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One of the biggest attractions in Portugal is the non-habitual residency (NHR) scheme, offering new residents ten years of low or even zero taxes on income and pensions.

With its beautiful scenery and warm climate, there are obvious attractions to living in Portugal. What is not so well known is that it also offers generous tax benefits that outshine many of its European neighbours.

Portuguese taxes are relatively low and there are tax-efficient arrangements available that can further lower expatriates' tax liabilities on pension income and investments. Those new to Portugal can benefit even more with the non-habitual residence (NHR) regime. This offers new residents special tax advantages for their first ten years in the country.

You could take advantage of the NHR scheme if you have not been a Portuguese resident within the last five years and you meet the residency requirements. You will likely be eligible to become a non-habitual resident if you spend more than 182 days a year in Portugal or your main home is here. If you tick these boxes, the next step is to apply for non-habitual residency through the Portuguese tax authorities.

The key benefits for non-habitual residents are:

  • A flat income tax rate of 20% – instead of the usual progressive rates up to 48% – if you work in a pre-defined ‘high value-added’ profession
  • Tax exemptions for foreign-source income, including pensions, rental income, capital gains on real estate (but not shares), interest and dividends

Foreign-source investment income for non-habitual residents is only exempt from Portuguese tax if it is taxable in the country of origin. Under the UK/Portugal tax treaty, most UK income and gains are taxable in Britain and therefore not taxed in Portugal for non-habitual residents. This applies even if in practice the income is not actually taxed in the UK.

Conversely, the same tax treaty makes UK pension income (but not government service pensions) taxable only in Portugal. Non-habitual residents, however, will not have to pay Portuguese tax here either, even if they take their whole pension fund as a lump sum under the new UK pension freedoms. This means you could end up paying no tax – in either country – on your UK pension income.

While the NHR scheme clearly offers significant tax benefits, it is complex and has potential downsides. It is important to take professional, personalised advice to establish what will work best for you. Even if you decide against it or you do not qualify for the NHR regime, Portugal’s favourable tax climate still makes it one of the most beneficial places for British expatriates to live in Europe.

Any questions? Ask our financial advisers for help.

The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.