UK Employee - work remotely from Portugal - NHR opportunities?

Tax and legal
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Hi,

With everything going on in the world at the moment and no return to the office on the horizon (or ever…?), i was toying with the idea of potentially moving full-time to Portugal (before Brexit) and “working remotely” and continuing in my job as an employee for my UK Employer (mid-sized tech company, HQ-ed in UK).

The following are probably basic questions, but I’m struggling to find answers and wondered if anyone could help:

- would I be taxed by the UK tax authorities or the Portuguese tax authorities?
I would be working remotely for UK company as an employee (not a contractor), but living full-time in Portugal - so which country would charge income tax / social security? I’m not sure which has higher tax/social security levels - so not sure if either is better/worse!

- would NHR be available or offer any advantages? I read something about Portugal’s NHR only charges a flat 20% income tax (i pay 40% tax in UK) - I’m a software engineer so should fall into one of the NHR professional buckets. How would that work? Would I tell the UK tax authorities that I’m a Portuguese tax resident (and register in Portugal etc), my employer would pay me my “gross” salary and Portugal would then tax me at 20%?

This might all be a pipe dream, but thought i’d ask to see if anyone could give me some direction and then i’ll dig into it more.

Thanks in advance!

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https://tax-free.today/blog/nhr-residency-in-portugal/

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@sm33 I’m in a similar situation, have you managed to figure this out?

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Sort of…! This is the way I understand it - though i could be wrong:

Benefits / Negatives for you - Income Tax & Social Security
If you move and work remotely from Portugal, you can can apply for NHR (reduce your income tax to a fixed 20%), BUT, you will have to pay Social Security, which is pretty high. In the UK, for higher earners, Social Security tax / NI, is capped and so it might only be ~4% of gross income. In Portugal, it isn’t capped, so it really is ~11% of your gross income. If you’re only doing it for 2-ish years, then you can apply to continue paying UK National Insurance (instead of Portuguese Social Security) - as it’s considered to be “temporary”, but i think your employer has to fill in a form to request that.

So, you can save a fair amount on your income tax, but when you factor in the personal allowances you get in the UK (first ~£10k is exempted of income tax in UK) + factor in higher Social Security payments in Portugal, the savings won’t be as much as you first think (at least, it wasn’t for me). Added to that, you can’t come back to UK for more than ~90 days / year (number of days varies on circumstances, but roughly) - that might be fine for you, but just mentioning it… plus, if you sell UK assets (e.g. your main house), you’ll have to pay Portuguese capital gains tax - whereas in the UK as a UK tax payer, that would be exempt as it was your main home.

Impact on Employer

  • Tax: your UK employer will be able to change the UK tax code to a “works abroad” tax code.
  • National Insurance / Social Security - as above, they might confirm you’re only working abroad for a couple of years so you can continue to pay UK National Insurance (instead of Portuguese Social Security)

The negatives for your employer is that (as far as i understand it), if the employer doesn’t fill out the “he’s only there for 2 years, so we will pay UK NI” form, then they will be liable to pay Portuguese Social Security for you, which is much higher for them (i think 5-10% higher from memory). They will also have to make sure that you comply with all Portuguese laws in terms of your employment etc.

Solution 1 - become a contractor
You could become a self employed contractor with them - i.e. you quit your job / no longer are an employee, but they take you on as a contractor. You are then liable to sort out all your tax / social security etc. To me, the issue with this approach is you lose all your protections - e.g. if they want to lay you off, you don’t get redundancy and they can just lay you off for no reason as you’re not an employee.

Solution 2 - use a middle man / “Body Shop”
My company has done this before. Basically, you technically become an employee of a different company (it’s a specialist company, that’s used for this purpose - to act as a middle man) and they take care of tax / national insurance etc, but you continue to provide your services to your original-employer. This middle man / body shop invoices your old-employer (with a slight uplift for their costs) and the middle man/body shop pays you. The benefit is that they take care of local taxes / laws / issues.

Here’s a bit I found about this, which explains it a lot better:
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BODY SHOP

  1. the person resigns and sets himself up as self employed in the other country, agreeing a contract for services with the UK company. Here they accept total responsibility for conformity with local legislation (tax, social security, immigration, employment law) as well as organising their own life insurance, medical cover, pension etc.

  2. You identify a local “body shop” which employs the person and sets up a contract for services with the UK company. All employment issues are now with the body shop and no longer with you.

Find a Spanish body-shop and transfer his employment contract to this local company, who will bill you for the services of this person (with a mark-up). You will also probably need to give him guarantees concerning future dismissal rights, recognising length of service etc.

As a longstop, he could set up his own business and invoice you, thereby transferring the risks to himself. He will need to charge you an amount at least equal to his salary plus employer’s contributions, plus medical and pension contributions…plus mark-up to cover professional accounting advice and administrative fees.

—

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@sm33 Amazing! Thank yous so much!!! this is incredibly helpful! Please also see this that I found interesting and useful https://www.eurofinesco.com/en/our-publications/nhr/49-e31-nhr-a5-tablet-colour-cover-trams-2nd-08-08-2016/file

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Hi,

I’m on a similar situation. I am a Portuguese national working in the UK. Due to the pandemic I have spent more time in Portugal and now negotiating with the company if I can stay here permanently . They’ve raised the flag that they would have to register the company in Portugal and that would mean severe tax implication on their end and thus I’m trying to find an alternative solution.

  • If I’m employed by them and my salary gets processed by a service provider (who deals with the PT contributions etc.) do they really need to register themselves as an entity in Portugal? Not sure if this relates with the Body Shop example and I wasn’t clear if I would have to be employed by Body Shop.

  • How does the “The employee is working temporary therefore we will register to continue to pay UK NI” actually work? Are there any set of conditions to be met? And how would that look at the eyes of PT tax? If anyone has more info on the matter would be great.

Thanks!

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Hi,

I’m no expert at all on this - so this might not be correct (anyone else, please correct me!), but from what I understand:

[I use UK / Portugal for your situation]:

(i) if you use a middle man / body shop (in your case, the body shop would be based in Portugal and would have all the necessary tax / social security / payroll systems set up), then you are technically employed by the body shop (not your uk employer), and therefore there’s no problem - your UK employer would just pay the body shop, who would then sort out any taxes and then pay you.

If you don’t use a body shop and instead, your employer (UK) pays you directly (i.e. no body shop), then no, i don’t think your UK needs to set up in Portugal. The concern for Big Companies is that if very senior (e.g. CEO / top decision makers) are based in Portugal, but working for a UK company, then the local authorities (Portugal) consider that all the important management / decision making is done in Portugal and therefore the company should be treated as a Portuguese company and taxed as a Portuguese company. If you’re a middle-level employee or junior employee that’s not a problem. The issue that UK employer could face is that it’s not complying with Portuguese health and safety law (e.g. what if you have an accident? Or they don’t give you certain benefits that employees are meant to get in Portugal.That’s the bigger concern for a UK company, not tax, if you’re a junior/mid-level employee.

(ii) - I’ve highlighted the section on the UK Government website about you being able to pay UK national insurance for 2 years, even if you’re in Portugal (or elsewhere): National Insurance if you go abroad - GOV.UK - your UK employer has to fill in a form.

So, in summary, for up to 2-ish years, if you’re not a super-senior employee, then i think they (UK employer) should be able to do it without too many issues. Some employers may worry about health and safety liability / other local benefits, others won’t.

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Hey,

This is great thanks! I’m mid-level management therefore there shouldn’t be an issues and that’s what I need to advise further HR on.

Concerning the 2years solution, do they have to have a specific reason for me to be working out of portugal? I mean they had to send me on a project with company XYZ or can they just base it on the fact I want to work from home there?

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I don’t think you / the UK employer has to say very much in any form to the UK authorities (i.e. maybe just a sentence or 2, keep it vague / high-level) - perhaps just say something like,

“[employee] temporary placement in Portugal to assist with exploring business opportunities and growth for [UK Company] in Portugal”.

Normally in these situations, the less you say the better!

That said i’ve never done it. Let us know how you get on / anything you learn.

This article seemed to have a little more information about paying NI instead of Portuguese social security (it seemed to say, you can do that for up to 5 years) - National Insurance for Employees Working Abroad: In-depth | Croner-i

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In the original post there was a question if the individual would be taxed in UK as well. I don’t think it was answered.

Under NHR it is possible to pay 0 tax in Portugal in case of Solution 1 - becoming the contractor (registered as freelancer in Portugal - I believe).

But acording to this, the earnings would need to be reported
(Also it seems the allowance of ~£10k is still there.)

I am not sure if this applies to the work performed remotely.

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Where is the 90 days rule coming from? Do you mean that in order to maintain my NHR tax residency in Portugal, I must physically stay in Portugal all year long (except 90 days)?

That said, how about Solution 3 - transfer with the same employer to Portugal, and pay 20% NHR tax + 11% Social Security = 31% total tax in Portugal? Provided of course that your employer already has a Portuguese legal entity AND that your profession is eligible for 20% flat rate under Portugal NHR.
If that would work from the tax standpoint, do you still need to maintain any physical residency requirement of either country, i.e. NOT stay in the UK for more than 90 days per year?
Assuming NHR status is maintained AND you have to declare your foreign income in the UK to HMRC because UK also considers you a tax resident (because you stayed X days in a year in the UK), could you simply declare in the UK that you have been already taxed on your foreign income?

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>>>>Where is the 90 days rule coming from?

There 2 competing things here:

  • escaping the clutches of the UK Tax Authorities / HMRC;
  • maintain NHR / tax residency in Portugal.

For the first one, the [90] days is about escaping from the tax clutches of the UK - it’s the maximum number of days you can be in the UK per year before you are deemed a “UK tax resident”, irrespective of if you’re also a tax resident elsewhere (e.g. in Portugal). (Note: the number of days varies for person to person, from 30-ish days to 150-ish days, depending on how many ties you have to the UK - if you have family there, do you have children at school in the UK, if you own property and a whole host of things - it’s on the UK Government website). As a very general rule of thumb, 90 days is a good average to use - but it depends on your own situation.

In terms of tax residency in Portugal, I think you’re deemed tax resident provided you are are in the country for more than 180 days / year in Portugal.

I should stress that I’m no tax expert, this is just what I understand.

“That said, how about Solution 3 - transfer with the same employer to Portugal, and pay 20% NHR tax + 11% Social Security = 33% total tax in Portugal? Provided of course that your employer already has a Portuguese legal entity AND that your profession is eligible for 20% flat rate under Portugal NHR. If that would work from the tax standpoint, do you still need to maintain any physical residency requirement of either country, i.e. NOT stay in the UK for more than 90 days per year?”

Correct, as far as i understand - and provided you’re not back in the UK for more than [90] days per year.

“Assuming NHR status is maintained AND you have to declare your foreign income in the UK to HMRC because UK also considers you a tax resident (because you stayed X days in a year in the UK), could you simply declare in the UK that you have been already taxed on your foreign income?”

If you’ve not been in the UK for more than [90] days per year, then you wouldn’t be a UK tax resident (i think you have to fill in a form to tell HMRC that you’ve left and you’re not a uk tax resident), so you don’t have to declare foreign income to the UK.

If you exceed [90] days in the UK, then irrespective of being a Portuguese tax resident (under NHR), this is where the Double Taxation Treaty kicks in - both countries will want a slice of tax, and that’s something you want to avoid. You wouldn’t double pay tax (as that’s the whole point of the Double Taxation Treaty), but it gets messy as to which country is entitled to which tax - it’s set out in the Portugal-UK Double Taxation Treaty. It sounds awful, but it’s not that long and not too difficult to read… though the devil is in the detail and you’d want specialist international tax advice.

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Thanks a lot for your response!
It sounds like I am on the right track with my line of thought on the Solution 3 though.

Firstly, I understand that the NHR and tax residency in Portugal can be maintained by obtaining the ARI aka Golden Visa, under which the requirements to be physically present in Portugal are as low as 7 days per year!

Secondly, even if I maintain the UK tax residency and submit my tax self-assessment, I would be declaring my foreign income from employment, which will have been already taxed at source by Portugal. Surely under DTA the UK HMRC will not tax me again on the same foreign employment income?

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This is a little beyond me - there’ll certainly be better experts on here to advise…! It’d certainly be interesting if your suggestion would work.

My 2 cents are that I think HMRC would say:

“Sure, you’ve got an employment contract in Portugal and you are declaring you’re a “tax resident” there with NHR. But, you live in the UK as you’re here for more than [90] days, therefore making you a “uk tax resident” [which i don’t think you’re disputing - you mention you’d keep your UK tax residency]. But, the earnings from your remote-Portuguese job are not “foreign earnings” as you’re actually physically in the UK and doing the work from here in the UK, and therefore UK taxes and UK National Insurance apply (and trumps anything you’ve got with NHR in Portugal)”. [i think they’re just ‘earnings / salary paid by a foreign company’]

It’s just I recall something about income being taxed based on where the work is done, which is primarily based on where you physically are when you do the work. Otherwise, you’d get paid by a company in a low / no tax country, but keep merrily living in the UK or wherever (effectively tax free).

I could be completely wrong - but will be interesting to hear what the real tax experts say!

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Ok, I have checked the UK Residency tests and found that indeed 90 day would be a residency threshold for me.
That is if I spend 91 days or more in the UK in a given tax year I would be considered a UK tax resident, as well as the Portugal tax resident at the same time, hence the Double Taxation Treaty will kick in.
Which in turn says this:
"Article 15 Employments
(1) Subject to the provisions of Article 17, salaries, wages and other similar remuneration (other than remuneration to which Article 18 applies) derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
(2) Notwithstanding the provisions of paragraph (1), remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) The recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and
(b) The remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
(c) The remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State."

I must admit that’s the point where I require a translator from ‘Legal’ to English :slight_smile:

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As far as I could interpret the DTA there are two scenarios:

  1. If I am employed in Portugal and do all of my work for my employer (‘exercise employment’) only in Portugal then I will be taxed only in Portugal and not in the UK.
  2. If I am employed in Portugal but do my work both in Portugal, and say occasionally in the UK, then still I will only be taxed in Portugal on the condition that I do not spend more than 183 days in the UK. And if I exceed 183 days then the UK income tax will also be payable, but not sure how much.
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Hi. I was wondering if anyone could help find a “body shop” in Portugal? I can’t seem to find one, no matter what I google! Thanks a lot.

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Once you go past 183 days, you’re legally a tax resident in the eyes of Portuguese law. That means you have to start filing income tax returns within Portugal and pay taxes to the Portuguese government.

While Portugal does not require you to apply for a digital nomad visa, you can apply for a D7 Visa and Resident Permit. This visa is highly recommended if you intend to work remotely from Portugal for longer than six months.

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I’m learning a little more about this and i think the proper term for ‘body shop’ is ‘employer of record’. This company is probably too big for a small scheme (they offer the service to big companies in multiple countries), but it’s an example: Employer of Record (EOR) Solutions - Bradford Jacobs - and that page explains how it works.

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this is quite a common thing. there are a number of small shops in the US that use an EOR rather than do all of the headache of HR and payroll and compliance themselves. to do it for one person doesn’t necessarily make sense though.