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.