Non-compliant NHRs now face large tax bills in Portugal

Non-Habitual Residents (NHRs) in Portugal are facing an increased number of tax enquiries – and these are likely to result in very large tax bills.

According to an informed source working in the Portuguese revenue authority – Autoridade Tributária e Aduaneira (ATA) – most NHRs appear to be filing tax returns stating that they have no discernible income, despite seemingly living a luxurious lifestyle. They are now being targeted by the ATA.

Anecdotal evidence suggests that most NHRs believe they are entitled to reside in Portugal for ten years without Portuguese taxation. This can be true if all their arrangements are correctly structured but most seem to have taken little care with their tax affairs and will be legally liable to pay tax on most of their worldwide income at rates of up to 48%.

It is probably fair to say that the ten-year tax-free deal under NHR does not do “precisely what it says on the tin”. Portuguese tax is not payable on overseas income if, but only if, it has either already been taxed, or been liable to tax, abroad. And that is the catch.

The legal position is quite clear. An NHR is required to file a return detailing their worldwide income and claiming exemption for any qualifying foreign income or capital gains that should not be subject to Portuguese tax. However, most NHRs appear to be filing returns that fail to declare any overseas income when much of their foreign income and capital gains does not qualify for exemption.

Portugal has stringent anti-avoidance laws that ‘look through’ most offshore (non-resident) structures and income and gains derived by the foreign entity are allocated to the Portuguese-resident shareholder. These laws are common to most high tax countries and are specifically designed to prevent profit shifting though low taxed entities. The rules are generally known around the world as controlled foreign company (CFC) or attribution rules.

Portugal’s CFC rules apply to tax resident individuals holding, directly or indirectly, at least 25% of the shares or voting rights of non-resident entities that are domiciled in a country, territory or region that is either on Portugal’s extensive ‘blacklist’ of tax havens or that are subject to effective rate of tax that is lower than 50% of the tax that would be due in Portugal.

Income or gains from any such non-resident entities are treated by Portugal as belonging directly to the beneficial owner and are therefore declarable and taxable in Portugal, irrespective of whether any distribution is actually made.

Under the OECD’s Common Reporting Standard (CRS), reports are made automatically to ATA by the tax authority of any jurisdiction worldwide in which a Portuguese resident has an account. The CRS applies globally, except in the US. The US has its own equivalent legislation, the Foreign Account Tax Compliance Act (FATCA), so there is nowhere to hide.

These CRS reports contain details of the amount of income and gains generated on the account, whether that be a personal, corporate or trust account.

The ATA seems to be very good at sifting through this information and contacting the relevant Portuguese residents if their tax return does not align with the information they are receiving from abroad. And that, of course, will trigger an investigation that is likely to result in a bill for the unpaid tax, as well as large fines for failing to properly declare worldwide income or gains.

The ATA seems to be extremely efficient in this area as this author, who is resident in Portugal and has NHR status, can personally attest. I had a mortgage loan on a Spanish property with Jyske Bank in Denmark. Jyske Bank reported the existence of the account used to service this loan to the ATA.

The ATA mistakenly concluded that I was receiving interest on the loan amount. This was an error. I was paying interest to service the mortgage loan. The confusion was swiftly resolved, but it was interesting to note that the ATA not only knew about the existence of the account but had details of the amount it contained and the interest paid in the previous tax year.

It was perhaps assumed that Portugal would leave the NHRs well alone because they were not a fruitful source of income and the Portuguese government would not want to deter the very same foreign investors that the NHR regime was designed to attract.

That may or may not have been true, but now that the NHR regime is largely being phased out there is no longer any disincentive on the part of the government to target taxpayers who have clearly ignored their tax obligations in Portugal and who are filing returns which bear little resemblance to reality.

The net is closing, and it is closing fast. Any NHRs who are in any doubt about their current, or past, tax obligations in Portugal are advised to seek professional advice without delay.