Living as a British expat in Portugal offers numerous advantages, including the tax-friendly environment provided by Portugal’s Non-Habitual Residence (NHR) regime. However, when it comes to the taxation of dividends from UK companies, there are certain complexities that need to be considered. In this comprehensive guide, we will delve into the tax implications for British expats in Portugal receiving dividends from UK companies. We will explore challenges such as split-year taxation, returning to the UK within five years, and the risks associated with a UK company being deemed tax resident in Portugal due to effective management being located there. Additionally, we will touch upon additional factors to consider, such as ties to the country and time spent there, as well as the benefits of the Non-dom program for those planning to return to the UK.
Understanding the Tax Environment in Portugal:
To effectively navigate the tax implications, it is essential to grasp the fundamentals of the NHR regime introduced in 2009. Designed to attract foreign professionals and high net-worth individuals, the NHR status provides tax exemptions on foreign-sourced income, including dividends, and reduced tax rates on specific Portuguese-sourced income for a duration of ten years. However, it is important to note that eligibility for this tax scheme is contingent on not having been a Portuguese tax resident in the preceding five years.
Taxation of Dividends from UK Companies:
Under the NHR regime, dividends received from UK companies are generally exempt from Portuguese taxation, except when sourced from a tax haven. The UK is particularly attractive in this regard, as it typically does not impose a withholding tax on dividends paid to non-residents, despite having the right to do so.
Risks of Split-Year Taxation:
Split-year taxation refers to the situation where an individual’s tax year is divided between the UK and Portugal. This scenario arises when a British expat leaves the UK in the middle of the UK tax year, which usually commences in early April. While income received during the UK part of the tax year is subject to UK tax, income received during the Portuguese part of the tax year adheres to the rules of the NHR regime. However, it is important to note that dividend income paid to a non-resident during a split year is fully taxable in the UK and cannot be considered as excluded income.
Returning to the UK within Five Years:
One significant risk for British expats in Portugal is the “temporary non-residence” rule. This rule affects individuals who return to the UK within five complete tax years of leaving. If a British expat, who received UK dividends while non-resident, returns to the UK within this timeframe, they may be liable to pay UK tax on the previously exempt dividend income, even if it was not subject to Portuguese tax under the NHR regime.
The Risk of UK Company Deemed Tax Resident in Portugal:
British expats should exercise caution regarding the potential tax residency status of their UK company in Portugal. According to the double taxation treaty between the UK and Portugal, as well as domestic Portuguese legislation, a company can be deemed tax resident in the country where its “place of effective management” is situated. Consequently, dividends paid by a UK company deemed tax resident in Portugal may become subject to Portuguese taxation instead of being exempt under the NHR regime. Mitigating this risk involves ensuring that strategic decisions and board meetings take place in the UK, and that the majority of the company’s directors are UK tax residents. Maintaining meticulous documentation is vital to support the company’s claims of tax residency.
Additional Factors to Consider:
In addition to the complexities discussed earlier, there are a few more factors that British expats in Portugal should consider when dealing with the taxation of dividends from UK companies.
- Ties to the Country and Time Spent: It is important to be mindful of the ties you may have to the UK and the time you spend there. In many cases, if you spend more than 90 days per year in the UK, you may risk creating tax liability there. Different rules may apply to British citizens compared to non-British individuals. Understanding the specific requirements and limitations based on your citizenship status will help you make informed decisions regarding your tax strategy.
- Non-Dom Program: If you plan to return to the UK in the future, it may be worth considering the Non-Domiciled (Non-dom) program. This program provides certain tax advantages for UK residents who have a non-UK domicile. It allows individuals to limit their UK tax liability on foreign income and gains by claiming the “remittance basis.” Under this basis, foreign income and gains are only subject to UK tax when they are brought into the UK (“remitted”). Exploring the benefits and eligibility criteria of the Non-dom program can help you optimize your tax position when returning to the UK.
Navigating the taxation of dividends from UK companies as a British expat in Portugal requires careful consideration of various factors. Understanding the implications of the NHR regime, split-year taxation, and the risks associated with a UK company being deemed tax resident in Portugal is crucial. Additionally, being aware of your ties to the UK, the time spent there, and the potential benefits of the Non-dom program will contribute to a comprehensive tax strategy. Seeking professional advice from tax experts who specialize in international taxation is highly recommended to ensure compliance with both UK and Portuguese tax regulations and to maximize the benefits of your expat status. With careful planning and knowledge, you can effectively manage your tax obligations and make the most of your financial situation as a British expat in Portugal.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as professional tax advice. While we strive to provide accurate and up-to-date information, tax laws and regulations are subject to change, and the application of these laws can vary depending on individual circumstances.
We strongly recommend consulting with a qualified tax professional or financial advisor who is familiar with the specific tax laws and regulations applicable to your situation. They will be able to provide personalized advice tailored to your unique circumstances and ensure compliance with relevant tax laws.
Reliance on any information provided in this blog post is at your own risk. We disclaim any liability for the use or interpretation of the information contained herein. It is always prudent to seek professional advice before making any financial or tax-related decisions.