Benefitting from Portugal's NHR scheme as a freelancer with foreign clients

Tax and legal
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Hi Everyone.

I’m hoping the wonderful @tkrunning or anyone else with direct NHR experience may be able to offer some advice/insight.

Specifically:

I’m British but live in Portugal and am tax resident here. I’m also registered for the NHR scheme. Professionally, I am a software developer/systems guy (with a Comp Sci degree) thus my work falls in to one of the favoured NHR liberal professions.

I will shortly start freelancing for a non-PT company, based in Northern Europe.The work I do for them will be exclusively software dev/systems planning and I will do this remotely from my home in Portugal. There may be very occasional on-site visits to their office but that’s it. My work will be auxilliary/preparatory in nature (supporting their in-house dev team) and so there’s no risk of them inadvertently creating a permanent establishment here in PT.

Under NHR, foreign source non-employment income (e.g. self-employed, dividends, royalties etc.) is not subject to income tax in PT if there exists the possibility of it being taxed in the source country. A good example of this is receiving dividends from a UK Ltd company. Under the UK/PT DTA, the UK has the right to charge tax on dividends to non-residents but in practice does not. This is sufficient to meet NHR’s criteria that the income “may” be taxed and thus no tax is due in PT nor the UK.

What none of the generally available on-line advice mentions is that while, yes, dividend income from a UK Ltd (or similar structure in another country) would not attract income tax in PT; profits for the UK Ltd would still be subject to UK corporation tax. Furthermore, if you are the sole owner, director, employee of the company (i.e. not a retired shareholder of a large company); the PT taxman will apply an “effective management” test and deem that the company you are receiving dividends from is actually an artificial arrangement and should in fact be treated (and taxed) as being a PT resident company (thus negating all of the benefits of NHR).

Given the above, how can a solo freelancer (working in one of the NHR’s favoured professions and exclusively providing services to non-PT based clients) benefit from NHR?

The only possible glimmer of hope I can see rests with Article 14 of the OECD model tax treaty:

"(1) Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other Contracting State but only so much of it is as attributable to that fixed base.

(2) The term “professional services” includes, especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants."

I’m not sure if this is strong enough to satisfy NHR since Article 14 says only the work performed at the fixed foreign base can be taxed by the foreign country (implying the rest of the work could only be taxed in Portugal).

I’m left to conclude that all NHR can offer solo freelancers like me is a flat 20% income tax. I would then need to pay social charges at ~21.4% on 70% of my income ( at least I think that’s the formula for self-employed people?).

This is quite a poor deal compared to a rich, retired executive who receives dividends from his foreign shareholdings. In his case, he would pay no tax on the dividend income and only about €2.6K on social security (i.e. the same amount as a person on minimum wage here in Portugal would pay).

Would love to hear if I’m missing something? Or if there is, in effect, a safe way to create a company outside Portugal and receive dividend income from it (without falling foul of effective management/CFC/BEPS/artificial arrangement rules).

Thanks!

P.S. I feel like I must be missing something because I keep bumping into articles like the following two which seem to suggest foreign source self-employed income (earned through a qualifying profession) will not be subject to PT income tax under NHR. I can’t figure out how that’s possible unless Article 14 of the OECD model tax convention (which is present in most of the DTAs Portugal has with other countries) is indeed sufficiently strong enough.

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Let me just preface this that I’m not an expert on Portuguese taxes, so take what I’m saying below with a grain of salt.

Another example of exempt earnings is income that’s effectively taxed abroad, e.g. director/board member fees. Typically that kind of income is liable for income tax (and sometimes even social tax—unless it’s an EU country and you get an A1 from Portugal) in the source country, and hence wouldn’t be taxed in Portugal under NHR. Not sure if you’d find jurisdictions where this route would make sense, but could be worth looking into.

That’s correct. Which is why expensive structures involving Malta (effective ~5% corporate tax) have been popular, but the Portuguese Tax Authority is aware of that and looking more and more closely at those setups. UK corporate tax will luckily soon be 17%, which isn’t bad.

Also true, at least in theory. They should apply that test, but in practice they don’t seem to do it very often (at least for expats). I know many people who received advice from local experts telling them to go that route. That seems fishy to me, and I wouldn’t personally recommend it—at least if you like sleeping well at night.

I’m not 100% sure how that social tax calculation works for freelancers. I do think I remember something about being able to choose how much social tax you want to pay as self-employed, and receiving benefits in accordance with that. But I think they changed at lot starting this year, and I haven’t had the time to look into those changes yet.

I’d definitely recommend talking to a local tax adviser on this. I do believe I’ve heard that you can get away with paying social security contributions equivalent to what you would pay earning the minimum wage, but I might be mistaken.

Not sure about this—I never heard about anyone using Article 14 of the OECD treaty for NHR purposes. My intuition is the same as yours, but might be worth discussing with a tax adviser.

If you do get some more conclusive answers to any of these questions it would be fantastic if you reported back here. I think a lot of people are in a similar position.

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@tunafish looks like we’re on a similar boat. The NHR programme seems obscure in its designation of “foreign sourced income” and also doesn’t make any concessions in the social security tax department. Please do update this thread as you learn more. I’ll do the same from my end!

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@tunafish Also looking into the NHR policy, and also share your concerns about controlled foreign corporation (CFC) rules.

But in your particular instance, why not have the Northern European client hire and pay you directly as an individual, instead of hire and pay your company? Wouldn’t that make this completely kosher “favored profession” foreign-sourced income? Are you concerned about personal liability?

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@slartibartfast this client doesn’t want the hoops of employment and I also hope to add further, unrelated, clients during the year.

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@plasticcup indeed, “foreign sourced” is very nebulous in the official NHR guide from PT taxman - I can’t find any hard and fast definition. I’ll keep you posted with my findings.

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Have you declared yourself non resident to the UK tax authorities? If so, couldn’t you pay yourself directly into the UK as a person, not a business, and there should be no tax issues there. As the income is derived from a company outside of Portugal hopefully all would be well?

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From a legal/tax perspective it doesn’t matter where you pay yourself (i.e. in which country your bank account is located), since Portugal (and most other countries—Malta being a notable exception) doesn’t operate with remittance based taxation. What primarily matters is where you perform the work you’re being paid for.

I’m not saying that you in practice won’t get away with something like that, but I wouldn’t recommend it. With automatic exchange of information there’s more and more transparency between countries, and the UK would report your bank balances there to Portugal anyway.

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@tunafish did you make any progress on this?

Working out the Portuguese system has been a nightmare for me so far.

In theory NHR sounds great, but when SS is added at 34.75% it loses some of its charm.

The self-employed route under the simplified regime seems to make the most sense if billing under 200K EUR as detailed here on page 23 of this PDF: https://www.eurofinesco.com/en/our-publications/nhr/49-e31-nhr-a5-tablet-colour-cover-trams-2nd-08-08-2016/file

However, it looks like they’re using a generous 65% coefficient against revenue for expenses which sounds upside-down, and then SS seems to be capped at some point for reasons that aren’t clear to me.

Going the LDA Unipessoal route seems like a CT of 21% and then paying yourself a ‘reasonable’ Portuguese salary (40k?!) which will then have PIT of 20% (NHR), but then a massive 34.75% SS. I imagine the rest can be taken as dividends/perf. related pay at the 20% NHR rate – but it still works out pretty nightmarish.

Did you uncover anything that paints a more positive picture?

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Currently trying to find tax advice on this topic.

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Yes, I am currently in the same boat. Did you find someone suitable with good advice on the topic?

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Hi Tunafish, just curious if you’ve received any positive feedback regarding the matter? I’m in the same boat, so if you’ve found someone for decent advice, I would love to get in touch.

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So, here’s my understanding so far:

The foreign-sourced income exclusion will only work if you are receiving a passive income from, say, a pension. The effective management rule all but rules out any ideas of running a limited company elsewhere, and if you’re self-employed (sole proprietor), the portion of work that you are performing in Portugal – even if the client is non-domestic – will be deemed domestic income.

However – the PDF document that I linked above is at least partially correct. Self-employed persons earning under 200K EUR can opt-in to something called simplified reporting with the tax authorities. This means you report only revenue to the tax man, and then have a coefficient applied to your total income to determine your ‘profit’ – and therefore taxable income.

For example, if your business is considered a ‘professional services activity’ you must apply a coefficient of 75% to your total income to determine ‘profit’, and it is this number that tax and SS will apply to (100K income, 75K is taxable). If your profession is ‘vocational’ services then you get to apply a 35% coefficient (100K income, just 35K is taxable!) – but if you’re going for the value added NHR, this likely wouldn’t apply to you – there’s conflicting opinions on this, though.

Social security is calculated on your taxable income, and therefore on a 100K income – with the 75% liberal professions coefficient – you will pay SS on 75K. Self-employed persons pay SS at 21.4% and benefit from a cap on SS at 12x IAS of 435 EUR – so the maximum SS you will pay is 13,428 EUR.

An additional complication with the ‘simplified’ regime added recently is that – although you don’t need to supply invoices – if you don’t supply invoices proving at least 15% of your revenue – the difference will be added to your taxable income. e.g. 100K income, 15K expenses = 75K taxable income. whereas 100K income, 10K expenses = 80K taxable income. In practice, if you’re hitting your limit for SS you already get a deduction of 4104 EUR, so – if you have at least 10,896 EUR in expenses this won’t affect you.

What this means is – if you’re hitting the 15% of revenue as expenses mark – at 50K income you have an effective tax rate of 30%, at 100K it’s 28.4%, at 150K the social security cap has kicked in and we’re at ~25%, 200K we’re down to 21.7%, and then after 200K we’ve been booted off the simplified regime and are at 23%.

With zero expenses – at 50K - 31%, at 100K - 30.6%, at 150K - 26.4%, 200K - 24.3%, and then at 250K - 25%.

Two rather large credit shaped cherries on the cake though:

For the first year of work you pay no SS. This lasts for 12 months after the point you begin working.

Then, in your first year of returns as self-employed reporting you get a 50% credit on your PIT rate. So your 20% flat-rate NHR becomes 10%. You also get a 25% credit in year two. So your PIT rate is only 15%. Unlike the SS benefit, this applies to calendar years only – so try and start billing in January to get the full twelve months at 50%!

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Hi,

I have a company in Hong Kong we are 2 shareholders and I have the NHR, do you think I will pay taxes on the dividends?
Thanks

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Hi there,

have you found anybody who was able to shed some light on this subject. ?

My situation is even worse since most payments I receive are coming from a Black listed country like Isle of Man etc. :frowning:
Ideas to get around that? Company set up has got to be ace for that I guess?

Thanks

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Hello Armenia, you should be OK because although HK is blacklisted in Portugal, there is a double tax treaty between the two. The Portuguese tax authorities have confirmed that in these cases dividends shall be tax exempt in Portugal. Stay well and best wishes, G

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I very much doubt any double tax treaty would waive the CFC rules:

Essentially, if you have a company in HK/Isle of Man. But, ‘effectively’, it is managed in Portugal, the Portuguese authorities will deem it a CFC (Controlled Foreign Corporation). Once that happens, the company will be taxed as if it were a domestic Portuguese entity. All the double treaty will do is limit the tax you pay to the higher amount of tax between the two countries through a tax credit for any tax already paid in the entity’s native country.

Whether of not an entity is deemed a CFC is determined by various criteria depending on territory but usually some combination of:

  • Effective management rule. Is the business controlled by persons resident in the authority’s jurisdiction? This may be determined by a threshold percentage of voting shares owned by a person or persons from the jurisdiction. Perhaps as low as 15%.
  • Plant and machinery. Does the business have significant physical operations in another territory which form the basis of its operations.
  • Attribution of income. In which territories are sales generated?
  • Entities domiciled or resident in a blacklist jurisdiction continue to be considered CFCs, regardless of other conditions.

These rules for CFCs are designed to act as a deterrent for ‘tax jurisdiction shopping’. They do this by raising the complexity of reporting requirements for foreign corporations to the point that it becomes more cost and time effective to simply operate through a domestic entity.

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As far as dividends from HK are concerned, these can be tax exempt under the NHR rules. Again, the Portuguese tax authorities have confirmed it.

Regarding the CFC rules, these have nothing to do with effective management of the company. In other words:

  • a non-Portuguese company effectively managed from Portugal may be deemed tax resident in Portugal and thus subject to corporate income tax in Portugal (i.e. this relates to the company itself and has nothing to do with the CFC rules);
  • CFC rules may apply to non-Portuguese/EU companies based on (i) % of shareholding by a Portuguese-resident, (ii) taxes effectively paid in the relevant country, (iii) the relevant country being a blacklisted jurisdiction.
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Dividends from a foreign entity may be tax exempt under NHR. However, if that entity is deemed a CFC it will be taxed as a domestic entity.

Regarding the CFC rules, these have nothing to do with effective management of the company

I guess that depends on your interpretation, here’s PwC’s:

Imputation of profits obtained by non-resident entities subject to a clearly more favorable tax regime (CFC rules)

Profits or income obtained by non-resident entities that are clearly subject to a more favorable tax regime, are imputed to the Portuguese resident taxpayers subject to Corporate Income Tax (CIT) that hold either direct or indirectly, even if through a representative, fiduciary or intermediary, at least 25% of their share capital, voting rights or attribution rights over the income or the assets of those non-resident entities.

Whenever at least 50% of the non-resident entity’s share capital, of voting rights or of other rights over income or assets, are held, directly or indirectly, even through a third party, by entities subject to Portuguese PIT or CIT, the mentioned percentage is 10%.

Source: CIT | Tax guide 2019 | PwC Portugal

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I’m sorry to say this but what you’re stating is not correct.

Tax residence and CFC rules are different:

  • a company will be deemed resident for tax purposes in Portugal if its head office is located in Portugal or if it is effectively managed from Portugal. The consequence: if a foreign company is effectively managed from Portugal, then it shall be deemed resident for tax purposes in Portugal and thus treated (and taxed) like any other company in Portugal.

  • if a foreign company meets the criteria set under the CFC rules, then that company’s income for the period shall be attributed to its PT resident shareholder(s) irrespective of whether that income is distributed or not to the latter. CFC rules are about control of the foreign company, not management. As you can see from PwC’s interpretation (as you call it) of the CFC rules, “management” is not even mentioned. Likewise, if you look at the law (art. 66 of the CIT code), there is no reference to “management”. It’s all about “control”.

Lastly, any issues between Portugal and say HK would be dealt with under the double tax treaty (which, by the way, is supposed to prevail over internal law - e.g. the CFC rules).