Portugal changing world

Portugal in a changing world AUTOMATIC EXCHANGE OF FINANCIAL INFORMATION, TAX RESIDENCY AND OTHER TOPICS

Why Portugal?

Portugal is a safe and dynamic country, with a low crime rate, highly qualified workers (around 18% of the population has an academic degree) and excellent infrastructure (from roads, airports and ports to communication networks).

All of this is coupled with the fact that Portugal offers a great quality of life with excellent climate, good food and 800kms of beaches.

As is well known, Portugal has been through a deep economic crisis that is only now starting to end. The crisis has resulted in a steep decline in prices that was felt in all sectors of the economy, most markedly in the real estate sector. Therefore, Portugal is, at the moment, a cheap country, especially when compared with the vast majority of other European countries.

Historically, Portugal has not been a country which has attracted much foreign investment. However, this has recently been starting to change and we are currently witnessing a significant increase in interest from foreign investors.

Non-residents have also increasingly been looking at Portugal as a place to live for the whole or part of the year.

In our view, this upsurge in interest in our country is related to the fact that the economic crisis has created a large number of excellent investment opportunities as well as to two recent developments: The introduction of the ‘Golden Visa’ rules through which residency rights are granted to foreign investors; The introduction of a tax regime applicable to ‘non-habitual residents’ taxpayers that benefit from this regime will see most of their foreign-sourced income being exempt from tax in Portugal.

A foreign investor that benefits from the Golden Visa as well as from the tax rules applicable to non-habitual residents will: Have the right to reside in Portugal and circulate freely in the whole of the Schengen area (comprised of 26 European countries); Family members of the foreign investor will also have residency rights and rights of free movement within the Schengen area, provided certain conditions are met; Have a total tax exemption in relation to most of its foreign-sourced income and a low tax rate applicable to certain categories of Portuguese-sourced income, assuming certain conditions are met.

New rules relating to the automatic exchange of financial account information are currently being implemented throughout the world.

These have been introduced by the Organisation for Economic Co-Operation and Development (OECD) within its Common Reporting Standard (CRS) program. The exchange of information will be made by financial institutions to the country of which the client is a tax resident.

Taxpayers that acquire Portuguese tax residency via the non-habitual resident tax regime will become residents in Portugal for all tax purposes and should inform their banks and other financial institutions in which they have accounts of this change of circumstances. Under the rules of the CRS program, these taxpayers will be reported to the Portuguese tax authorities instead of being reported to the country in which they are currently resident.

10

+

million total population

18%

of the population has an academic degree

800 of beaches

kms

Residency rights in Portugal and granting of Portuguese nationality The Golden Visa is not, in reality, a visa. It is rather an authorisation for temporary residency for investment purposes.

Advantages of the Golden Visa

Possibility of entering and residing in Portugal without having to obtain a residency visa for these purposes; Residing and working in Portugal whilst maintaining their residency in another country (however, investors need to be careful about the interaction between the length of their stay in Portugal and the tax legislation in both Portugal and their country of origin); Free movement in the whole of the Schengen Area without having to obtain a visa for any of the Schengen area countries; Right to benefit from the ‘family gathering’ rules –family members of Golden Visa holders will also have residency rights in Portugal provided that certain conditions are met; After staying in Portugal for a period longer than 5 years, Golden Visa holders can request permanent residency; After staying in Portugal for a period longer than 6 years, foreign investors can ask to be granted Portuguese nationality.

Golden Visa: Investment requirements Make capital transfers to Portugal of amounts totalling at least 1 million euros; Acquire real estate totalling ¤500 000 or more; Acquire real estate totalling ¤350 000 or more when the acquired property is older than 30 years or is located in an area classified as an ‘urban intervention zone’ Investment totalling ¤350 000 or more in scientific or technological research; Investment totalling ¤250 000 or more in artistic productions or in the maintenance or recovery of national heritage; Investment totalling ¤500 000 or more in the acquisition of a participation in investment or venture capital funds directed to the capitalization of small and median sized companies; Investment which creates, at least, 10 new jobs in Portugal.

Acquisition of the Portuguese nationality Apart from the possibility of acquiring residency rights through the above mentioned Golden Visa program, there is also the possibility of acquiring the Portuguese nationality in certain limited circumstances, as follows:

Being the grandchild of a Portuguese national;

Being a descendent of the Sephardic Jew community;

As mentioned above, residing in Portugal for a period longer than 6 years.

Non-habitual tax residents The non-habitual tax resident status applies to taxpayers who:

Did not reside in Portugal for tax purposes in the previous five years;

Transfer their tax residency to Portugal.

Once acquired, the non-habitual resident tax status will be kept for a period of up to ten years provided that the Portuguese tax residency is maintained for each one of those years.

Based on a favourable tax regime, the non-habitual residency status intends to attract to Portugal foreign high-net-worth individuals as well as individuals that exercise in Portugal certain high valueadded activities.

The tax regime is particularly attractive in relation to nonPortuguese sourced income, since most foreign-sourced income will be exempt from tax in Portugal, provided certain conditions are met.

There is also the possibility of applying a reduced 20% tax rate to certain categories of Portuguese-sourced income.

Non-habitual residents taxation INCOME

TAXATION

Foreign-sourced employment income

Exempt in Portugal as long as it was effectively subject to tax in the country of source

Foreign-sourced self-employment income

Exempt in Portugal as long as certain requirements are met (see below)

Foreign-sourced royalties

Exempt in Portugal as long as certain requirements are met (see below)

Foreign-sourced pension income

Exempt in Portugal as long as the income is not considered as being Portuguese sourced under the applicable legislation or as long as the income is taxed in the country of source: in practice, almost all foreign-source pension income will be exempt from tax in Portugal

Foreign-sourced passive income (dividends, interest, capital-gains)

Exempt in Portugal as long as certain requirements are met (see below)

Portuguese-sourced employment income

Taxed in Portugal at a reduced 20% tax rate if considered a high-value added activity.

Taxed at the normal rates (up to 48%) if not considered a high value-added activity

Portuguese-sourced self-employment income

Taxed in Portugal at 20% if considered a high-value added activity. Taxed at the normal rates (up to 48%) if not considered a high value-added activity

In relation to foreign-sourced self-employment, royalty and other passive income, the requirements mentioned in the above table are:

That the income received can be taxed in the other jurisdiction in accordance with the applicable Double Tax Treaty (DTT) or, in the absence of such a Treaty, in accordance with the OECD Model Tax Treaty;

That the income is not considered to be Portuguese sourced income under the applicable Portuguese tax legislation; and

That the jurisdiction of source is not part of the Portuguese tax haven list.

As can be seen, there is no requirement that the foreign-sourced income be subject to tax in the other jurisdiction. The requirement states that there only needs to be the possibility of the other jurisdiction subjecting the income to tax, even if ultimately chooses not to do so.

Example – Country A does not impose withholding taxes (WHT) on dividend income paid out of that country. The DTT between Portugal and Country A (or, in the absence of such Treaty, the OECD Model) gives taxing rights both to Portugal and to Country A in relation to the dividend income. This means that, although the internal legislation of Country A does not impose WHT on dividends, Country A has the possibility of doing so, according to the Treaty or the OECD Model.

In this case, the dividend income will be exempt from Portuguese tax at the hands of the foreign investor. The dividend income will not be taxed in the state of source, nor will it be taxed in Portugal.

In practice, the tax regime applicable to non-habitual residents allows taxpayers with foreign-sourced income to structure their assets in such a way that most or all of the foreign-sourced income they receive will be exempt from tax in Portugal. With adequate planning it is possible to structure the assets in such a way that the income is also not subject to tax in the state of source, therefore escaping taxation altogether.

NOTE – there are not many countries in the world which offer such an attractive combination between a residency scheme - with the accompanying rights to free movement in all of Europe - and a very favourable tax regime for foreign-sourced income. This, coupled with the fact that Portugal is a safe and cheap country, which offers a high quality of life and is only a short flight away from all of Europe’s capitals, explains why our country is increasingly grabbing the attention of foreign investors from all over the world as well as from foreign individuals wishing to enjoy their retirement.

Automatic exchange of financial account information A true revolution is currently underway in terms of how exchange of information for tax purposes is carried out.

Until very recently, information was only exchanged between tax authorities on a specific basis and following specific requests for information. Going forward, the new rules on automatic exchange of information will require financial institutions to automatically report most financial account information.

99 countries throughout the world have already committed to implementing the new rules under the OECD CRS program starting in 2017 which means that this automatic exchange of information is taking a truly global dimension.

Financial institutions report taxpayers to their country of residence. A nonhabitual Portuguese tax resident is a tax resident of Portugal for all legal purposes. Therefore, as long as the financial institutions are informed of this new status, the report they make will be to the Portuguese tax authorities rather than to the tax authorities of the country of origin.

Other characteristics of the Portuguese tax system currently in force

No wealth taxes.

There are no inheritance taxes when the ascendants or descendants are the recipients of the inheritance.

There are no gift taxes where the ascendants or descendants are the recipients of the donation.

There are taxes levied on purchases of immovable property. However, a number of exemptions can apply where the purchase is carried out for the purposes of a subsequent sale or where the property is purchased and subsequently renovated.

There are a number of tax benefits which may be granted on investments carried out in Portugal, especially where these investments create new jobs.

A participation exemption regime was recently introduced. Dividends and capital gains are currently not taxed at the hands of the parent company provided certain conditions are met (5% shareholding, 2 year holding period and other conditions).

A favourable taxation regime for certain investment vehicles was recently created which results in the fund being transparent for tax purposes.

Low withholding tax rates apply to distributions / redemptions to foreign investors from these vehicles.

PORTO R. da Restauração, 348 4050-501 Porto · Portugal t. +351 220 308 800 f. +351 220 308 898/9 LISBOA Av. António Augusto de Aguiar, 15/5º 1050-012 Lisboa · Portugal t. +351 210 308 830 f. +351 210 308 839 Carlos Lucena Managing Partner

e. c.lucena@telles.pt t. +351 210 308 830 Miguel Torres Partner - Tax

e. m.torres@telles.pt t. +351 220 308 800 Henrique Moser Partner – Corporate and Real Estate

e. h.moser@telles.pt t. +351 210 308 830 João Araújo Associate – Tax and Financial Services

e. j.luisaraujo@telles.pt t. +351 220 308 800

www.telles.pt/en/Portugal www.telles.pt