I’ve spent more time than I should looking at various setups for Digital Nomads who want a new residence to optimize both their corporate and personal income tax.
Like me, when you were researching such options, Portugal’s Non Habitual Residence (NHR) program likely came up.
I just want to share the information I have collected. In the process, I’ve spent time and money talking with tax consultants in Portugal. Conflicting information is everywhere, therefore please note that this is my interpretation of the various patchwork of laws and OECD frameworks and regulations.
If you disagree with any particular point, let me know why, I’d be happy to update this to be more accurate.
As much as I enjoy a cold Super Bock, I chose to not pursue setting up my residence in Portugal.
Hopefully this can help you in deciding whether or not Portugal’s NHR is for you.
The challenge of foreign sourced income
On paper Portuguese NHR looks great: For 10 years, you get a total exemption on taxes from foreign sourced income.
Any nifty digital nomads might think at this point: “Great I just need to figure out how to structure my income to make it “foreign sourced”.
During my travels I’ve met other nomads who just assumed their income would be foreign sourced and rushed right in to the NHR, only to get loads of headaches afterwards.
Of course, it goes without saying that any freelance type of work (even for foreign customers) will not be considered “foreign sourced” if you’re a resident and doing the work in Portugal.
I remember one person who said “but what if I’m in Bali or Thailand for 5 months, can that income be considered foreign sourced?”. Most likely you’re not declaring that income in Bali, Thailand, or any other place you might be travelling to, so it will be considered Portuguese sourced income.
What if I set up an offshore company?
So the question becomes, what if I set up a legal entity in an other country and pay myself dividends?
The frequent options to set this up include:
- Maltese trading and holding company.
- Cyprus LLC.
- If in the IT sector, Georgia’s IT tax free zone.
- A UAE company, or any other no tax jurisdiction.
You often see people talk about “Controlled Foreign Company” (CFC) regulations, and how that will be problematic.
Holding companies would fall into the scope of CFC regulations, but trading companies would not, as the income would be active and not passive. CFC is not the issue.
The trouble comes from the fact that your company will likely not have sufficient economic substance in those countries.
According to OECD frameworks, if you’re the sole shareholder and director, it can be deemed by Portuguese taxmen that the company’s effective place of management is Portugal and therefore that the corporation should be taxed in Portugal.
This would leave you liable for Corporate Income Tax as well as Personal Income Tax on the dividends. Not desirable.
You could try and get around it by renting offices in that country, hiring staff, appointing educated and qualified directors to the board, but you have to ask: do you really want to do all of this to avoid tax? Once you’ve gone through all these costs, will there really be any benefit to avoid tax?
If you’re making less than 30K / month, it is highly unlikely that there is any real benefit to going with such a set-up.
Furthermore, setting up such substance might avail you from tax obligations in Portugal, but it might not. If you are the most senior person in the company, that you reside in Portugal, and that you manage the company in Portugal, then having an office in Dubai with two staff, and flying there once a year to sign the board minutes might not be enough.
Of course, it is not a given that the tax authorities will hunt you down, but if you’re going to go to the effort of relocating and establishing a new home base, do you really want it done on a shaky foundation which has more holes than Swiss cheese?
For me the answer was a clear no. Swimming against the tide is tiring, and I want to sleep well at night.
Salvaging tax benefits of Portugal’s NHR
As a digital nomad with active income, Portugal’s NHR isn’t the tax free dream that local bean counters and lawyers pitch it as.
However, you can still achieve a reasonable tax rate with the NHR provided you set up a “transparent” entity.
I would be cautious about assuming that a US LLC (Delaware/Wyoming/New Mexico) will be considered transparent in Portugal. In the UK, Canada, and France, rulings have considered them opaque.
A UK LLP might be a better option.
You’d then declare UK LLP profits as professional income.
You’d have to pay 21.4% of social security on “relevant income”, which is 70% of reported income.
So if you make 100K in profits, you’d pay 14,980 or 14.9% in social security. It seems you can opt-in for a further 25% reduction, reducing this amount to 11,235 or 11.2%.
Finally you’d pay 20% income tax on the after SS profits, or 17,758.
This would mean that your total burden SS + Tax would be 28.9%.
For some, simply registering as a freelancer in Portugal and using the simplified tax regime rather than the NHR could result in better rates, depending on the amount of money you make, and your margins.
When looking for effective tax planning solutions, Portugal has brought up more questions than answers. No two professionals seem to agree, even on my final solution which would still come with a burden of 28.9%.
I ultimately decided against it, because living in doubt is not what I’m seeking to achieve.
What else can we add to this? In particular to my assessment of the best possible set-up for someone relocating to Portugal.