Private Client Briefing - Tax residence and the habitual test
From the outset one may say that the choice of the term “non-habitual” for a specific tax residence regime in Portugal was bound to create some misunderstandings as tax residence requires always some degree of habituality or residency link to the State of Residence.
This short article is attempts to clarify some points and at the same time address difficult questions.
Most of discussions on relocations into Portugal start with the requirements of the fulfilment of the tax residence test in the new state of residence and potential interactions with exit and third-country states.
Such interaction is relevant not only to limit situations of dual residency but also to gather support documentation of exit of one jurisdiction and entry in Portugal.
To apply for the non-habitual tax regime, Portugal adopted a two-condition approach.
The first requirement is that the applicant has not been taxed as a Portuguese resident taxpayer in the five years prior to taking up residence in Portugal. This condition is simple to verify as most of the inward expatriates either have not been tax residents in Portugal before relocation or if they had a prior link to Portugal they were effectively registered as non-residents and hence fulfill the requirement.
Practice Note: In the first years of the regime, we faced numerous cases in practice where there was an incorrect registration as Portuguese tax resident prior to relocation potentially contaminating the ability to benefit from the NHR. In those cases and to the extent that the applicant was able to prove via tax residence certificates (of third countries) and other types of proof (such as tax returns) that prior tax liability rested in another State and not in Portugal, those mistaken cases of registration were corrected and NHR applications were accepted.
The second requirement is that at the time of submitting the electronic NHR request the applicant is already registered as Portuguese resident taxpayer under the Portuguese domestic tax rules. In that regard, the individual qualifies as domestic tax resident if he/she meets one of the following alternative conditions:
(i) More than 183 days, consecutive or not, are spent in Portugal in any 12-month period starting or ending in the fiscal year concerned; or
(ii) He/she maintains a dwelling in conditions suggesting the intention to keep it and use it as the habitual residence during any day of the period referred to above.
Practice Note: The ownership of Portuguese real estate or a lease agreement with sufficient degree of permanence will fulfil the requirement to be considered domestically resident. The actual registration as a tax resident in the local office is a rather simple and straightforward procedure but always requires the existence of dwelling so that a full tax address in Portugal is linked to the taxpayer as his tax domicile.
The next difficult question that is raised is what should be the minimum stay to be a resident of Portugal. There is no single answer as the place of tax residence is inherently determined by reference to factual considerations. The favourite answer of legal counsel is “each case is a case”.
If in-country presence is by any reason below the 183 day test, then there should be “an intention to keep [a property] and use it as the habitual residence”. Interestingly there is no domestic definition of “habitual residence” in Portuguese tax rules.
In some jurisdictions habitual residence is linked to habitual place of abode, as the place where the individual is present in circumstances which indicate that his stay is not just temporary based on facts and not intentions. Other jurisdictions link such habitual test based on a continuous presence for a specific period of time. Others link the habitual test to the centre of vital interests, meaning where the business and personal interests of the individual are located.
In Portugal, one other route could be to extract indicia from other legal sources. For example:
In the framework of tax treaties, the third tie-breaker test is the “habitual abode” test and that is deemed to be located in the jurisdiction in which the individual has a greater presence during a calendar year. No specific length of time is specified but the comparison should cover sufficient length of time and take into account the intervals at which the stays take place to reach to an habitual abode.
In the sphere of private international law, the Rome I and Rome II Regulations do stipulate that “habitual residence of a person acting in the course of his or her business activity shall be his or her principle place of business”.
In the sphere of EU Social Security rules it is mentioned that residence means habitual residence. In this field, the European Court of Justice has already held that “the concept of ‘the Member State in which he resides’ must be limited to the state where the worker, although occupied in another Member State, continues habitually to reside, and where the habitual centre of his interests is also situated.” In a subsequent case, the Court added to the community-wide meaning of habitual residence that “in that context, account should be taken in particular of the employed person’s family situation; the reasons which have led him to move; the length and continuity of his residence; the fact (where this is the case) that he is in stable employment; and his intention as it appears from all the circumstances”.
More recently, the EU Successions Regulation employs the notion of “habitual residence” of the deceased at the time of death as a general connecting factor for the purposes of determining both jurisdiction and the applicable law. The Explanatory Memorandum provides further clarifications on the reasons for the choice of the habitual residence. The EU Regulation recitals also provide indicia for finding both jurisdiction and the applicable law by stating that authorities “shall make an overall assessment of the circumstances of the life of the deceased during the years preceding his death and at the time of his death, taking account of all relevant factual elements, in particular the duration and regularity of the deceased’s presence in the State concerned and the conditions and reasons for that presence.” It is then concluded that habitual residence reveals “a close and stable connection with the State concerned” in line with the specific aims of the Regulation.
Bottom line, habitual residence may be many things but the silver lining is that habituality requires facts and circumstances.
This being said, at Kore Partners we have learned 5 lessons from advising under the NHR regime, namely:
Keeping track of the habitual residence test is vital as the quality of the stay in Portugal is as equally important as the length of stay.
The crux is sometimes in the departing or connected jurisdictions to ensure that domestic residence tests are not triggered in more than one jurisdiction.
As the onus of proof will always be on the individual that claims it is a non-resident or a resident, it is important to be prepared at any time to show where is (and where is not) your tax residence.
There is an increase of scrutiny over change of tax residence and some countries are raising less orthodox measures based on big data analysis to obtain evidence and track situations of accidental or fictitious tax residence.
We see an increase of exchange of information requests to determine individual residency status and tie-breaker tests of tax treaties should be a last-resort mechanism to avoid double taxation as they bring uncertainty as regards final outcome or timings.
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The next Private Client Briefing will address how NHR interacts with emigration procedures, namely the fast-track golden visa program for non-EU nationals. See here.
© Kore Partners, March 2021
This briefing provides for general information and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, this should not replace legal advice tailored to your specific circumstances. This briefing is intended for the use of Kore Partners clients and is also made available to other selected recipients. Queries or comments regarding this including joining our mailing list can be directed to kore@korepartners.com