Portugal or Spain? Two tax regimes for non-habitual residents to consider in the EU

Sun, sea, and incredible landscapes. Portugal and Spain are two favourite destinations for those who want to improve their quality of life.

Aware of their excellent natural features, both Portugal and Spain have, in the last decade, created very attractive tax regimes for foreigners who become residents.

But are Portugal and Spain really that similar when it comes to taxation? The answer is no! Find out why.

Portugal - Tax Regime of the Non-habitual Resident

The Tax Regime for Non-Habitual Residents (NHR) in Portugal was created in 2009.  It aims to encourage foreign investment in Portugal by creating special conditions and tax exemptions for those who want to live part, or all, of their time in Portugal.

For a non-habitual resident in Portugal, employment income obtained in Portuguese territory resulting from activities considered of high added value (HVA) with scientific, artistic, and technical character (whether dependent or independent work) is taxed at a flat rate of 20%. This is a substantial reduction of the progressive rate applicable to the remaining Portuguese residents, which can go up to 53%.

Income from outside Portugal is exempt from taxation without any quantity limit. This is also applicable to private pensions from abroad.

Dividends, capital gains and other capital income are also exempt from taxation in Portugal, provided that they originate from abroad and that there is a Double Tax Treaty (DTT) between Portugal and the country of origin of such income. These dividends, capital gains and other capital income must have been taxed at source, provided this country is not on the Portuguese blacklist (tax havens).

If obtained in Portugal, this income will be taxed at the standard rate of 28%. In practice, this is the most frequent situation. Most of the conventions entered into by Portugal only give the right to tax the source State when the professional has a permanent establishment, or the work is carried out in the other State.

Pensions earned by non-habitual residents in Portugal are taxed at a reduced rate of 10%, provided they originate from abroad (which is the most common).

Who can be considered an NHR?

A Non-Habitual Resident is an individual who becomes a tax resident in Portugal and has not been a tax resident in Portugal in any of the 5 years before moving to this country.

In Portugal, as a rule, a tax resident is anyone who spends more than 183 days per year in the country or, even if spending less time in the country, has a dwelling throughout the year in such conditions that make the intention to maintain and occupy it as a habitual residence be assumed.

The deadline for registration as an NHR is 31 March, inclusive, of the following year after becoming a resident in Portugal. After approval by the Portuguese Tax Authority, the NHR status lasts 10 years.

Mandatory requirements to become an NHR in Portugal

• Be over 18 years of age
• To have acquired fiscal residence in Portugal
• Not have had a residence in Portugal in any of the previous 5 years

Spain - Tax Regime for Foreign Workers (Beckham Law)

The Special Regime for Posted Workers, commonly known as the Beckham Law, was approved in Spain in 2004. This principle of attracting foreign talent became an ideal tax scenario for transfers in football, and the first to enjoy the regime was David Beckham. In 2015, the rule was amended, eliminating elite athletes from the respective regime without having retroactive effects.

In Spain, taxation on income from employment has a general rate of 24% with a limit of €600,000 (after which the rate rises to 45%). In addition, employment income is taxed globally, regardless of where it is generated, which also applies to pensions.

Dividends, capital gains and other capital income are exempt from taxation in Spain, provided that they originate from abroad and there is an international double taxation treaty (DTT) with the country of origin of the respective income. If obtained in Spain, they are taxed between 19 and 23%, depending on the amount.

It should be noted that there is a legal obligation to file wealth tax if you have assets in Spain (except for the Community of Madrid or Andalusia).

Who can benefit from the Beckham Law?

The Spanish regime applicable to foreign workers is established by Article 93 of Spanish IRS Law 35/2006. Under that provision, it is stipulated that to opt for that regime, the following conditions must be met:

• Not have been resident in Spain in the 10 years prior to the displacement.
• Travel to Spain to conclude a work contract. Professional athletes can no longer benefit from this regime.
• Going to Spain to become a company director, although this must not be a related entity (shareholding of more than 25%).
• No income is earned through a permanent establishment in Spain.

The six-month period from the commencement of the activity in Spain (not from the date of consolidation of the tax residence) to request the option for this regime is essential as neither the Tax Administration nor the Courts allow the regime to be granted after this period. From the date of the option, the regime has a duration of 6 years (the year of registration and the 5 following years).

Should you opt for Portugal or Spain? - Comparison

After the presentation of the two schemes, the question remains: which one should you choose? Both have their strong and weak points.

In the case of the Spanish tax regime, this requires an absence of tax residence in the previous ten years, being only five years in Portugal. In terms of taxation, income from activities considered to be of high added value in Portugal is subject to a rate of 20%, which seems more beneficial than the 24% rate for taxable income up to €600,000 and the 45% rate for taxable income above €600,000 applicable in Spain.

It should also be noted that the period of benefit of the special schemes in Spain is six years (the year of registration and the following five years) and in Portugal ten years.

Check out our comparative tables below.

Employment income (IRS) in Portugal vs Spain

 *Provided they are taxed in another country with which there is a DTT

Dividends, capital gains and capital income in Portugal vs Spain

 *When taxed in another country with which there is a DTT

Pensions in Portugal vs Spain

 *When taxed in another country with which there is a DTT

Other taxes

Portugal abolished the inheritance tax on 1 January 2004. All family members (spouse, children, grandchildren, parents, and grandparents) are exempt from tax on free transfers by gift or inheritance.

Thus, in Portugal, for spouses, descendants and direct ascendants, transfers of assets by death are not subject to taxation. Non-profitable transfers between living persons are subject to stamp duty at a rate of 10%, apart from those made for the benefit of the spouse, descendants, or ascendants, which are exempt from this tax.

As regards Inheritance and Gift Tax, the beneficiaries of the "Beckham Law" who have their residence in Madrid or Andalusia may benefit from the respective rebate system of the Autonomous Community of Madrid or Andalusia, as is the case with a wealth tax.

They will also be required to file the Bank of Spain's international transactions declaration, which is compulsory for those who carry out economic transactions with non-residents or maintain financial assets or liabilities abroad and model D, for the declarations of the Register of Investments of Spanish investments abroad in companies listed on the Stock Exchange or Organised Market, when the values are deposited abroad or remain in the custody of the holder of the investment.

In Spain there is also a Wealth Tax and beneficiaries of the special regime must declare and pay wealth tax exclusively on assets located in Spain.

In Portugal, there is no wealth tax.

Advantages for NHRs in Madeira, Portugal

Madeira is a Portuguese autonomous region which combines a unique quality of life, a very competitive cost of living and a very favourable tax regime.

Non-habitual residents who choose to live and work in Madeira may set up a company in the International Business Centre of Madeira (IBC) and enjoy several tax advantages:

• Reduced IRC rate of 5% for income obtained outside Portugal.
• Reduced flat rate of 20% for salaries of employees with activities considered of high added value (see above)
• Worldwide participation exemption regime for dividends, reserves, capital gains and capital losses
• Tax credit for international, legal, and economic double taxation.
• High reductions in stamp duties, IMT, IMI, municipal property tax, municipal taxes, autonomous taxation and other fees and costs.

The IBC of Madeira is a preferential tax regime approved by the European Union (EU) in full compliance with all EU treaties and laws. Madeira companies may be used in a wide variety of activities: trading, consultancy, shipping activities, technical and professional services, holding companies, telecommunications, e-commerce, and any other services of an international nature.