The Non-Habitual Resident Scheme, better known as the NHR, was originally introduced in Portugal in 2009. Expatriates from around the world have relocated to Portugal to take advantage of the NHR regime, with significant benefits such as reduced income tax liabilities for up to ten years.
Last month, the then Portuguese Prime Minister, António Costa, announced that the NHR tax scheme was closing to new applicants in 2024 – with his sudden departure amid controversy just a short time afterwards creating much uncertainty.
Since then, parliament has assembled and voted for the abolishment of the scheme. However, there will be a transitional period in 2024 for expats who can provide evidence that they had pre-existing plans to relocate to Portugal and apply to the NHR scheme.
What Is the Portuguese NHR Tax Scheme?
The Portuguese NHR isn’t a visa, per se, nor a residency programme. Rather, it is a tax status that allows new foreign national residents to access favourable tax treatments. Expats applying for NHR benefits must already have the legal right to live in Portugal.
Popular with affluent foreign nationals and retirees, NHR applicants must either receive pension income or demonstrate they carry out a ‘high value’ profession. They must not have lived in Portugal as a tax resident within the last five years.
Tax incentives include:
- Reduced 10% taxation on all pension income and a 20% tax rate on local earnings.
- Exemption against gift, wealth and inheritance tax.
- No tax on most foreign-sourced income provided it is paid in the country of origin, covering dividends, capital gains, employment income, interest and royalties.
Portuguese NHR status lasts for ten years and provides a number of considerable tax advantages with very few ongoing criteria.
What Is Happening With the Portuguese Non-Habitual Resident Program?
Costa announced that the special taxation treatment will end in 2024, although those who already have NHR status will retain their position until they reach ten years of residency. These comments were confirmed in the Portuguese government’s draft State Budget but were thrown into doubt when Costa resigned abruptly during an investigation into alleged corruption.
He stated that until 2019, around 59% of NHR applicants had decided to remain in Portugal indefinitely after ten years of reduced taxation. The context seems to be that a growing number of expatriates apply for NHR status and then relocate elsewhere – without making long-term contributions to the Portuguese economy.
While a snap election is scheduled for March 2024, the Portuguese parliament had agreed to vote on the State Budget before being disbanded and upheld the proposal on 29th November.
How Will the Closure of the Portuguese NHR Scheme Impact Foreign Nationals?
The Socialist Government remains in office for the time being and has announced a transitional period that will last until 31st December 2024. While the NHR will technically close to new applicants after 31st December 2023, the 12-month transitional period ensures that those intending to relocate or currently living in Portugal and pending acceptance will be able to proceed.
Any foreign national who wishes to take advantage of the transition period must have documentation to prove that they had met the scheme eligibility requirements and begun the process before 31st December 2023, providing evidence of one of the following:
- An employment contract or confirmed offer of employment dated before 31st December 2023.
- A lease or other agreement related to property ownership or habitation dated before 10th October 2023.
- Confirmation that dependent children had been enrolled in a Portuguese educational establishment dated up to 10th October 2023.
- A residence visa or permit dated before 31st December 2023.
Any prospective expat that is considering a move to Portugal or is already resident, and plans to apply for the NHR should assess their circumstances promptly. This is to determine whether they can proceed and if they have the necessary documentation to submit an NHR application within the transition period.
The Chase Buchanan team in Portugal is available to discuss these changes to the NHR on request and establish how the reforms impact your residency or NHR tax status.
Foreign Nationals Intending to Apply to the Portuguese NHR Scheme
The NHR will officially be discontinued on 1st January 2024. However, the originally proposed three-month transition period has been extended to 12 months.
Applicants who have not yet submitted an NHR application but can show compliance with the scheme terms by 31st December 2023, supported by one or more of the documents listed above, can proceed with their registration. Expats living in Portugal with valid residency status can also submit their application before the end of 2023.
For those yet to relocate, it is important to remember that NHR applications can only be submitted after they have completed their visa residency application. Foreign nationals who have yet to apply to the NHR or are part-way through finalising their residency permit or other long-stay visa should proceed as quickly as possible.
Further information about the scheme and eligibility criteria is published on the Autoridade Tributária e Aduaneira website, with the translated name of the NHR scheme shown as ‘Non-Regular Residents’.
There is a proposed new scheme that may replace the NHR called the Incentivised Tax Status Program (ITS), which we’ll explain in a little more detail shortly. There may be the option of applying to the ITS for expats who do not manage to submit an NHR application in time, albeit with less generous flat-rate income taxation rates.
Expats Living in Portugal With NHR Tax Status
Those already resident in Portugal with NHR tax status will see no immediate impact. As long as their NHR acceptance was confirmed before 31st December 2023, they will continue to benefit from reduced tax obligations for the full ten years.
It remains important to consult with an experienced financial adviser or wealth manager. The end of this tax status could impact financial planning and future tax liabilities, particularly if you have yet to review your anticipated asset and income structures when the 10-year duration of NHR benefits ends.
Planning for Expat Residents in Portugal Approaching the End of Their 10-Year NHR Period
As with our comments above, a comprehensive appraisal of your finances, assets, income, and plans is essential if you hold NHR tax status and will reach the 10-year limit soon. Whether you intend to remain in Portugal or relocate at the end of the ten years, a full assessment is an important process that will ensure you have oversight of your tax liabilities and can make informed decisions.
Once a Portuguese resident becomes ineligible for further NHR tax treatments, they are normally required to pay the standard income tax rates, which are progressive and depend on total wealth and income.
Failing to plan ahead and consider how your tax profile will change following the NHR could be a costly mistake without taking advantage of tax-efficient and strategic changes that would prevent you from paying higher taxes than necessary.
Is the Incentivised Tax Status Program an Alternative to the Portuguese NHR?
The State Budget proposal introduced a new scheme called the Incentivised Tax Status Program (ITS), which many expect to replace the NHR tax regime. Details around the ITS still need to be clarified. The proposal states that the alternative scheme would operate on a similar basis, albeit with fewer and less sweeping tax benefits.
Should it proceed, the ITS may offer:
- Similarly decreased taxation on some income tax categories but reduced to a 20% flat rate rather than the 10% offered through the NHR for up to ten years.
- Reduced taxation on professional incomes, with 50% of earnings exempt from tax up to an upper limit of €250,000, valid for up to five years.
In light of the higher tax rate, foreign nationals intending to apply for Portuguese tax residency should do so as a matter of urgency, and ideally before 31st December 2023 or by 31st December 2024 at the outside – noting that there is the potential for either date to change particularly in spring of next year when the snap election will take place.
However, all expats currently benefiting from the NHR are strongly advised to contact a tax professional with in-depth knowledge of the Portuguese tax regime to ensure their plans are up to date and take into account recent developments.
For further information or to discuss the effects of the end of the NHR on your tax position or residency plans, please get in touch with the Chase Buchanan Wealth Management team in Portugal at your convenience.
*Information correct as of December 2023