What Tax Incentives Can Individuals and Companies in Portugal Benefit from?

With its international economic zone featuring enticingly low tax rates for companies and an appealing tax regime that grants residents favorable treatment on foreign income for a decade, Portugal is capturing attention as one of the most sought-after tax havens in Europe. 

Delve into the details and discover the specific eligibility criteria for individuals and corporations seeking to take advantage of reduced tax rates in Portugal.

Is Portugal a good tax haven?

Portugal has emerged as a highly attractive hub for expatriates and foreign investors. The jurisdiction offers advantageous tax rates on income derived from foreign sources in the realms of real estate and business ventures. Since the implementation of the Non-Habitual Residence (NHR) tax regime in 2009, individuals have been able to benefit from remarkably low or even zero tax rates on foreign income for as long as 10 years, contingent upon the country of origin.

Foreign entrepreneurs also capitalize on appealing tax regimes in Portugal’s exclusive economic zone. Non-resident companies registered in the Madeira International Business Center (MIBC) enjoy a remarkably low corporate tax rate of a mere 5%, in contrast to the standard 25% rate on the mainland.

These tax regimes, characteristic of midshore jurisdictions, firmly establish Portugal as an enticing destination for offshore endeavors.

How you pay tax in Portugal

Learn about the criteria that foreigners shall meet to acquire a tax residency status in Portugal:

• reside in the country for more than 183 days within a single year
• have a permanent residence in Portugal by December 31st of the specific reporting period
• be a dependent family member of a tax resident in Portugal
• work as a crew member on a ship or aircraft owned by a Portuguese company
• hold an official position within the Portuguese government, regardless of the employment location.

Foreigners can legally stay in Portugal for up to 6 months on a long-term D7 visa or a residency permit they obtained through starting a business or purchasing properties.

To fulfill their tax obligations in Portugal, every taxpayer shall obtain an individual fiscal number (NIF) and complete an initial form. You can conveniently complete the NIF application and submit the above form online via the National Tax Service’s portal.

The tax year in Portugal corresponds to the calendar year, spanning from January 1st to December 31st. Taxpayers are required to submit their tax returns for the previous reporting period between April and June. The online platform offers the option to file taxes in Portugal electronically. Be sure to adhere to the deadline for tax return submission. NB: your failure to comply may result in substantial penalties ranging from EUR 200 to EUR 2,500.

The Personal Income Tax (IRS) in Portugal operates on a progressive scale, with different tax rates for various income brackets:

• The minimum rate is 14.5%, applicable to annual incomes up to EUR 7,479.
• The maximum rate is 48%, applied to annual incomes exceeding EUR 78,834.

Resident individuals in Portugal pay IRS on 6 different types of income:

1. employment income
2. self-employment income
3. profits distributed from business and investments
4. rental income from real estate
5. capital gains from the sale of property, assets, or shares
6. pension income, including private pension plans.

These categories encompass the sources of income that are subject to taxation under the Portuguese IRS system.

In Portugal, the average yearly salary is approximately EUR 30,000. The amount falls within the 37% tax bracket. This places a significant tax burden on individuals compared to the average in the European Union. As a result, immigrants are encouraged to leverage the advantageous NHR tax regime to substantially decrease their income tax liability, regardless of whether the income is earned domestically or internationally.

Portugal as a low-tax jurisdiction for expatriates with foreign income

For 10 years, expats in Portugal have had the opportunity to benefit from a special tax status known as Non-Habitual Resident or NHR for short. This status, granted once and not extendable, offers appealing tax advantages on foreign income.

To be eligible for the NHR status, foreigners shall meet the below requirements:

• reside in Portugal for more than 183 days during the preceding tax year, either on a D7 visa or a residence permit, to establish tax residency in Portugal
• obtain an individual tax identification number (NIF)
• possess a rented or owned property in Portugal
• not have been a tax resident of Portugal for the past 5 years leading up to the last tax year.

Expatriates who have acquired the NHR status enjoy favorable Portugal tax rates and payment conditions:

• When earned in Portugal, salaries and income from business, freelancing, and self-employment are subject to a flat income tax rate of 20%, deviating from the standard progressive scale that ranges from 14.5% to 48%.
• Dividends, interest, and royalties from foreign sources are taxed at a rate of 0% if a valid agreement to prevent double taxation is in place.
• Foreign income generated from the sale or rental of real estate and capital gains is exempt from taxation if the source is in a country not listed as a non-cooperative jurisdiction with Portugal. FYI: The above list includes over 70 states.
• After changes implemented in 2020, pension payments from another country are subject to a 10% income tax rate.
• In the absence of a tax treaty between Portugal and the country of income source, expatriates can benefit from the OECD Model Tax Convention and the provisions thereof.

Applications to participate in the Non-Habitual Resident tax regime shall be submitted by the end of the first quarter following the reporting period. The applicant’s nationality is irrelevant. Applications are submitted electronically through the financial portal of the Portuguese government.

Offshore advantages of Madeira – a self-governing region within Portugal

Entrepreneurs looking to establish an incorporated business can take advantage of an advantageous tax regime in Portugal. To achieve the above, it is enough to register a company in the Madeira International Business Centre (MIBC). 

Located in the autonomous region of Madeira, this center is strategically positioned approximately 1,000 kilometers away from mainland Portugal. The Portuguese government established the MIBC with the idea of leveraging its remote location in mind. The thing is, EU regulations are in place that are aimed at supporting ultra-peripheral regions. Until 2027, all companies registered in the Madeira International Business Centre benefit from a preferential corporate tax rate of 5%. This tax rate equals the international business zone with the widely recognized low-tax jurisdictions.

The benefits of establishing a business in Madeira for you are obvious:

• Enjoy a low corporate tax rate of 5%.
• Experience the absence of currency controls, as the National Bank of Portugal monitors transactions exceeding EUR 5,000.
• Gain an exemption from Portugal taxes imposed on the mainland.
• Benefit from zero customs duties when you import and export goods within the European Union. NB: raw materials shall originate from local sources or countries outside the EU for you to be eligible.
• Take advantage of bilateral agreements to prevent double taxation between Portugal and 60 countries worldwide.

Here are the requirements that offshore companies registered in Madeira shall meet to maintain substance:

• rent office space within the autonomous region
• employ a director and an accountant who are residents of Madeira
• create new job opportunities for residents, particularly in the manufacturing sector.

The Madeira International Business Centre offers reduced tax rates and fees:

• 5% corporate income tax (IRC) rate
• 22% value-added tax (VAT) rate
• 0% Portugal tax rate on dividends, interest, and royalties paid to non-residents
• exemption from the capital gains tax
• registration fee of EUR 1,500
• annual licensing fee ranging from EUR 1,000 to EUR 1,500.

Under specific conditions, offshore companies qualify for a tax credit that makes 50% of the corporate income tax.

Schedule a consultation with International Wealth to experience the benefits of Portugal’s International Business Centre and gain valuable insights into offshore company taxation. The International Wealth team of experts is dedicated to assisting you whenever you need it. Be it residency permits, company registration in Portugal, or the establishment of accounts with renowned international banks, International Wealth is the place to turn to.

To request a consultation and explore the possibilities, please contact us via info@offshore-pro.info. We look forward to hearing from you.