial or scientific information, earned by non habitual residents abroad are PIT exempted provided such fees could have been taxed under an existing Double Tax Treaty or could have been taxed in another non black listed jurisdiction following the OECD Model Convention. Real Estate Income, Capital (passive) Income and Capital Gains of a non Portuguese source of Non Habitual Residents are also PIT exempted provided the above mentioned conditions are met. Pensions paid abroad to non habitual residents are also PIT exempted if such pensions were subject to tax under an existing Double Tax Treaty, if the pension should not be considered as obtained in Portugal and related previous contributions did not allowed a PIT deduction in Portugal. As a conclusion, under the new regime MNC’s will have a major advantage in placing their centers of excellence in Portugal, e.g. their R&D departments and Portuguese companies will have a significant stimulus to attract the best talent. Furthermore by becoming Portuguese non habitual residents the UHNWI’s may be able to accrue their wealth in a white listed tax friendly environment, to dispose of their assets benefiting from capital gains exemption, to pass on their wealth or estate without inheritance or gift taxes and/or to enjoy their retirement without tax leakage on their pensions.

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Individual Taxation Contacts

Lisbon Palácio Sottomayor Rua Sousa Martins, 1-2.º, 1069-316 Lisboa Tel.: +351 213 599 000 Fax: +351 213 599 999 [email protected]

Oporto

John Duggan

Jaime Carvalho Esteves

o’Porto Bessa Leite Complex Rua António Bessa Leite, 1430 - 5º, 4150-074 Porto Tel.: +351 225 433 000 Fax: +351 225 433 499 [email protected]

Partner since 1985, he has a degree in Mathematics and is a member of the Institute of Chartered Accountants of Ireland. He specialises in tax planning, investment projects and VAT matters.

Partner since 1998, he is responsible for the Portuguese Tax practice. He has a degree in Law from the Catholic University of Oporto and post-graduate studies In European Studies and Commercial Law from the Catholic University in Lisbon. He specialised in international tax planning, mergers and acquisitions, company reorganizations and personal and family business taxation issues.

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