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New rules for non-habitual tax residents in Portugal

Written by
pbbr, the exclusive Portuguese member of Ius Laboris.
Under new rules, non-habitual tax residents in Portugal will no longer have to demonstrate they exercise a ‘high added value’ activity before submitting tax returns on that basis.

An Instruction from the Portuguese Tax Authorities was recently published, determining a change to the procedures for recognising the exercise of a high value-added activity by non-habitual tax residents.

Non-habitual tax residents benefit from a 20% Personal Income Tax flat rate applied to income derived from employment and/or business and professional activities that, according to the applicable Government Ruling, are deemed as high value-added activities. Otherwise, they will be subject to the normal tax rates that go up to 48%, plus a solidarity tax that can be of an additional 5%.

Until the publication of this Instruction, when applying for this regime, non-habitual tax residents were required to provide the Portuguese Tax Authorities with a set of documents to prove that they carry out an activity deemed a high value-added activity according to the relevant Government Ruling.

However, this prior recognition procedure was ‘excessively lengthy’, as acknowledged by the Portuguese Tax Authorities and non-habitual tax resident did not have clear guidelines on how to handle it, resulting in an unfair and even unjustified obstacle to the application of this tax regime.

In this context, the Portuguese Tax Authorities, aware of these difficulties, decided to withdraw the prior recognition procedure. Recognition of high value-added activity will now take place with the submission of the annual tax return or whenever requested by the services of the Portuguese Tax Authorities.

This means this regime will apply if and when the relevant requirements are met, and will apply directly from application of the law, with no prior act of recognition being required by the Portuguese Tax Authorities.

Additionally, the Portuguese Tax Authorities have identified some of the documents that non-habitual tax residents must hold to prove that they engage in high value-added activities.

Although there is nothing setting out the timing for application of the new rule in this Instruction, another Instruction was subsequently issued, confirming that this new procedure now applies to all non-habitual tax residents, including in particular those who are still waiting for a decision from the Portuguese Tax Authorities. In fact, all pending prior recognition procedures will be set aside as no longer relevant, allowing non-habitual tax residents to correct (if appropriate) any annual tax returns already submitted without applying the rules arising from this new regime.