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

(TF) #1

Hi Everyone.

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


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).


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.


(Thomas K. Running) #2

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.


(PC) #3

@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!


(Slart E. B.) #4

@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?


(TF) #5

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


(TF) #6

@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.


(Nabil) #7

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?


(Thomas K. Running) #8

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.