Portugal’s Non-Habitual Resident (NHR) Tax Regime: A Comprehensive Update and Analysis
Portugal’s Non-Habitual Resident (NHR) tax regime has been a cornerstone of the country’s strategy to attract expats and retirees. However, recent shifts in policy, including the introduction of the Scientific Research and Innovation Regime (often dubbed NHR 2.0) and proposals for a new modified NHR scheme, have reshaped the landscape. This article explores these developments, their implications, and how Portugal remains an appealing destination for expats.
The Original NHR Scheme: Successes and Controversies
Introduced in 2009, Portugal’s NHR scheme offered tax benefits to new residents, including a flat 20% income tax rate on certain earnings and tax exemptions for foreign-sourced income, such as pensions, dividends, and royalties. This program was particularly popular among retirees from high-tax countries, as it allowed them to legally reduce their tax burdens.
Challenges:
- Perception of Inequality: Portuguese citizens and long-term residents criticized the scheme for creating a two-tier tax system, where newcomers enjoyed significant breaks while locals did not.
- European Pushback: Some EU countries, particularly Nordic nations, protested that the regime siphoned off their retirees and tax revenues.
- Misinformation: Many believed that NHR participants paid no taxes, which was inaccurate but fueled public criticism.
Despite these issues, the program was a major success, drawing thousands of expats and boosting the real estate and tourism sectors.
NHR Ends and the Emergence of NHR 2.0
In 2023, the Portuguese government terminated the original NHR scheme, replacing it with the Scientific Research and Innovation Regime (NHR 2.0). This new framework aims to address earlier criticisms while targeting highly skilled professionals.
Key Features of NHR 2.0:
- 20% Flat Tax: Applied to qualifying income from employment or self-employment.
- Exclusions: No benefits for pensioners, dividends, or capital gains.
- 10-Year Duration: Tax advantages are capped at a decade.
- Eligibility: Focused on professionals in sectors like scientific research, higher education, technology, and export-driven industries.
Eligibility Requirements:
- Must not have been a Portuguese tax resident for at least five years.
- Must earn qualifying income from employment/self-employment in specified fields.
The new regime also emphasizes activities in Madeira and the Azores, although specifics remain unclear.
Proposed Return of a Modified NHR Scheme
In mid-2024, Portugal’s center-right government announced its intention to reintroduce an NHR-style program, potentially under the name IFICI+. This scheme appears to strike a balance between attracting expats and addressing domestic criticisms.
Proposed Features:
- 20% Flat Tax: Applies to salaries and professional income.
- Exclusions: Pensions, dividends, and capital gains remain outside the scope.
- Broader Appeal: Unlike NHR 2.0, this regime would apply to a wider range of workers and self-employed individuals.
- Eligibility: Requires 183 days of residency annually in Portugal.
This scheme is designed to maintain Portugal’s competitive edge as a destination for skilled workers and entrepreneurs.
Implications for Retirees and Expats
One significant shift in both NHR 2.0 and the proposed new NHR scheme is the exclusion of pensions and social security income from tax benefits. This change could deter retirees, who once viewed Portugal as an attractive tax haven. Under the original NHR scheme, retirees benefited from a simplified tax system and reduced rates, which no longer apply.
For high-income retirees, alternatives such as Spain or Malta may now offer comparable or better tax benefits.
Who Can Still Benefit from the Original NHR Regime?
Although the original NHR regime was officially closed to new applicants in 2023, certain groups of individuals can still take advantage of its benefits. This is because those who applied before the regime’s termination retain the right to its advantages for up to 10 years from the date of approval.
Who Is Eligible to Benefit from the Original NHR Regime?
- Those Who Registered Before December 31, 2022:
If you submitted your application and were approved before this date, you continue to enjoy all the benefits of the original NHR regime:- Tax exemptions on foreign pension income.
- Reduced tax rates or exemptions on dividends, interest, and royalties.
- A flat 20% tax rate on income derived from certain professional services.
- Those Who Began the Application Process Before the Official Termination:
Individuals who started the application process (e.g., obtained residency status and registered as Portuguese tax residents) before the changes took effect can still complete the process and secure approval. - Inheritance of NHR Benefits During the Approved Period:
Once someone has been granted NHR status, the benefits remain valid for the 10-year duration, even if the program is no longer open to new applicants.
What Benefits Are Still Available?
- Tax Benefits for Retirees:
For those approved under the original NHR regime before the end of 2022, foreign pension income (from countries with a double taxation agreement) remains either fully tax-exempt or taxed at a reduced flat rate of 10%. - Foreign-Sourced Income:
Under specific conditions, income from dividends, capital gains, and rental income outside Portugal can remain exempt from Portuguese taxation. - Flat 20% Tax Rate:
This rate applies to certain types of income earned by highly skilled professionals in fields like IT, medicine, engineering, and others.
How to Verify Your Eligibility for the Original NHR Regime?
If you believe you qualify for the original NHR benefits, it is advisable to consult a tax advisor or lawyer specializing in Portuguese tax law.
Portugal’s Enduring Allure
Despite these changes, Portugal remains a top destination for expats. Its high quality of life, warm climate, safety, and affordability continue to attract professionals and retirees alike. The country’s healthcare system, public infrastructure, and cultural richness are additional draws.
Conclusion
Although the original NHR program is closed to new participants, those who registered in time can continue to benefit from its advantages. This makes Portugal an attractive option for retirees and professionals looking to optimize their tax obligations. Its high quality of life, warm climate, safety, and affordability continue to attract professionals and retirees alike. The country’s healthcare system, public infrastructure, and cultural richness are additional draws.
