22 de October, 2024
In recent years, the Non-Habitual Residents (NHR) regime in Portugal has attracted thousands of foreigners to the country, offering exclusive tax advantages. However, a recent report from the Court of Auditors of Portugal revealed significant failures in the oversight of the regime, including a lack of proper verification of tax debts from registrants. This resulted in substantial fines, including retroactive penalties, for beneficiaries who were not in full compliance with the regime’s rules. If you are one of the registrants in the NHR, it is essential to understand how to avoid tax issues on your IRS declaration. Staying updated and compliant with the legislation can save you both money and headaches in the future.
Did you know? Since its creation in 2009, approximately 52,000 people have benefited from the NHR. Brazil ranks as the third-largest beneficiary of the Non-Habitual Residents (NHR) regime, accounting for 6,623 registrants as of 2021. It falls behind only France, with 9,371 beneficiaries, and the United Kingdom, which has 6,748. As reported by Público newspaper, in an article in partnership with Atlantic Bridge, out of a universe of 399,000 beneficiaries, 93 taxpayers have been identified as debtors, accumulating debts of 17 million euros!
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The Non-Habitual Residents (NHR) regime is a special tax regime for new residents. Its main benefits include:
Although the regime has been revoked for new entrants starting in 2024, those already registered can continue to enjoy the benefits. The government introduced the new NHR 2.0, which maintains the fixed rate and the duration of 10 years but excludes pensions from tax exemptions and expands exemptions for capital income. The access conditions have become more restrictive, focusing on professionals in higher education, scientific research, and entrepreneurship, with a requirement for additional certification from the employer.
Learn everything about the new Non-Habitual Residents regime (NHR 2.0) here.
The Tax Authority has been reinforcing the importance of beneficiaries of the Non-Habitual Residents (NHR) regime strictly complying with their tax obligations to avoid penalties. Below, we have gathered the main common mistakes made by taxpayers, including when filling out the IRS – Personal Income Tax, and how to avoid them:
A common mistake is maintaining tax residency in two countries, such as Brazil and Portugal, which can result in double taxation. Both countries may attempt to tax the same income, leading to unnecessary fines.
How to avoid: For those who have joined the NHR, it is essential to declare all global income and become exclusively a tax resident in Portugal. Otherwise, you may face double taxation (Portugal and Brazil) and penalties for incorrect declarations.
Many Brazilian retirees who move to Portugal do not know that they need to declare all income, including private pension obtained in Brazil. Failing to do so can result in heavy fines.
This taxpayer cannot exempt themselves from their obligation to the Portuguese tax authorities under the mistaken claim that their retirement income was obtained abroad, that it was declared abroad, or that it was already taxed in the country of origin (if there is taxation in the country of origin, the principle of tax credit may be applied in Portugal based on the agreement between the countries).
How to avoid: Even if the income is exempt or has already been taxed abroad, it is mandatory to declare it in its entirety. If there is taxation in Brazil, you can request a tax credit in Portugal based on the tax agreement between the countries.
Another common situation involves the taxpayer who has sources of income both in Portugal and abroad, but declares in the country only the earnings obtained from Portuguese sources, ignoring international earnings. For example, a taxpayer who works in Portugal and receives a salary from a local source but also earns profits and dividends from a foreign company.
Following this mistaken logic, they end up communicating to the Portuguese Tax Authority only the income generated by their work in the country, while declaring to the Brazilian Federal Revenue the profits and dividends received from the Brazilian company, making an incomplete communication of their income in both countries.
How to avoid: If you are a tax resident in Portugal, you must declare all your income, regardless of the source. Even if some income may be exempt or benefit from tax deductions, such as those from the NHR, full declaration is mandatory.
Correctly declaring income when joining the Non-Habitual Residents (NHR) regime in Portugal can be challenging, especially regarding investments and income from foreign sources. Below are the most common mistakes and how to avoid them.
A common mistake among Brazilians investing abroad is confusing the source of income with the location where the investment was made. Often, taxpayers believe that by investing through a Brazilian bank, all income generated is of Brazilian origin. However, for declaration and taxation purposes in Portugal, what really matters is the final destination of the investment, not the bank used to make it.
For example, Carlos invests in Itaú from Brazil, thinking that the income will be Brazilian. However, Itaú may invest the money in a fund in Luxembourg. For tax purposes, the location of the income source is what matters, meaning it is essential to identify that the income was generated in Luxembourg and not in Brazil.
This distinction is crucial to correctly determine the State of Source of income, which will be vital in defining which Double Taxation Agreement applies and whether João’s income will be exempt under the NHR regime. Due to the complexity of the subject, bank and fund statements often lack detailed information for proper presentation in the declaration. Therefore, it is highly recommended that, especially regarding investment portfolios, a specialist in the area conducts this analysis, given the high complexity of the subject.
The correct qualification of income is another critical point. Some types of income, such as dividends, may be misclassified, resulting in taxation errors. For example, Joana receives income from an Investment Fund in Brazil and, when filling out her declaration in Portugal, classifies this income as dividends. However, according to the Double Taxation Treaty between Brazil and Portugal, this income may, in certain situations, be considered “other income,” subject to different taxation rules. If Maria does not make this distinction correctly, she may end up paying unnecessary taxes or being penalized by the Tax Authority for errors in the declaration, even though she is a beneficiary of the NHR.
Mistakes of this nature can cause income that should not be taxed to become taxable, and vice versa. Therefore, it is essential to correctly qualify and identify the source of income, even if it seems to be exempt from taxation.
These measures are fundamental to avoid problems and ensure full enjoyment of the tax benefits offered by the Non-Habitual Residents regime.
Check out the official Tax Authority manual.
The Non-Habitual Residents (NHR) regime can be extremely advantageous for those seeking to reduce their tax burden, but the details make all the difference. If not applied correctly, it can create more problems than solutions. Failing to declare all income, misclassifying income, or not understanding how the double taxation treaty works are traps that can lead to tax contingencies and high penalties.
Finally, it is important to highlight that these types of mistakes also frequently occur among foreign citizens who, although they do not have the NHR, have become tax residents in Portugal. Taxpayers with NHR may have a more complex financial portfolio and, therefore, be more susceptible to mistakes and tax issues. However, all taxpayers should exercise the same care when correctly declaring their income.
The secret is to be well-informed, have the support of specialists, and ensure that you are meeting all requirements to continue enjoying the benefits without complications.
Want to avoid tax problems and maximize the benefits of the NHR? Talk to our specialists and ensure an error-free IRS declaration!
Author:
Roberta Frazer
