THE NON-HABITUAL RESIDENT REGIME

The Non-Habitual Resident Regime is a tax benefit set up by the Portuguese government, allowing the beneficiary to be exempt from all or a part of their income tax.

It was set up in 2009 in order to attract professional experts of high added-value activities and especially the liberal professions (artists, architects, doctors, lawyers, engineers, contractors, etc.).

As such, they benefit from a tax rate reduced to 20% on their Portuguese earnings and a total exemption on the foreign earnings, whether active or passive.

This regime was extended in 2013 to pensioners for a total exemption of their income tax during 10 years (excluding pensions from civil service work taxed in the original country).

The main and essential conditions for obtaining this regime are :

• Living in Portugal more than 183 days per year, i.e. to be resident according to Portuguese law
• Not being resident in Portugal in the five years before requesting the Non-Habitual Resident status
• Applying for it (this status is not automatically given)

The French government signed a tax treaty on 14^thJanuary 1971 with Portugal to avoid double taxation for its citizens living in Portugal. Convention

But with the set-up of this RNH regime, a double non taxation is noted even though a citizen has to be taxed in the country in which he/she has his/her tax residence (original country or host country).

The French government considers that the RNH regime is a tax benefit granted by Portugal according to its internal law but not according to article 18 of the OECD (Organisation for Economic Cooperation and Development) convention template, reproduced in article 19 of the Franco-Portuguese tax treaty, which stipulates that the retirement pension and other earnings received from a contracting State for a prior employment are only taxable in this State.

So, the French government claims its right to tax its citizens living in Portugal and exempt from income tax, for their French earnings.

In this context, the notion of “tax resident” has to be explained. What is the tax residence? And what are the rules for?

This notion is defined in article 4 of the OECD template as every person who, according to the legislation of this State, is subject to tax in this State, for his/her home, his/her residence, his/her management headquarters or any similar standard.

In November 2015, two case-law examples agreed with France in judging that a person exempt from tax in a contracting State due to his status or his activity cannot be seen as subject to this tax according to the treaty, or thereby, as a tax resident of this State.

Perhaps, the French government will use these case-law examples to renegotiate the tax treaty with Portugal, if that kind of renegotiation is to be launched shortly, which is not the case for the moment.

An amendment was signed by France and Portugal in August 2016 ajouter lien in which the civil servant regime was specified among other additions. It is indicated that earnings from a State, especially retirement pensions, will be taxable in this State.

Other countries are more advanced in challenging the RNH regime. Finland, for example, signed a new tax treaty with Portugal in November 2016 ending, for their citizens living in this country, tax benefits linked to the RNH regime and to the double non taxation. It allows Finland to tax the Finnish earnings of its citizens living in Portugal and exempt from tax in this country.

Sweden also launched the renegotiation of the tax treaty signed with Portugal in order to avoid its citizens being exempt from income tax in the 2 countries.

The left-wing Political Portuguese Party “Bloco de Esquerda” would like to include in its 2019 budget proposal, the cancellation of the RNH regime because it considers that it is not fair to tax the Portuguese or foreign workers and not to tax the foreign retired residents.

However, even if the RNH regime cost €350 Million for the Portuguese State in 2016, it apparently brought between €9 and 11 Billion (plus 4 Billion for the Gold Visa) in direct and indirect taxes, making this tax benefit a real source of wealth with a qualitative immigration of a population with high purchasing power or with strong economic potential.

The Portuguese government has recently confirmed its intention not to give in to internal and external pressures, and its wish to maintain its tax competitiveness.

Le gouvernement portugais a, en outre, récemment confirmé qu’il ne compte pas céder aux pressions internes et externes, mais entend maintenir sa compétitivité fiscale.

The Portuguese government plans new policies in order to facilitate the return of the immigrant Portuguese to their native country. This programme concerns each person who left the country before 2015 and who will come back to live in Portugal in 2019 or in 2020.

The Portuguese government is particularly keen to encourage the return of young qualified workers who left the country after their studies to find a job abroad. The policies set up are the following:

• Exemption of 50% of income tax for 5 years maximum
• Reduction of the cost for their return (move and installation)

However, this challenging is to be qualified.

The experts agree on the fact that the Franco-Portuguese tax treaty will be reviewed shortly and thereby, the RNH regime for French citizens.

They also think that the taxation rate of 0% could be replaced by a reduced but reasonable taxation (Italy has, for example, set up a taxation rate of 7% for the foreign citizens).

Regarding the current beneficiaries of the RNH regime, they could continue to benefit from this regime without any retroactivity being planned; therefore no tax regarding the past years should be claimed by France.

The RNH regime raises a lot of debate due, according to some critics, to the “injustice” generated:

• Between the contracting countries with a loss of citizens in their original territory and, mostly, a loss of income (especially consumption and tax)
• Between the Portuguese residents (foreign or native) who see their working taxpayers pay income tax on earnings that are sometimes low and the new often richer residents who are exempt from tax

However, this challenging may well take time before an agreement is found.

If an agreement were found, we think that it will remain advantageous for the future expatriates in Portugal, perhaps copying the Italian model in order to confirm the tax residency of these new citizens.

Indeed, Portugal wishes to remain attractive as it has over several years and which is beneficial for its economy.

It is important to remember that Portugal has followed a social policy since 2015 allowing many benefits, such as:

• Lowering of unemployment rates
• Increasing of minimum wage
• Constant increasing of GDP
• Reduction of Portuguese debt
• Progression of the rate of growth, over the European average and especially that of France, Germany, Greece, Italy and Switzerland.

PORTUGAL & YOU will inform you when more news is available.

To find out statistics about expatriates in Portugal : Les expatriés en chiffres au Portugal

PORTUGAL & YOU can deal with obtaining the Non-Habitual Resident regime for you