It has been nearly 6 years since the Decree-Law 249/2009, of 23 September, passed the tax regime applicable to non habitual residents (RNH in Portuguese) in Portugal under IRS law (“Imposto sobre o Rendimento das Pessoas Singulares” or Personal Income Tax).

One of the objects of said Decree-Law is fostering a new competitive spirit in Portugal, in order to boost economy and business. In this regard, and with the aim of invigorating economy and attracting investments, the Portuguese RNH regime tries to attract to Portugal non-resident professionals in value-added services, high-return investors as well as foreign pension beneficiaries.

At Belzuz Abogados, as experts for several years in the study and process of non-residents applications in Portugal, at the end of 2015, it is up to us to make an assessment on this regime and, based on our experience, to offer opinion on whether its implementation would be successful or not, as well as to analyse some practical issues with which the Tax Law Department at Belzuz Abogados in Spain and Portugal deals often when giving tax advice to customers.

We would like to start pointing out the main tax characteristics of this regime:

• Cash return of categories A (Employment income) and B (business and professional income, self-employment) from “high value added services” have a 20% tax liability, which shall be increased with a 3.5% surcharge, which means that, in practice, RNHs will have at least a 23.5% tax liability in Portugal. Such tax liability is very favourable when comparing IRS tax rates that may be increased to 48%.

• Possibility of tax exemption for foreign returns, such as employment, real property, capital gains, interests, dividend incomes as well as capital yields, some conditions such as not having been taxed as residents in Portugal the previous 5 years to the request.

In this regard, it is worth pointing out that the regime is not automatically implemented. The implementation of the regime shall be requested by the Portuguese tax authorities, who will decide case-by-case after assessment. However, the procedure of RNH status is limited by very objective terms, not allowing the tax authority great discretion when conferring it.

In every procedure with which we have dealt, Tax authorities have been fast and efficient.

Moreover, we think that analysing in advance which tax framework will have the returns expected in the following years, and, with legal protection, request the RNH status.

For example, there are some returns whose type (capital yields, pension, salaried work or other) is not completely clear. In this regard, before filing the request for acceptance into the regime, we think that in some cases it would be prudent to file a binding request before the Portuguese tax authority, regarding that return type, in order to provide certainty to the taxpayer that has to change their residence to Portugal.

Finally, we would like to highlight that taxpayers acquiring the RNH status will pay as such for a period of 10 years, after which they will be taxed under the regulations on Código do IRS. We highlight that this 10-year period is intended as a maximum period of profits use and not as a condition of profits allocation. This means that RNHs may benefit from this special regime for three or four years and if, for personal or professional reasons, they decide to return to their country of origin or change their residence to other country, they won’t lose the attributable profit of previous years in Portugal.

To sum up, this regime is already consolidated in the Portuguese legal system without prejudice to possible amendments that may be passed in the future.

Regarding tax implications in Spain due to change of residence, it is important to point out that apart from reporting such change to Spanish tax authorities, they must take into account that if, based on their personal status, they will continue receiving any kind of returns in Spain, in order to determine under which tax treatment they are. Under the returns that they may continue receiving in Spain, the most common are employment returns, interests obtained from bank accounts located in Spain, scholarships and returns obtained from renting real property in Spain to third parties, among others.

Unlike Spanish residents that must be taxed in Spain for their worldwide income, non-residents in Spain obtaining income and paying taxes there will only be taxed with regards to the income obtained in Spain. In this case, we advise to reach specialised lawyers in order that they analyse correctly the provisions on the Convention signed between Spain and Portugal regarding tax residence and taxing powers on income of each country and their implementation case-by-case. Moreover, they must check the provisions in Spanish legislation, and it is especially important to obey the provisions of the Non-Residents Income Tax Law on the type of income, because, in most cases, it is established that income is subject to taxation but also tax exempt as Portugal residents, because they are in another State of the European Union.

We also highlight that, as European Union residents, in the event of being taxed as non-residents in Spain, Spanish regulation currently sets out the possibility of deducting expenses provided on the Personal Income Tax Law, if the taxpayer is able to prove that such expenses have a direct economic connection with the activity performed in Spain and are directly bound with the returns concerned.

As tax lawyers, we explain that the so-known exit tax, i.e. the capital gains obtained when changing residence, hit only Personal Income taxpayers that had been residents of Spain, that had been taxed with Personal Income Taxed for at least ten out of fifteen tax periods previous to the last tax period, where Personal Income Tax return must be filed, and that they have lost their status due to residence change, whenever one of the following circumstances is present:

• The market value of shares jointly exceeds €4,000,000, i.e., they own a share portfolio exceeding four-million-euro latent capital gains.

• On the accrual date of the last tax period where Personal Income Tax return must be filed, they own more than 25% of a company and the market value of the shares exceeds €1,000,000, i.e., they own more than 25% of a company with assets amounting more than a million euro.

It is applied to taxpayers with a significant stake in shares. If any of the preceding circumstances are met, the taxpayer must integrate in the savings income of the last tax period where they must pay for the Personal Income Tax, latent capital gains multiplied by positive difference between market value and acquisition value of shares.

However, if residence changes to a European Union country or to a country with which there is an effective exchange of tax information, the taxpayer may request a deferment. Moreover, if the residence change happens for employment reasons to a territory that is not considered a tax haven, the deferment of debt may be requested, setting out the appropriate safeguards. If they don’t return to Spain in five years, they will have to pay the tax. But if they have not transferred shares and return to Spain, acquiring the status of Personal Income taxpayer, debt and its interests will be extinguished, but the return of safeguard costs will not be payable. In the event that a taxpayer had not transferred shares and requested a deferment, i.e. who had paid for the latent capital gain, the amendment of the self-assessment may be requested in order to obtain the paid amounts.

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