One of the questions on people’s minds when considering the Portugal Residency programme is the tax implications, in particular, if there are any tax advantages. The tax implications will depend upon the residence choices you make during and after the Golden Visa. While I am no taxation expert, and I would strongly recommend taking counsel from a tax professional before making any decisions, here are my findings that may serve simply as a starting point.
To start with, Portugal is NOT a tax haven of any kind so there is no real “tax advantage” to be gained from a Portuguese Residency. If anything, individual tax rates are slightly higher in Portugal as compared to India. However, India and Portugal are signatories to a Double Tax Avoidance Agreement (DTAA) thereby allowing you to claim tax credit for the taxes paid in Portugal. With that background, the tax implications will be different depending upon whether you are tax resident in India or in Portugal.
Scenario 1: Tax Resident of India
The Portugal Golden Visa allows you to retain Residency rights in Portugal without having to be physically present in the country beyond the stipulated seven days a year (average)*. This means you can continue to live, work, and pay taxes in India as usual. Only income you earn in Portugal will be taxable in Portugal, for example rent received on your property, or interests/dividends on your investments. The taxation rates for the Portugal income as a non-resident of Portugal are as follows:
Like TDS in India, the payer in the above cases will be required to deduct the above taxes as a Withholding Tax (at least 25%) from your income before paying it out to you. You will also be required to file annual returns to square off your taxes, which your legally appointed tax representative in Portugal will do on your behalf.
Such income will of course need to also be declared in your IT returns in India and will be taxable at the appropriate rates as per the head of income in India. If any further taxes are due on your Portuguese income in India, over and above what has been withheld in Portugal, this will need to be paid in India. However, if the tax withheld in Portugal is in excess of what you need to pay in India, you cannot claim a refund from Portugal (or India).
Now, thanks to the DTAA between India and Portugal, you CAN apply for a lower rate of tax to be withheld in Portugal. For this, one needs to prove to the payer in Portugal that one is a Tax Resident of some other country (India) by completing a Form 21-RFI and attaching a Tax Residency Certificate issued by the relevant authority in India. Based on this, the withholding tax can be reduced to 10% (in some cases 15%) instead of the 25%. However, the tax liability in India does not change, so one must still pay any difference in taxes due in India.
Scenario 2: Tax Resident of Portugal
Now consider a scenario where upon obtaining your residency, you decide to move to Portugal. To become a tax resident of Portugal and NOT of India, you will need to satisfy two conditions:
1. You are physically present in Portugal for 183 days or more in a 12-month period of a calendar year (or maintain a home in Portugal as of 31st December of that year), AND
2. You are a NON-RESIDENT of India (NRI) as per Indian Income Tax Rules (you can visit here for an overview of NRI rules in India)
If you satisfy the above conditions and become a tax resident of Portugal, the roles will be reversed. You will pay income tax as per Portuguese rules for residents, and pay tax in India only on income earned in India.
The tax rates in Portugal for Residents are as follows (additional surcharges may apply from time to time):
As you can see, at the highest slab, the rate is 48% which is significantly higher than that in India.
Once again, the DTAA will allow you to claim tax credit in Portugal for any TDS deducted in India on your India income, but that income (and income from any other part of the world) must be declared in Portugal and taxes duly paid as per Portugal rates.
The Non-Habitual Resident Tax Regime (NHR)
For those moving to Portugal from another country, Portugal has an interesting scheme called the Non-Habitual Resident Tax Regime (NHR) which provides some tax benefits for a limited period of 10 years.
To qualify to apply as an NHR, you must:
1. Become a tax resident in Portugal (i.e. spend 183 days or more in Portugal)
2. Not have been taxed as a Portuguese resident for at least 5 consecutive years preceding becoming a Tax resident
If you fulfill the above conditions, you can apply for the NHR tax status. The main advantage of the NHR tax regime is that the following categories of FOREIGN income are not taxed in Portugal for a period of 10 years:
Dividends and interest
Real estate rental income
Capital gains from the sale of real estate
Employment Income (Salary)
Self-Employment or Professional income from a specified list of activities
PROVIDED THAT,
a. Such income is taxed in the source country (say India) as per the DTAA (in other words TDS is being deducted in India on that income)
b. Such income is not derived in a black-listed tax haven
So if you become a Portugal Resident, and have any of the above incomes in India, you will not be required to pay tax in Portugal for a period of 10 years (provided the conditions above are satisfied).
Further, even Employment or Self-Employment income in Portugal can benefit from a reduced flat tax rate of 20% for the period of 10 years, provided it is from the specified list of activities (for example Doctors, Engineers, IT specialists, University Teachers, General Managers, Creative & Performance Artists etc).
All other income in Portugal will be taxed as per normal Portuguese tax rates.
To summarise, if you plan to take the Portuguese residency and continue to live in India, there is no real tax advantage (or disadvantage). However, if you decide to move to Portugal and become a tax resident there, the tax rates are higher than in India. The NHR tax regime, though, does provide a window of 10 years to enjoy reduced taxation. You can read more about the various ways to mobilise your funds on this blog post.
Once again, I am not a tax expert or a tax lawyer, so please do consult a tax specialist to get the latest and most accurate information before making any decisions.
* To retain the Golden Visa, you need to be in Portugal for at least 7 days in the first year, and then 14 days every two years for the next 4 years.