People have very different preferences. Some of our clients simply choose to live in Malta and operate a business from here. However, once you have decided that you want to live in a sunny location, there are also options other than Malta. Some choose to move to Spain, some decide on France, and others prefer to settle in Portugal.
Citizens residing in Portugal have the choice of registering under the Portuguese NHR, (non-habitual residence) programme. Registration and acceptance as a non-habitual resident exempts a person from paying taxes on most foreign sources of income for 10 years. Given existing international tax laws, I think this can be better defined as: a tax exemption on foreign passive and capital income.
This is my preliminary, professional interpretation of the Portuguese NHR rules and laws. Much like the non-dom status, I feel that a one-sided interpretation simplifies things a bit too much. Yeah, I’m going to be the strict German again. More on this below.
NHR Portugal: parallels with Malta’s “non-dom status”.
Most people vastly overestimate the possibilities of having non-dom status, and only see it from one side – usually the side of the country they want to move to. But don’t forget that there must always be another country from which the money comes, otherwise it would not be foreign income at all. And that other country might be entitled to taxes. Learn more in my webinar.
And then there is also the double taxation agreement (DTA) between Portugal and the foreign state. This could restrict Portugal in the application of Portuguese law. How does it work and why?
DBA > NHR.
International law > National law.
That’s why a one-sided interpretation provided on some consultant’s website might sound good – someone who claims that “Malta is so easy”. And that you won’t have to pay taxes in Portugal. And that you will live happily ever after.
International tax consulting: foresight is better than hindsight
Of course it’s true that there are fantastic possibilities. But presenting everything in such a one-sided way is like selling ice cream and not telling the customer that it will make him fat if he doesn’t have the willpower to eat it in moderation. Of course, it tastes fantastic, but that’s just one side of it.
I’ve seen a lot over the course of almost 20 years in the tax field, and I’ve seen rules, interpretations and practices change. Therefore, my advice is: never borderline, and remain conservative at all times. I try to anticipate future changes and interpretations.
That’s what I call sustainable tax consulting: always being one step ahead.
Avoiding mistakes when establishing an international company. Get free advice now.
Myth: Double zero tax – not even in Portugal (NHR)
The reason for this is that normally, the foreign country would tax all income under its own jurisdiction and would only give up this right if it complied with the relevant double taxation treaty with Portugal. It is a myth that double no-tax solutions (often referred to as “double no-tax” arrangements) are legally possible. And it is simply a lie that this is even desired or intentionally built into laws.
If there is no risk or chance of double taxation, then of course, the double taxation treaty should not apply at all.
However, there are still ways to structure your affairs efficiently – we’ll get to that later. Before that, however, let’s take a closer look at what it means and what it takes to become a non-ordinary resident in Portugal.
Legal requirements for the NHR programme in Portugal
First of all, there are the legal requirements:
You must stay in Portugal for at least 183 days per calendar year or (the or is very important) have your centre of vital interests in Portugal. I am aware that the domestic guidelines of the Portuguese Tax Office provide for a slightly different interpretation for persons living in Portugal for less than 183 days, as follows.
“When remaining for less time there (than 183 days), to have a house in such condition that it is implied the current intention is to maintain it and occupy it as a habitual residence.”
So this basically means
“If you live there for a shorter time (than 183 days), you need to have a residence in such a condition that the impression exists, that you intend to maintain it and use it as your habitual residence”
… This makes it seem easier than Portugal being your centre of life interests. However, I would say that in the event of a challenge by a foreign, non-Portuguese tax authority, one would still have to apply the OECD Model Convention tiebreaker, and that would potentially limit Portuguese domestic law. Sorry, but I have to be very technical here; I’d be happy to explain it further during a consultation.
To play it safe and allow common sense and reason to prevail, I would say that the best way forward would be to move your centre of life interests – your entire life – to Portugal.
Yeah, I’m being German again. Just move to Portugal and live there! It’s a beautiful country. Take your family with you. Meet new friends. Join a book club and embrace the vibrant culture. Of course, you can leave Portugal from time to time, and visit friends and family abroad. You don’t need an accountant to tell you how many days to spend where. Just really live there. That’s all it takes. It’s like a business or a restaurant without price tags: If you have to ask how much it costs, you can’t afford it.
Either way, let’s assume that a person has now moved to Portugal, has officially applied for NHR, and has been accepted as a non-resident in Portugal.
Live in Portugal and establish a company abroad (e.g. Malta Limited)
Most people now think “That’s it!” They think they can just set up a business in the UK or Malta and live happily ever after in Portugal, but from a tax point of view, that won’t be the case, because according to the NHR rules, the income that is not taxed has to be foreign. You are right when you say that a company in Malta is foreign for Portugal. However, according to tax laws, that is not always the case. As always, when it comes to money and taxes, things get complicated. However, this complication is nothing new. And there’s nothing special about it. And there is nothing illogical about it either.
These are the good, old-fashioned, controlled foreign company rules, or, in short, the CFC rules (again, I will explain this in detail in my webinar).
If you manage and operate a Maltese or UK company in and from Portugal, the Portuguese tax office has the right, under the CFC rules, to audit the company – which means that the company does not exist for tax purposes. And if the company does not exist and is screened, suddenly the only person remaining is a natural person residing in Portugal. And that natural resident is taxed at the full income tax rates, because suddenly, the person and the income are no longer foreign. This is the point at which the NHR rules cannot be applied.
The solution: a combination of NHR and Malta Limited
Since I mentioned the good, old fashioned CFC rules…even though a very nice Portuguese legislator has made it so easy for the NHR to register individuals, you should disregard the domestic Portuguese CFC rules: In 2020, the European Union made it mandatory for each member country to implement CFC rules into national law.. This has been done within the framework of the Anti-Tax Avoidance Directive (ATAD).
In this very ATAD (which, as we know, has been transposed into Portuguese law) you will see the legal background to the above: the substance carves out or substance escapes. This means that if you establish and operate a legal entity in the EU / EEA for a genuine economic purpose, within the framework of an actual, genuine activity, you have nothing to fear.
To cut a long story short: if you are registered under the NHR programme, it is very important that whatever foreign company you use, that company must be based in a country with an advantageous tax rate, like Malta: you will need substance.
What does substance mean in the context of a Malta Limited company?
Substance in Malta means having an operation there, even if it is small; e.g. having a management/director there, and having value creation in Malta.
Mind you, dear folks: even if you have substance in Malta, you can knowingly or unknowingly, but most importantly, also establish a permanent business premises in Portugal for the MT entity.
How? By simply running the business. That doesn’t mean establishing a top CEO position there: ANY management position (HR, IT, etc.) will do.
See the Maltese-Portuguese double taxation treaty Art 5.
And as a special treat, the same contract also includes the option of a so-called service facility. Read it for yourself first.
Now, a brief summary
If you are an entrepreneur and want to benefit from NHR status, one option is to establish a company outside Portugal. By incorporating a Malta Limited company, you do not have to pay taxes in Portugal, as the profits of the company count as foreign income, which is tax free under the NHR programme. However, you should familiarise yourself with the applicable legal requirements. In my experience, a one-sided view of the law is not advisable. You should rather be guided by what the law says at its core, and what the legislature intended.
Moreover, merely establishing a Malta Limited company is not enough. Issues such as DTAs, CFC rules and substance, as well as value creation, should also be taken into account.
I can advise you on how to get this up and running properly, yet cost-effectively. This would include advice on the overall structure and scheme, establishment of a company, and also registration in Portugal. Then there are the local Portuguese issues – such as finding housing or local management.
And this includes advice in your specific case, in the specific substance and in the ongoing support of your business, e.g. bookkeeping, accounting, provision of an office, etc.
