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VOICEOVER
This podcast channel is about you. Successful international entrepreneurs, successful expats, successful investors sponsored by HTJ.Tax
DERREN JOSEPH
Welcome everyone. HTJ.Tax. We do these live streams every week. We talk all things about cross-border and international tax, demystifying the sometimes-confusing world of international taxation. This is being recorded, so if you do not want your image to appear on the recording, you just need to switch your camera off, and you won’t be visible. This is also being live-streamed on several platforms. It will be recorded for those who said they have to leave early or will be late. So, this will be recorded and will be available on about 25 platforms. YouTube, Facebook, LinkedIn, Twitter, and also on your favorite podcasts like Spotify, iTunes, Podcast, etc.
DERREN JOSEPH
Please be aware that while we are qualified tax professionals, we are not your tax professionals. Not yet, anyway. So, we are having a general conversation about general principles. This is not meant to be advice. You can take it as education or entertainment, but if you want advice that’s relevant to your situation, you need to engage an advisor who will know your situation inside out. Again, this is not an advice. This (information) is how I keep my premiums and professional liability insurance as low as possible, and we don’t want any misunderstanding.
DERREN JOSEPH
Our two tax experts are Augusto in Portugal and Ricky from sunny Spain. Gentlemen, would you like to introduce yourself, please?
RICKY GUTIERREZ BECKER
Thank you. Well, so my name is Ricky, and I’m working well. I’m from Gutierrez, Pujadas, and Partners. It’s a tax accounting and law firm located in Barcelona, Spain. We’ve been working in international and Spanish matters for over 30 years. I’m here to give you a rough explanation of how the Spanish tax system works and some of its advantages, as well as the special tax regimes that we have here in Spain, and hopefully, it can solve some of the people’s doubts.
DERREN JOSEPH
Thank you, Augusto?
AUGUSTO PAULINO
I am Augusto Paulino, Tax Partner at DFK Portugal, an audit advisory firm in Portugal. We assist corporate and private clients. The idea would be to share some of our experience, link with the individual clients here in Portugal, and share some information about the tax regime. And Thanks, Darren, for the invitation. It’s a pleasure to be here with you and Ricky.
DERREN JOSEPH
Fantastic. Thanks for sharing your time. So many of our clients come in, especially from the US, and they would say, okay, I’m considering moving to Portugal or Spain. Which one? Sometimes we do models where we compare the two, but we thought this pointed to an area of interest. Let’s have a conversation. Not that any country’s better than the other. But there are pros and cons that we might want to explore. There have been over 200 RSVPs to this event, and you have thrown a lot of questions at us. We apologize in advance. It is impossible to go through all the questions we got. Some of them were lengthy. We got it. But you know, time is not necessarily on our side.
DERREN JOSEPH
It’s tax season for everyone here. So, we’ve decided to look at the commonalities, and we’ve come up with 10 questions that more or less cover everything regarding the subject matter that people have been asking. So, we go through each of these 10 in turn, and then if you don’t think your specific area was covered, feel free to ask. Let’s jump in. So, regarding tax residence, how is tax residence triggered in Portugal versus Spain? Augusto, generally speaking, how would tax residence be triggered in Portugal, please?
AUGUSTO PAULINO
Generally speaking, several criteria can trigger taxation, but the first one would be to spend more than 183 days in each 12-month period on Portuguese territory. Of course, you can also be considered a tax resident even if you stay less than that period in Portugal if you intend to live in Portugal permanently.
Those would be the main criteria. Of course, suppose we are discussing tax residency between different jurisdictions. In that case, other criteria may apply under the double tax treaty concluded between different jurisdictions or what we call time break clauses, central fetal interest, etcetera. But generally speaking, this will be the rule.
DERREN JOSEPH
Okay, fantastic. Thank you, Augusto. Ricky, how is tax residence triggered in Spain?
RICKY GUTIERREZ BECKER
Well, basically, we both come from the European Union. Everything is almost under the same O E C D model. The criteria are the same. It is based on three criteria. The first one, obviously, is the 183-day rule. If You spend more than that, you are automatically considered a Spanish tax resident. And then the second one would be having a permanent house available here in Spain. And also lastly, the economic interest. So, if all your income comes from Spain and everything is generated in Spain, then it can trigger you to become Spanish-taxed. And then the last one is the presumption test. Whether your family is living here, where do your kids go to school? This would be the third one. And as Augusto mentioned, if there are also some discussions between countries, you go to the double taxation treaty with the other country and find out where you should reasonably pay your taxes.
DERREN JOSEPH
Okay. So just to quickly summarize, there’s a days-test, which is quantitative, that’s subjective. Everybody gets that. But there’s also a subjective element in terms of, let’s say, a center-of-life test. Do you have a home available for you to use as a place abode, your family’s economic interest, and so on? That’s a bit subjective, and when there’s a clash, there’s a tie-breaker, assuming a double tax treaty is in place. Fantastic. I think, generally speaking, that covers it. So the next question, again, generally speaking, is what is the personal income tax for foreigners who are residents of their respective countries?
Let, let’s start with Spain. Personal income tax? I’m not talking about the special tax regimes, though.
RICKY GUTIERREZ BECKER
Whenever you become a Spanish tax resident, it doesn’t matter whether you are a US national or Portuguese national. I mean, automatically, if you are a Spanish tax resident, that means you have to pay taxes on your worldwide income. Whether the income is coming from the US, Spain, or anywhere in the world, that income will be taxable in Spain. What we have here in Spain is a progressive tax rate. Depending on the income you generate, you can go from 20% to the maximum of 47%.
And depending on the region of Spain where you live, it can go up to 52%. For example, here in Catalonia, it’s the region where you pay the most taxes, and it’s 54% maximum. So, that’s how they do it. It’s a progressive tax rate.
DERREN JOSEPH
Thank you for that. An Augusto in Portugal? Generally speaking,
AUGUSTO PAULINO
Generally speaking, if a foreigner is considered a tax resident in Portugal, he’ll be treated as a regular taxpayer. In general terms, the progressive tax rate is up to 48%, depending on the annual income level, and would apply to different sources of income. Once an individual becomes a tax resident, he will also be taxed in Portugal on the worldwide income, just as Ricki mentioned for Spain.
Briefly speaking, the tax regime is similar to any other tax resident. Of course, we may have special tax regimes that may apply in certain circumstances.
DERREN JOSEPH
So, generally speaking, the personal income tax rates are aligned with each other, 47 versus 48. However, Ricky, as you pointed out, depending on which region you’re in, some local or regional taxes could apply that will push you up a bit. And then, of course, on a separate topic, which we get people interested in, is the wealth tax, which may apply over a certain level. And just to be clear, Augusto, there is no wealth tax in Portugal. Is that a fair thing to say?
AUGUSTO PAULINO
Yes, it is a fair thing to say. However, an additional surcharge could reach 5%, which is applicable if the annual income is above 80,000 euros.
DERREN JOSEPH
Hmm, 5%. That could push you up to 52-53%.
AUGUSTO PAULINO
Yes.
DERREN JOSEPH
Yeah. Okay. So again, in line with Spain, if you’re in Catalonia, for example?
RICKY GUTIERREZ BECKER
Yes, but, as you said, one of our biggest disadvantages is the wealth tax. I mean, it’s a tax that the government does not designate. So, each region is the one that decides if they want to have wealth tax or not. Unfortunately, Catalonia is one of the worse ones because you normally have a regular tax allowance for the first 700,000 of your assets; there’s a deduction. But in Catalonia, instead of 700,000, it’s only 500,000. So, it’s a disadvantage. But then you have this other region such as Madrid or Andalusia where there’s no wealth tax.
So, for many people, whenever they want to move to Spain, they need to look at where they will live because it can make a big difference. And then, because there is no wealth tax in Andalusia, which was introduced in mid-2020, the government decided, okay, since there will be no wealth tax here, we will apply a new tax. This new tax is called the solidarity tax. It’s for people with wealth over 3 million. They will have to pay a small percentage, but still another tax has been added. For now, this tax will only last for two years, but who knows? Maybe they’ll keep it.
DERREN JOSEPH
Very interesting. Here’s our next question: for those who are business owners and entrepreneurial entrepreneurs. Corporate income tax generally depends on the type of company. But generally speaking, what is the corporate income tax look like, Ricky?
RICKY GUTIERREZ BECKER
So, in Spain, corporate income tax is at a rate of 25%. But one thing that people need to know is that whenever you incorporate a company, the first two years that you have earnings, you have benefits. You’re only taxed at 15%. So at least for the first two years, you only pay 15%, then you go to the 25% tax rate.
DERREN JOSEPH
Augusto?
AUGUSTO PAULINO
Portugal’s general corporate income tax rate is 21%, and the municipal surcharge may apply up to 1.5%. So, depending on the region and taking into account such maximum municipal surcharge, we can consider the corporate income tax rate at 22.5%. There is also an additional surcharge for companies with high profits above 1.5 million. They are subject to additional surcharges, but this is general corporate and not contextual.
DERREN JOSEPH
Okay. So, generally speaking, it is slightly more attractive in Portugal. Generally speaking. Of course, it depends on the industry, the size of your turnover, et cetera, and location. But, okay, next question. Social charges, which are borne depending on your situation by both the employee and the employer. If you’re self-employed, you bear them all on your own. But for someone planning to move to Spain or Portugal, it is something they sometimes forget to consider that may have a big impact. So, with that in mind, Augusto, can you talk about social charges in Portugal, please?
AUGUSTO PAULINO
So social charges apply to employment income and also to self-employment income. In the case of employment income, the general rates would be 23.75% for the employer and 11% for the employee, which in total is 34.75%. And for the self-employed, in general terms, the social security contributions correspond to a tax rate of 21.4%.
DERREN JOSEPH
So, to be clear, if you’re self-employed, the social charges would be around 20-something percent. But only on part of your income; it will be up to this certain amount of income. Is that it?
AUGUSTO PAULINO
Right. The social security contributions only apply to 70% of income, in case, for example, of services.
DERREN JOSEPH
Okay. Got it! Thank you very much for that. Ricky Spain?
RICKY GUTIERREZ BECKER
Yeah. And in Spain, there’s this monthly fee called the autonomous for self-employed people. Normally whenever you become autonomous, you only pay a fee of 50 euros monthly for the first two years. But I think this was changed starting in 2023. And they moved it up to 80 euros a month. And then once, once these two years are over, depending on what you think you’re going to earn that year, you inform the social security, and then they give you a range where you can say how much you want to pay. And then, at the end of the year, they check between the tax authorities and the social security. They check how much you paid, whether you paid more or you paid less. So either you have to pay more, or they give you credit. For people who have been employed: for the employer, the withholding is normally around 36%, and the withholding for the employee is around 5 or 6%.
DERREN JOSEPH
Okay. So, proportionately, the burden on the company is a bit higher now. What I didn’t quite get for someone who is self-employed is the auto. Right. So roughly, what percentage would that person be looking at?
RICKY GUTIERREZ BECKER
So normally, the minimum autonomo fee you would be paying, if you are earning a decent amount of money, say over 35,000, is around 300 to 350 euros a month. This is the social security charge. These people have a fixed amount, not a percentage. It’s a fixed amount that you can increase because, for example, if some people want to retire and get money from social security, some people even pay more, like over a thousand euros.
DERREN JOSEPH
But roughly speaking, that’s a flat amount, at least the minimum requirement. Does it translate roughly into a percentage or not really?
RICKY GUTIERREZ BECKER
No, it’s not really a percentage. It’s an amount that, “however it works. “I’m not an expert on the labor part as to how it works. But you go on the website of social security. You normally put the gross salary that you will be earning, and then it gives you a range of either you can pay this minimum amount, or you can pay this much, and then people decide. It’s something that was implemented this year. And then that’s how it is going to work for people who are self-employed.
DERREN JOSEPH
So, it’s brand new. Understood. So, that is the basic part. We’ve set the foundation. Now we’re going to go to the fun part that many of you have asked about: the special tax regimes. So, I know each of them is a whole day of seminar, right? They have their own intricacies. So just at a very high simplistic level, how does a special tax regime, which I believe is called the Beckham law, how does it work in Spain?
RICKY GUTIERREZ BECKER
On a very high level, it’s a special tax regime that was made for people from outside of Spain (US expat tax Spain) who wanted to come and live in Spain. Basically, there are some requirements that people need to meet. The main requirement is that you need to be employed by a Spanish company. The other requirement would be that you cannot be the director of the company. So basically, you cannot employ yourself. And, and then the other main requirement is that you have been taxed in Spain for the past 10 years. The advantage of being on the Beckham law is that instead of going through the progressive tax rate, you are taxed based on a flat rate of 24%, which is way more advantageous than being on the progressive tax rate.
So, it’s a 24% flat rate for the first 600,000. And then once you go over these 600,000, you automatically go to 47%. This was made basically for very famous people such as footballers, but now they don’t really use it anymore because their salaries are so high that these 600,000 are not enough.
DERREN JOSEPH
That’s half of what the regular rates could be. That could be pretty attractive. But it’s very nuanced. So it’s for a company that a foreigner cannot own?
RICKY GUTIERREZ BECKER
Yes.
DERREN JOSEPH
But they must be employed. So, they’ll need to come to a professional team like yourself to help get it structured.
RICKY GUTIERREZ BECKER
Yes. One structure that is pretty common, and we’ve done this with several clients to help them apply to the Beckham law, is to create this structure where our firm incorporates a company, and we act like a fiduciary. We act as directors and shareholders of the company, and then we employ these people. This way, they are able to apply for the Beckham law. Also, I should have mentioned the Beckham Law lasts six years. After these six years, they can either decide to move somewhere else, or they become Spanish.
DERREN JOSEPH
So, six years, 24%, and you need a professional firm like yourself to have it set up. Of course, there’ll be fees that would…
RICKY GUTIERREZ BECKER
…or you could have a normal company hire you.
DERREN JOSEPH
So, that’s Spain, Augusto. What’s going on in Portugal? Let’s talk about the NHR. I know it’s very intricate, but generally speaking,
AUGUSTO PAULINO
The NHR or Non-Habitual Resident regime is, in terms of conditions to apply for the regime, the main one is that the individual has not been a tax resident of Portugal for the previous five years. This is the main condition or requirement to apply for the regime. So, we are talking about tax residents. It’s for people who decide to move to Portugal and become tax residents. This regime is applicable for 10 years and has certain advantages with respect to specific sources of income.
Generally, the individual would be treated as a regular taxpayer in Portugal. However, some benefits apply to certain sources, natures, or income streams. And also, depending on the source of the income, for example, with respect to income from a foreign source, there are exemptions available for investment income such as interest or dividends, or even rent received.
There are also tax benefits in terms of the tax rate applicable to employment or self-employment income derived from what we call high-evaluated activities. So there is a list of professional activities that can benefit from a 20% flat rate for personal income tax purposes instead of the progressive tax rates of up to 48%. And there are also benefits for pension income from a foreign source, which has a flat rate of 10%.
AUGUSTO PAULINO
And these are some examples of income streams that have special rules under the NHR regime.
DERREN JOSEPH
Okay, got it. And Ricky? Are you about to say something?
RICKY GUTIERREZ BECKER
Yes, I forgot to mention that with the Beckham law, once you are with the Beckham law in Spain, you are treated as a non-resident. Often, people ask us, okay, I’m on the Beckham law; do I still need to file the form 7-20? No, since you are not considered a tax resident in Spain, you don’t have to file. The only thing you have to file is a form that is very similar to the regular income tax that is just for people in the Beckham law. Also, the only things taxed at a 24% tax rate are the incomes generated in Spain. Anything else generated outside Spain is taxed in the country where these earnings were performed or generated. If they’re not generated in Spain, these things are taxed in the other jurisdictions.
DERREN JOSEPH
That’s an important point to take note of. Technically, it’s like an exemption from the tax residency that we discussed earlier. You’re not a tax resident of Spain, and that makes a whole difference. Comparing the two: On the surface, Beckham law lasts 6 years at 24%, and NHR in Portugal lasts 10 years at 20%. But it doesn’t mean that one is better than the other. It applies to very different circumstances. So generally speaking, and Augusto, correct me if I’m wrong, if we see clients with an interesting investment portfolio where they get a lot of securities income, they will get sticker shock because they think they’re coming into a more benevolent tax regime, but potentially, especially, if coming from the US–Portugal’s effective tax rates will likely be higher than in the US even under the NHR?
DERREN JOSEPH
Is that a fair example of someone who could be shocked by the NHR?
AUGUSTO PAULINO
Yes, because sometimes the NHR regime is confused with the full-exemption regime for foreign income, which is not the case, as you mentioned. For example, capital gain zone and securities. The General rule would be that such capital gains would not be exempt under the regime. There are some exceptions depending on the country of source, but as a general rule, capital gains and securities would be taxed.
DERREN JOSEPH
So, it’s exceedingly nuanced. It’s unlike Spain, Gibraltar, Cypress, Greece, Ireland, and the UK, where you have this clear delineation. If it’s local, it’s taxed. If it’s foreign, it won’t be taxed; it’s not that clear. It’s extremely nuanced, and you go through your income sources one by one to see what the impact will be and see whether it makes sense for you.
AUGUSTO PAULINO
Yes, because as, as Ricky mentioned, this regime is applicable to tax residents in Portugal, so they need to report their worldwide income anyway, and if it’s not tax-regime based, for example, on the remittance of funds to Portugal– it’s not the case, we have another jurisdiction.
DERREN JOSEPH
Exactly. And coming back to Spain again sounds really attractive. Well, 60 years, at 24%, that sounds great, right? But one of the things that come up in conversations with people from the US who are thinking about coming over is that to set up that structure, there’s a cost, so you’d probably want to be earning above a certain amount or enjoying the benefit of income above a certain amount to pay the fee to set up the structure and to run the structure. So, generally speaking, just a ballpark, no commitment, roughly what type of cost and, therefore, what income levels would benefit from this structure?
RICKY GUTIERREZ BECKER
Normally the people that we’ve set up this kind of structure, it’s people that normally have companies. I’m familiar with the US because we have a lot of people coming who want to come to Spain, and these people normally have companies in the US with really, really high incomes. But to really take advantage of this regime, you must earn over 80 to 200,000. I think you could take a great advantage because here in Spain, if you earn income above 80 to 200,000, you are on the top tier, between the 47 and 52% tax rate.
So, applying for the Beckham law could be a great advantage once you are on those rates.
DERREN JOSEPH
Right. And to add to your point, so technically, since you’re not a tax resident, you can run those companies from Spain, and the normal triggers around the place of effective management do not apply, right?
RICKY GUTIERREZ BECKER
Yes, that’s correct.
DERREN JOSEPH
So, you can run your American company from anywhere in Spain once you’re under the Beckham law because you’re not a tax resident, and therefore, the company doesn’t get pulled into the tax system in Spain.
RICKY GUTIERREZ BECKER
Yes, and many people ask: “Since I’m not considered tax-worth in Spain then what am I considered?” What, then, would you have to pay? (obviously, you have to pay somewhere in the world). The most typical clients that we’ve found are Americans. So, this is not a huge question for them because American citizens are always required to file taxes whether they’re tax residents or not. So, obviously, they can say that they are tax residents in the US and then pay taxes for their worldwide incomes in the US and then pay the 24% here for the income generated in Spain.
DERREN JOSEPH
Fantastic. And for those who just joined us, Yes. And you didn’t hear the beginning. Yes. This is all being recorded and will be immediately available afterwards if you want to get it. I see questions coming up about the NHR. If you just go to HTJ.tax on YouTube and type in Augusto’s name, there are hours of conversations with Augusto going into all the ins and outs of the NHR; it’s all there to answer all your questions. As for Ricky, you can go to Ricky’s website, and he will give us his credentials later on. Also, he’s having a live stream next week with his colleagues where and he will be going into a lot of details.
DERREN JOSEPH
Ricky, what’s your website again for those interested?
RICKY GUTIERREZ BECKER
So our website is www.gpasoc.com. Next week, we are having a webinar, and we will talk a bit more about the wealth tax and the new regions of Spain where they decided that the wealth tax will not be applied. And also, we’re going to talk about the solidarity tax introduced last year and the most recent thing that was incorporated on the 1st of January, 2023, the new startup law, the Nomad visa.
RICKY GUTIERREZ BECKER
So next Thursday, we’ll mostly cover all these four subjects, and with the Nomad visa, we will also talk about the Beckham law.
DERREN JOSEPH
Right. And yeah, I see the comments on Facebook, but we want to get through the stuff and not get trapped in a rabbit hole. Anyway, Augusto, somebody wanted to find you on the web. What what’s your website?
AUGUSTO PAULINO
Okay, so, for me, it’s www.dfk.pt
DERREN JOSEPH
Okay. Simple. So, we can go down that rabbit hole on each of those topics now. So, I think that’s a decent introduction, but please bear in mind that this is just an introduction to these very nuanced regimes, but moving on, that was a good segue into that this nomad visa and, of course has been a popular option in both Spain and Portugal. Let’s talk about the nomad visa from a tax perspective. I’ll start with you, Ricky, please.
RICKY GUTIERREZ BECKER
Well, so, as I mentioned, it was incorporated in early January. So, it’s very new, and we’ve had many people ask questions about how to apply for this type of visa and everything, but the government hasn’t given us a lot of information about that. We were in touch with a lot of immigration attorneys, and just now, in March, they gave some additional information. So, if anyone wants to apply, we can assist them.
RICKY GUTIERREZ BECKER
But tax-wise, it will work very similarly to being a non-resident in Spain. Basically, it gives you the advantage of working remotely in Spain for a foreign company. It either works if you are self-employed or autonomous or working for a company. If you are self-employed, there’s one condition that only 20% of your income can be coming from Spain. Tax-wise, this income, and everything you are generating and all the salary being paid to you, is only taxed at a 24% tax rate.
RICKY GUTIERREZ BECKER
So, it’s very similar to the Beckham law with the way it’s taxed. And also, obviously, as if you are not a tax resident in Spain.
DERREN JOSEPH
So, to confirm, it’s 15%, right?
RICKY GUTIERREZ BECKER
No, it’s 24%. It’s the same rate as the Beckham law.
DERREN JOSEPH
Okay. Sorry, but you were about to say something else?
RICKY GUTIERREZ BECKER
It’s not a complicated thing, but some requirements are complicated because the people who want to be here and work remotely for a company need to know that the foreign company needs to be registered in Spain. It’s something that many people need to learn about, but the foreign company needs to be registered in Spain and then pay the social security charge.
DERREN JOSEPH
So just let me make sure I got this. So, for a Nomad Visa, you’re not a resident; you can run a company, but whatever company is paying you must be registered in Spain. Yeah, this is if you are an employee, but what if you’re an independent contractor to that company?
RICKY GUTIERREZ BECKER
So, if you’re an independent contractor of the company, you need to show a business relationship with that company for around a year that you’ve been working with this different company. And also, you need to demonstrate that you can work remotely for this company and that it’s something that is necessary. And, being an independent contractor, you can work for a Spanish company, but only 20% of your income can come from Spain. If there are more than that, then this type of PCL will automatically be denied.
DERREN JOSEPH
Okay. And under this scenario, whether you’re an independent contractor to that foreign company or an employee to that foreign company, will social charges be triggered regardless?
RICKY GUTIERREZ BECKER
Yes, for the employer. For the self-employed? No. But for the person that is actually employed by a company. Yes. Because the company will need to register here in Spain, they will pay social security. Yeah.
DERREN JOSEPH
Okay. Thank you for that.
RICKY GUTIERREZ BECKER
What they recommend, and it’s also one of the requirements, is that the person moving to Spain must have private insurance.
DERREN JOSEPH
So, generally, they do not have recourse to government healthcare facilities?
RICKY GUTIERREZ BECKER
Yes, that is correct. Well, for the person that is employed here they have access to it.
DERREN JOSEPH
Because they pay social charges, right? Yes. Gocha! Augusto?
AUGUSTO PAULINO
Well, with respect to the nomad visa, this is not a tax regime and does not have any specific tax treatment. So, either the individual is a tax resident in Portugal or not depending on the criteria that we have already discussed. So, if the individual who obtained this kind of visa meets the requirements to be considered a tax resident in Portugal, then he/she would be subject to the general rules.
AUGUSTO PAULINO
Or it could be that the NHR regime may apply to him. So, for example, if such a person has an activity either as an employer or employee or self-employed, that can be considered an NHR activity, then it can ask for the benefits of the NHR regime, but it does not have any specific tax treatment derived from the type of visit.
DERREN JOSEPH
Okay. So again, to summarize, for Portugal, it’s not like Spain in that within the program, there’s no special tax treatment, but it can and is usually paired with the NHR, typically. Depending on your situation, that may be beneficial. But keep in mind that with the NHR, it doesn’t apply to everyone that applies. You must fit under one of the government categories of a high-value activity as defined by the government. If you do, then you get your 20%. If not, you are on the regular progressive tax rate. But assuming that you do make the cut, that’ll be 20% versus Spain, which is 24%.
DERREN JOSEPH
However, with Spain, it’s 24% for an independent contractor, with no social charges. But with Portugal, it’s 20%. Yes, you pay social charges as an independent contractor. Again, none is better than the other. It depends on your unique circumstances, and before you decide, you’d want to speak with a professional. Okay. Next question: we got a lot about foreign pensions. So this is highly contentious and hotly debated. People get upset debating over this.
DERREN JOSEPH
So, let’s, let’s get some clarity. Augusto foreign pensions received by someone who’s now resident in Portugal. How is it treated?
AUGUSTO PAULINO
Assuming that the non-habitual resident regime applies, as mentioned before, the 10% flat rate applies to pension income from foreign sources.
DERREN JOSEPH
And what if the person receiving that pension was a government employee, military, or state? Does that change anything?
AUGUSTO PAULINO
Okay, so while the rule is a flat rate, we still need to evaluate it in line with the rules of the power of taxation of the different jurisdictions, the country of source of the pension, and the country of residency, in this case, Portugal. Of course, if under the double tax treaty, the pension income can be taxed at source, which is the case, for example, with pension derived from public services. In such cases, if there is taxation at source under the double tax treaty, then no taxation.
But that’s an exemption of the pension treaty derived from public services and under the rules of the double-tax treaties and not under the specifics of the NHR regime itself.
DERREN JOSEPH
Right. To summarize, for private pensions, i.e., pensions derived from service to the private sector, You might want to have a conversation with Augusto about the NHR. For pensions derived from government service or to the state, you should have a conversation with Augusto about tax treaties.
AUGUSTO PAULINO
Ricky, How about Spain? Pensions?
RICKY GUTIERREZ BECKER
Well, if you are under any special tax regime such as tobacco law foreign pensions, since it’s not income generated in Spain, they are not taxed in Spain. So easy. Not our problem. Yeah. But as we found in many cases, there are people who are actually tax-based in Spain with foreign pensions. Normally pensions, they are taxed once you make withdrawals from those pensions. But, here, we need to consider whether it’s a private or a public pension.
Whenever we talk about public pensions, as you mentioned, these people who worked for the government receive these types of pensions. Then these pensions are only taxed in the country of origin. So here in Spain, they would be exempt, but private pensions, as I was saying, whenever people make withdrawals, this money will be taxed as earned income on your income tax and then, and then you would pay tax on, on those.
RICKY GUTIERREZ BECKER
What bothers people or what people are afraid of is if these foreign pensions will be taxed on their wealth tax here. We need to check the type of pension people have. For example, whenever we talk about the US, we are very familiar with IRAs, Roth IRAs, 401k, and Roth 401k. We have found that we would need to study the type of pension and decide whether it needs to be included in the 7-20 and in the wealth tax.
RICKY GUTIERREZ BECKER
But normally, what we have found is with Roth IRAs and Roth 401Ks. They’re normally not always included under the wealth tax, and they have to be informed 7-20. and as for traditional IRAs and traditional 401Ks, they are normally taxed as traditional pensions here in Spain. So these are the things that need to be in consideration.
DERREN JOSEPH
Okay. So just to summarize, if it is someone who has worked for the government, state, or military, under the treaty, it is tax-free in Spain.
RICKY GUTIERREZ BECKER
Yes. It’s, it’s exempt because it’s only taxed on the country of origin. Yeah.
DERREN JOSEPH
Okay, perfect. Now, which is the same case as in Portugal. However, if it is a private pension, then if it’s a regular traditional IRA 401k, it will be taxed as a pension is taxed in Spain, which has a progressive rate of up to 47-48%.
RICKY GUTIERREZ BECKER
Yes, it’s treated as an earned income, and Yes.
DERREN JOSEPH
Right. Thanks
RICKY GUTIERREZ BECKER
It’s the same as if you were earning money from your salary. Yeah,
DERREN JOSEPH
It’s, yeah, it’s just income. Okay, got it. Yeah. Whereas if it’s a Roth, there may be an opportunity for some planning in terms of the return on the investment because it’s after tax, you know, investment. Is there an opportunity planning? Yeah,
RICKY GUTIERREZ BECKER
The issue with Roth IRAs and Roth 401K is that they are both taxed in wealth tax and then also in income tax. Okay. And that’s what people are most concerned about. I mean, they’re not that much concerned about income tax. They’re mostly concerned about wealth tax because it’s something that you need to pay every year,
DERREN JOSEPH
So. Right. But of course, as you mentioned, if you were under the special tax regime like the Beckham law, obviously, or the nomad, you’re good. Okay.
RICKY GUTIERREZ BECKER
Yeah, you’re good because since you’re not considered a tax resident, then you don’t; you don’t have to pay taxes here in Spain for that.
DERREN JOSEPH
Fantastic. Very good to know. We are moving on. And I, yes, I see a lot of questions coming in; we took all the questions that came in, looked for the similarities, and came up with these 10. So yes, I’m seeing your question, but we’ve synthesized it into these 10, so moving on to number eight. Under some regimes, depending on when you enter the country and become a tax resident, it is possible to split the year between the time before you arrive, let’s say, in Spain or Portugal.
DERREN JOSEPH
So I’ll start with you, Ricky; is it possible to get that sort of split-year treatment in Spain? In the US, we call it the dual status treatment, or does it even exist at all, once you trigger tax residency, are you all in for the entire calendar year?
RICKY GUTIERREZ BECKER
Yes. So basically, how it works with this point is we would go to the three criteria and check whether you are considered a Spanish tax resident or not. Normally, whenever people want to move to Spain, we recommend that they come in in the second part of the year to avoid being tax residents of that year that they are moving in; we normally recommend coming in the second part of the year. So from July forward, this way, these people can avoid becoming tax residents that year.
That’s just something that we recommend. And it also gives us the advantage to do some tax planning. It gives us one more year to plan everything better and give the best advice to the potential client.
DERREN JOSEPH
So, that deals with the first criteria and the second too. So, if you come in August or September, but then your center of life becomes Spain, wouldn’t that still trigger, or is that a gray area?
RICKY GUTIERREZ BECKER
Yes, it is. It would become a gray area, but what we do to avoid being tax rented in Spain for that year is to justify that this person has actually paid an income tax somewhere else, and we can provide documents: the tax filing and then also the tax payment, and the Spanish tax authorities normally also want to see tax residency certificate issued by the country of residency. If we are able to provide all those things, then the tax authorities won’t be, won’t be able to say anything.
DERREN JOSEPH
Okay, and again, just playing with that theme, just one more question, and this is the point that Jay Mendez has raised in the chat, what if you come in like a regular person, like a tourist or whatever, and then you jump on either the nomad or the Beckham law. So for part of the year, you are full-blown exposed, but then for the other part, you were not right? Isn’t that like a split-year as well?
RICKY GUTIERREZ BECKER
Yeah. So, what happens, it’s either apply for the Beckham law or the nomad visa? Well, we need to differentiate the nomad visa. It’s actually like a residency status. And then the Beckham law is a special tax regime. So as Augusto was saying, the nomad visa is not actually taxed. It’s more of a visa, with some tax advantages, but you can enter Spain as a tourist, and then from here, you can make all the necessary paperwork to apply to the Beckham law if needed.
RICKY GUTIERREZ BECKER
Or you can aspire for the nomad visa. You can enter here as a tourist and then look for an immigration attorney to do all your paperwork to apply for the nomad visa. Or you can do everything or plan everything before coming to Spain. But what happens is that for the Beckham law, you actually need to be employed whenever you make the application; you need to have your employment agreement with a Spanish company. So normally, these people are those already living here in Spain for those months that the law hasn’t been approved yet.
These people are taxed as non-residents. So, no problem for them because once they get the Beckham law, they will be taxed at the same rate, 24%. Yes, that’s the way it works. So you can come here as a tourist and then do all the procedures that you need to do.
DERREN JOSEPH
Okay, fantastic. Thank you for that, Ricky! Augusto? What’s going on in Portugal? Is there
possibility to do that split here?
AUGUSTO PAULINO
Yes, in Portugal, we have the concept of partial tax residency, meaning that individuals can become tax residents on the day that they arrive in partial or until the end of the calendar year. For example, picking up in July or August, if individual moves to Portugal, they can be considered tax residents from July or August until the end of the year, meaning that he will only be taxed on the income earned after that specific date.
DERREN JOSEPH
Okay. So that’s a great planning opportunity. So if you want to move to Portugal, you’re looking at late summer as probably the best time to move, at least for tax purposes and maybe others, but yeah. Okay.
AUGUSTO PAULINO
And always important to match the date of registration for tax purposes in Portugal with the date when the individual is leaving the previous, previous country of residence.
DERREN JOSEPH
Okay.
AUGUSTO PAULINO
…to avoid the discussions around the double taxation
DERREN JOSEPH
Yeah. Which nobody wants to hear. Nobody wants to hear about double tax, so you need to get that right.
RICKY GUTIERREZ BECKER
Yeah. And Darren, one thing to mention that I read on the chat. No! Whenever you want to apply for the nomad visa, you should have been a tax resident in Spain for the previous five years. It’s something they change with the Beckham law. With the Beckham law, it’s 10 years with the nomad visa, it’s five years, but if you aren’t already a tax resident in Spain, then sorry, but you cannot apply for this type of visa.
DERREN JOSEPH
Okay. So, it’s something that you need to decide on as soon as possible, either before coming or just after arriving. You need to have a conversation with a professional. Okay. All right. That’s good. That’s good to know. Okay, we have two more questions: question nine: fallback rules. So there are certain rules around, like when you leave Spain or Portugal, potentially you may still be caught in the tax net of Spain or Portugal, even though you’re not technically there. Is that possible, Ricky, is that possible? How does that work?
RICKY GUTIERREZ BECKER
So, basically, it’s exit tax. As we mentioned earlier in the conversation, Darren, there’s an exit tax in Spain. But the criteria for the exit tax is pretty high because you need to have shares of over 4 million. Well, you’ll be lucky if you have this kind of money. This is the only exit tax we have here. And well, the most common is whenever people move to a tax haven. There’s this rule here in Spain, called the quarantine rule, that whenever someone decides to move from Spain to a tax haven, they are considered tax residents for the next five years.
DERREN JOSEPH
And to get that list of tax havens. You get that on the government tax website, right?
RICKY GUTIERREZ BECKER
Yes. Yeah. If you go to the government website, you can check the list of tax haven countries. Basically, tax haven countries are countries with which Spain doesn’t have a double taxation treaty with.
DERREN JOSEPH
Yeah.
RICKY GUTIERREZ BECKER
I mean, we have over a hundred double-taxation treaties. So yeah, there are some countries that are considered as tax havens.
DERREN JOSEPH
We also have it on our website for those who want to access it quickly; just go to htj.tax. So basically, it’s all the fun countries. Any island with zero or the UAE, which is also zero. Okay. Augusto, does Portugal have anything like that? Any sort of exit or quarantine rules?
AUGUSTO PAULINO
In terms of the fallback rules or quarantine rules, it’s similar to Spain. So, in case an individual move to what we call blacklist jurisdiction and blacklist in Portugal is a long list. The individual is still a tax resident of Portugal unless one can prove that he/she moved for justifiable reasons, namely to work or to have an employment contract in such jurisdiction.
AUGUSTO PAULINO
But the rule is similar to Spain. We do not actually have exit taxes. There are some specific situations where you can be picked by specific rules of exit taxes. For example, we have a pretty recent one that was introduced for 2023 with the state budget for this year. That is related, for example, to cryptocurrency. Because when you leave the country, you can trigger taxation on crypto assets.
AUGUSTO PAULINO
But it’s just an example to show that we may have some specific rules with respect to taxation on exit, but there is no such general rule.
DERREN JOSEPH
Okay. Got it. Okay. So, the last question, and thank you for being so generous with your time, gentlemen. The last question is about tax for non-resident landlords. So, landlords that are not tax residents of Spain or Portugal but they’re in love with the country, they have their holiday homes, something on the beach, and they may rent it out when they’re not around. Obviously, that’s Spain’s or Portugal’s source of income. Will it be subject to some sort of tax? Augusto? How would it be taxed by Portugal? the Non-resident landlords?
AUGUSTO PAULINO
Okay, so in the case of rental income or even capital gains derived from the sale of property in Portugal, such income would be taxed in Portugal, even if it is earned by a non-resident. And the tax rate would be 28% for rental income. And with respect to capital gains, there is also a recent change in the law, and taxation would be at progressive tax rates enforced in Portugal, as it applies to tax residents.
AUGUSTO PAULINO
But, on taxation, it’s only applicable on 50% of the capital gain.
DERREN JOSEPH
So roughly, the progressive rates jumped 47 to 48% pretty quickly, right? So, it may be half of what the profit is on half of the sale price. Yes, okay, got it.
AUGUSTO PAULINO
To simplify, it’s 24%, just to keep it simple.
DERREN JOSEPH
Yes, to keep it simple. So, I just want to go back real quick to rental income. Is there any distinction between short-term rental like Airbnb as opposed to long-term rental income? Or is it the same?
AUGUSTO PAULINO
There could be differences because short-term rental could be a business activity. In such cases, it may trigger other tax obligations because the individual that is a non-resident is considered to have a business activity in Portugal, and it has different obligations.
DERREN JOSEPH
Okay, understood. Thank you for that.
AUGUSTO PAULINO
The income may be treated as a business income and not as a passive rental income.
DERREN JOSEPH
So, if it is business, then it will be taxed at a corporate rate, like 21.75%?
AUGUSTO PAULINO
In case of non-residents would be at a rate of 25%.
DERREN JOSEPH
25%. Okay. Right. Got it. Understood. Okay. Ricky, what’s the situation in Spain? Non-resident landlords?
RICKY GUTIERREZ BECKER
Yes. So, in Spain, it’s, well, it’s treated as non-residents as well. Basically, any income generated from those properties, whether it’s rental income or capital gains, depending on whether this individual is from the EU, they would be paying 19% on that. Or if it’s from outside the EU, it’s 24%. I mean, it’s as simple as that. Regarding what you mentioned, if it’s like short-term, it’s very similar to what Augusto mentioned, maybe it can be considered business income, and then that income could be taxed 25% out as if it was a company.
DERREN JOSEPH
Okay. Right. So roughly, Portugal and Spain are in line. Yeah. What about a sale? What if you were to sell the property?
RICKY GUTIERREZ BECKER
So, if you were to sell a property, then it is taxed on whether the sale has been made, and then we check if this person has a gain or not. And then, they would pay for those gains. And as I said, if the person is from the EU, it would be 19%; if not, it’s 24%.
DERREN JOSEPH
Okay. So, it’s 19-24, so whether it’s a sale or rental income, same.
RICKY GUTIERREZ BECKER
Yes.
DERREN JOSEPH
All right. That, that’s good to know. That’s it. We’ve come to an end. We appreciate everyone who’s joined us and who’s asked questions. We’ve got something like 63-64 questions, but we have compressed those down into the 10 that we’ve asked because many people are asking the same thing but in different ways. So those 10 questions kind of, at least, we believe captured the spirit of what everyone is trying to ask. If it is that you still need to take a deeper dive into your situation because, again, we’ve just spoken generally. But just to repeat, Ricky, do you want to say again how they can find you, please?
RICKY GUTIERREZ BECKER
Yes. Well, my email, it’s ricky@gpasoc.com, and our website is www.gpasoc.com.
DERREN JOSEPH
Great. And Ricky will do a live stream with his colleagues next week, so if you want to take a dive, join for that.
RICKY GUTIERREZ BECKER
Yes. Next week, next Thursday, it’s at 5:00 PM. We are doing a webinar on wealth tax and also the new startup on the nomad visa.
DERREN JOSEPH
Okay. And Augusto, what’s the best way to reach you if someone wants to engage your team?
AUGUSTO PAULINO
Okay. The website of our firm is already in chat, and my email address is august.paulin@dfk.com.pt.
DERREN JOSEPH
Okay. Wonderful. Yes, that is it. And for those who just joined and were asking. Yes, this is all being recorded. It’ll be immediately available. So, I suggest to Keep checking the various platforms. Thank you. Have a good evening or morning, depending on where you are, and we will see you next time. Bye-bye.
RICKY GUTIERREZ BECKER
Yeah. Thank you so much, Derren and Augusto, for this webinar. Have a good day.
AUGUSTO PAULINO
Bye.
VOICEOVER
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Ensure compliance with US taxes for expats in Spain. Contact us for professional assistance.
