Portugal tax: Special tax regime for expatriates in effect

The Portuguese government published the long-awaited special tax regime for inbound expatriates on 23 September 2009, and, contrary to expectations, the new regime applies retroactively as from 1 January. As a result, the benefits under the regime will be applicable to all qualifying expatriates that came to Portugal in 2009.

According to the new rules, which are set forth in the Personal Income Tax Law, qualifying employees and self-employed individuals will be taxed at a flat rate of 20%. Only income related to Portuguese duties or income paid by a Portuguese entity will be taxable in Portugal. Foreign employment income and pensions will be exempt from tax provided:

- The individual is taxed in another country according to a tax treaty between Portugal and the home country of the expatriate; or

- If there is no applicable tax treaty, the income is not deemed to be derived from Portugal under Portugal's domestic law and the individual is taxed in the other country.

Foreign self-employment income and other types of income derived from abroad (e.g. investment income, rental income, capital gains and pension income) are exempt provided the income is taxed in another country under an applicable tax treaty or in the absence of a treaty, the income is taxed at source according to the OECD Model Treaty and the jurisdiction is not considered a tax haven under Portugal's domestic rules.

Such exempt income will be taken into account in determining the tax rate applicable to other Portuguese-source income. The new regime, which is available for 10 consecutive years, applies only to individuals who have not been taxed as Portuguese residents in the five preceding tax years and provided the individual is registered with the local tax office. The government will be issuing a Ministerial Order to specify which professional activities will qualify for the regime.

Once the Ministerial Order is published, all expatriates that started an assignment in Portugal during 2009 should determine whether they qualify for the benefits of the new regime. This may be an opportunity to reduce costs associated with assignments in Portugal because the marginal tax rate is 42% for regular tax residents. The benefits of the regime also may be applied to Portuguese outbound expatriates upon their return to Portugal.