Portugal's non-habitual resident (NHR) tax regime, once celebrated for its attractiveness to expatriates, is undergoing a significant shift. Initially praised for offering tax-free transactions, favourable rates on pension income or wealth, and reduced taxation on various sources of income, the NHR scheme has been a key incentive for those considering a move to Portugal.
However, recent developments bring news of changes to this renowned tax regime. Originally set to conclude on January 1st, 2024, the NHR scheme faced uncertainties due to Portugal's political landscape. With the government's collapse in December 2023, hopes for a reversal emerged, but ultimately, parliamentarians voted to proceed with the planned termination.
Summary
The new end date is now December 2024, extending the scheme by another year.
The Update to NHR Tax
This adjustment will impact thousands of British expats who benefited from the NHR regime. The scheme, which grants residency to those spending over 183 days annually in Portugal, includes a special 20% tax rate for income from 'high value-added' activities, catering to professionals such as professors, doctors, and architects.
Despite the closure, individuals who have already secured NHR status will continue to enjoy the regime's advantages until the completion of their 10-year term. This guide aims to navigate you through the NHR tax scheme, shedding light on its benefits, updated requirements, tax rates, and crucial dates in light of the recent policy adjustments.
What is the NHR Tax Regime?
Portugal's NHR tax regime is a unique tax status designed for newcomers. This special tax classification involves establishing tax residency in Portugal, granting individuals the benefit of reduced tax rates on their income for 10 years. However, as of January 1, 2025, NHR holders must fulfil a requirement of spending more than 183 days each year residing in Portugal.
The primary objective of Portugal's NHR regime is to attract investors and professionals who can make significant contributions to the country's economy and culture. By offering this special tax status to new residents, Portugal aims to incentivise their relocation, potentially leading to tax exemptions on their global income. Additionally, active income generated through high value-added activities in Portugal is subject to a flat tax rate of 20%.
The NHR status presents an opportunity for substantial tax savings and was initially introduced in 2009 to enhance Portugal's competitiveness. The regime has changed, including the introduction of minimum residency requirements starting in 2025, reflecting the evolving nature of the program.
The Benefits of NHR Tax Residency
By applying for NHR tax residency, you can benefit from:
- Special 10-year tax treatment: Benefit from unique personal income tax rates for a decade.
- Exemption on foreign income: Enjoy tax exemption on nearly all foreign-source income.
- 20% flat rate on specific Portuguese income: Pay a flat 20% rate on certain Portuguese earnings (applicable to specific professions and self-employment), in contrast to national rates of up to 48%.
- Tax residency in a white-listed EU country: Join a tax-friendly environment on the white list.
- Tax exemptions on family gifts and inheritance: Enjoy tax exemptions on donations between direct family members.
- No wealth tax: Experience the absence of wealth tax obligations.
- Free remittance of funds to Portugal: Benefit from unrestricted transfer of funds to Portugal.
How Does it Work With Double Taxation Agreements?
One of the pivotal advantages of Portugal's non-habitual resident (NHR) tax regime lies in its alignment with Double Taxation Agreements (DTAs).
Double taxation agreements serve to facilitate the taxation of various income categories in the country where the income originates. While many countries often refrain from imposing income tax on non-residents to foster an image of being open to foreign investment, the NHR tax regime in Portugal takes a distinctive approach. Under this regime, Portugal now imposes taxes on a substantial portion of foreign source income earned by NHR individuals, affording them the unique benefit of receiving certain foreign income entirely exempt from taxation. This strategic alignment positions the NHR tax regime as an attractive option for individuals seeking to optimise their tax liabilities within an international context.
Who Can Apply?
To be eligible for the NHR tax regime, the primary prerequisite is for the applicant to establish tax residency in Portugal. This program extends residency benefits to qualifying entrepreneurs, professionals, retirees, and high-net-worth individuals, encompassing UK citizens, Americans relocating to Portugal, digital nomads, foreign investors holding Golden Visas, and those under the Tech Visa.
Eligibility is open to individuals of any nationality, including non-EU, EEA, and Swiss citizens, provided they meet the conditions for tax residency in Portugal and have not been subject to Portuguese taxation in the five years preceding the establishment of residence.
Applicants must also fulfil the criteria for tax residency in the application year, typically achieved by spending more than 183 days in Portugal. It is important to note that NHR status and associated tax benefits are valid for 10 years, after which individuals revert to standard Portuguese tax rates.
What are Considered High-Value Professions?
Under this regime, certain professions are considered high-value and may enjoy special tax treatment. Some professions that were commonly considered high-value include:
- Science and Technology: Researchers, scientists, and professionals in the fields of science and technology were often considered high-value.
- Culture and Arts: Writers, artists, and other professionals in the cultural and artistic sectors were also included.
- Healthcare and Medicine: Doctors, nurses, and other healthcare professionals were typically considered high-value.
- Academia: University professors and researchers were often eligible for the NHR regime.
- Engineers and IT Professionals: Professionals in engineering and information technology were commonly included.
- Managers and Executives: High-level managers and executives with international experience were sometimes eligible.
- Investors and Entrepreneurs: Individuals involved in investment activities or entrepreneurship, particularly in innovative sectors, could qualify.
Foreign Source Income under NHR
Individuals earning foreign income can enjoy significant tax exemptions. This is mainly due to Double Taxation Agreements (DTAs) between Portugal and other countries.
If the income comes from a country with a DTA with Portugal, it won't be taxed in Portugal. Here are the key points for different types of foreign income:
Employment Income: Foreign income from eligible professions is taxed at a flat rate of 20% in Portugal.
Self-Employment Income: Foreign income from eligible professions is also taxed at a flat rate of 20%, except if the individual already contributes to social security in another system.
Royalties, Dividends, and Interests: These are usually exempt if there's a Holding and Trading Activities (HTA) agreement between the countries involved. If no DTA exists, the OECD model (Organisation for Economic Co-operation and Development) convention applies. If not exempt, they may be taxed at 28% in Portugal. However, if the income originates from a blacklisted tax haven, the tax rate is 35% in Portugal.
Real Estate Income and Capital Gains under NHR
For real estate income and capital gains, it is as follows:
Real Estate Income: This is commonly subjected to source-based taxation, implying that it should be taxed in the jurisdiction where it is generated.
Capital Gains: When it comes to capital gains arising from the sale of securities such as shares and bonds, a fixed rate of 28% will be applicable.
Pension Income: Pensions are assessed at a flat rate of 10%. Generally, pension income is subject to withholding tax in the country of origin.
Portuguese Source Income under NHR
For any income from Portuguese sources, the NHR is:
Employment and Self-Employment Income: For employment income that does not fall within the specified eligible professions, the standard progressive tax rates are applicable. However, if the employment is classified under eligible NHR professions or involves a high value-added activity, a fixed tax rate of 20% is imposed.
Real Estate Income and Capital Gains: Rental income is subject to taxation at an elective rate of 28%, or alternatively, at the standard progressive rates. Net capital gains, on the other hand, are taxed at 50%, following the standard progressive rates.
Pension Income: Within the NHR framework, pension income is subject to the standard 10% tax rate.
How to Apply
To initiate the application for the Non-Habitual Residence (NHR) tax regime in Portugal, individuals are typically required to submit relevant documentation, including proof of residency and details of their income sources. The process involves engaging with the local tax authorities, providing the necessary information to demonstrate eligibility, and adhering to any specific requirements outlined by the Portuguese tax authorities. Additionally, seeking professional guidance from tax experts or legal advisors can streamline the application process and ensure compliance with the intricate details of the NHR regime.
For assistance from our tax experts in Portugal, contact us today. Our English-speaking team in Portugal can help you with your application, questions and concerns about the upcoming changes to NHR tax.
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