Portugal’s reputation as a prime destination for foreign workers is partly due to its exceptional tax system. Mariana Carp, a tax advisor and partner at ILYA, a tax advisory firm in Lisbon, states that following the Great Recession of 2008, Portugal faced severe financial difficulties.
To entice foreign workers to the country, the government established the non-habitual resident program, which provides tax incentives to individuals working in “high-value” fields. “The government identified a list of high-value-added activities, which are professions where there is a shortage of skilled professionals, such as professors, engineers, doctors, and IT experts,” Carp explained, adding that there are additional professions on the list. “They encouraged people to move to Portugal by offering a reduced flat tax rate of 20%, rather than the progressive tax rate that goes up to 53%.”
To qualify as a tax resident in Portugal
To qualify as a tax resident in Portugal, the employee must have either spent a minimum of 183 days in the country during a calendar year or established their primary residence there. Individuals must apply for tax residency by March 31 of the subsequent year following their move to Portugal.
Moreover, to prevent double taxation on foreign income, Portugal has implemented a system, although there are certain exceptions. “Does this imply that all foreign income is exempt, as I sometimes hear? Absolutely not,” cautioned Ms. Carp. “This is a common misconception among people relocating to Portugal.”
First and foremost, not all foreign income is classified as high value-added activities, she clarified
According to Ms. Carp, “The term ‘high value’ pertains to the contribution it makes to the economy and not the amount of income earned. Even if you earn a dollar, you can still be engaged in a high value-added activity. Conversely, even if you earn a million dollars, you may not be involved in a high-value activity if it is not included in the list.”
Furthermore, for U.S. citizens, evading the grip of the U.S. government is difficult. “The double taxation treaty incorporates a saving clause that allows the United States to levy taxes on its citizens as though the agreement never existed,” Ms. Carp observed.