“The hardest thing in the world to understand is the income tax”, Albert Einstein once said. Granted, his theory of relativity is not exactly easy to grasp, but getting one’s head around income tax rules is no walk in the park either. For a 10-year period, individuals eligible as Non-Habitual Resident regime can enjoy a simplified, more beneficial Personal Income Tax (PIT) regime. The benefits includes a special rate to employed and self-employed individuals and exemptions on certain foreign income such as interest, dividends, rental income, capital gains on real estate, royalties and, the most popular, pensions. In a snapshot, the regime applies to anyone that becomes Portuguese resident, who has not been resident in the 5 years prior to moving and applies within the deadline.
The Non-Habitual Resident regime applicable to employed and self-employed individuals sets a special 20% PIT flat rate on income from those sources. The income must result from high value added activities performed in Portugal. Those activities can be of a scientific, artistic or technical nature, with examples including doctors, university teachers, designers, architects, engineers, researchers, IT technicians, investors and managers. If you don’t have income deriving from a professional activity, depending on the country of source, using the domestic legislation of that country or the applicable tax treaties, it may be possible to have income that during the application of the regime will not be taxed at source nor in Portugal (the most popular being pensions, dividends and interests). As for the regime relevant for Non-Habitual Resident pensioners, it allows foreign-source pensions to be fully exempt from PIT, subject to certain conditions.
One of those conditions is that the source of the pension is not a Portuguese tax resident entity. The other is that the pensions are subject to tax in the source country. However, this condition may, in reality, not be required for cases in which the source country, based on its existing tax treaty with Portugal, does not tax the individual at the source. It is important to note that attribution of Non-Habitual Resident status is not automatic. It must be activated by fulfilling specific formalities. Had Einstein been a taxpayer under the current Non-Habitual Resident regime in Portugal, we bet his quote would have never been produced. But then again maybe his famous theory of relativity would not be around either. After all, living the good life can be an absolute distraction.