The Portuguese government recently announced that, starting in 2024, it plans to end a special tax regime that provides tax benefits to foreigners living part-time in the country, arguing that this will help improve the housing market.
According to Prime Minister António Costa, quoted by The Portugal News, the non-habitual residents (NHR) is “a measure of fiscal injustice” and its maintenance is “no longer justified” as it has served its purpose and will only contribute to rising housing prices.
“In 2024, special taxation for non-habitual residents will end. Whoever has it will keep it”, he said, clarifying that foreigners living in Portugal who already have this tax advantage will continue to benefit from it for the duration of their 10-year term.
Anyone who meets the conditions for registration as a non-habitual resident on December 31, 2023, as well as holders of a residence visa valid on that date, can register within the available period (until March 31, 2024) and potentially benefit from the scheme, as reported by consulting firm Global Citizen Solutions.
According to Fortune, this deadline may have inadvertently triggered a new influx of digital nomads who want to take advantage of this tax scheme while it is still available.
Portugal D7 visa program
The Portugal D7 visa, while different from the NHR scheme, is an attractive option for many non-EU citizens, including retirees, entrepreneurs, and remote workers, who wish to settle in Portugal with their own funds.
This visa, also known as a retirement visa or passive income visa, was introduced in 2007 and allows people who are not citizens of the EU/EEA/Switzerland to apply for temporary residence in Portugal and possibly obtain citizenship if they are eligible.
The main requirements include:
- You are not a citizen of the EU/EEA/Switzerland.
- You have sufficient financial means to support yourself during your stay in Portugal.
- You have a clean criminal record.
- You can provide a residential address in Portugal.
- You are able to spend at least 16 months in Portugal within the first two years.
Find the perfect accommodation in Portugal
Benefits of NHR status
The NHR program offers a number of benefits for expats. One of the most important benefits is the opportunity to be exempt from income tax on certain types of foreign income for a period of ten years.
This includes income from:
- pensions
- dividends
- royalties
In addition, individuals who qualify for the NHR program can benefit from reduced tax rates on earned income from high value-added activities. These reduced tax rates can be as low as 20 %, depending on the particular circumstances.
Another significant benefit of the NHR program is the potential for double tax treaty relief. Portugal has an extensive network of tax treaties with other countries that can help avoid double taxation of income earned abroad. By taking advantage of these treaties, expats can ensure that they do not have to pay taxes on the same income in both Portugal and their home country.
Let's now examine the impact of the proposed tax rule changes on individuals who currently have NHR status, those who are in the process of applying, and prospective expatriates, as advised by Portugal Pathways.
Existing NHR status holders
NHR status holders are advised to consult with a financial and tax planning professional to understand exactly how the end of NHR status will affect them. If they do not structure things early enough within the 10-year period, the end of their tax status may negatively impact them.
This is especially important considering that, according to financial advisors, many expats fail to plan and structure things for the next 20 years, not just the initial 10-year period of their tax benefits under NHR. Failure to do so during their non-resident status may increase their tax burden in the long run and expose them to progressive taxes.
New applicants
Those who want to secure NHR status before the deadline should act quickly. The application deadline is December 31, 2023, and the application process can take several months. New applicants are advised to seek legal advice to fully understand the implications of the NHR tax regime and how to best take advantage of it.
Future expats
Despite the changes to the NHR tax regime, Portugal remains a popular destination for expats and digital nomads. The country offers a high standard of living, year-round sunshine, excellent investment opportunities, and an efficient healthcare and education system.
In addition, Portugal has been repeatedly recognized as a popular destination for digital nomads, a global real estate hotspot for high net worth individuals, and a preferred retirement destination.
Find the perfect accommodation in Madeira
NHR tax regime alternative
While the NHR tax regime is set to end next year, the 2024 state budget proposal introduces a tax incentive for scientific research and innovation. This incentive will allow various professions to enjoy a ten-year income tax reduction.
As reported by The Portugal News, the new tax incentive was created along the lines of the NHR, but is aimed at a specific audience, namely highly qualified professionals in the fields of scientific research, investment and business development.
This tax incentive will apply from the outset “to researchers and highly qualified workers who, having not been tax residents in the last 5 years in Portugal, have become residents”, reads the 2024 state budget proposal
Subsequently, these workers must demonstrate eligibility for income in the following categories:
-
Occupations related to higher education and scientific research, such as educators and scientific professionals working in institutions, structures, and networks dedicated to the generation, dissemination, and transmission of knowledge and integrated into the national science and technology system
-
Qualified positions that fall within the scope of contractual benefits tied to productive investments
-
Research and development jobs specifically for people with PhDs covered by SIFIDE, the R&D tax incentive scheme for companies
Individuals who meet these conditions benefit from an IRS tax rate of 20 % on the net income of categories A [dependent work] and B [self-employed work] obtained from these activities "during a period of 10 consecutive years starting from the year of their registration as residents in Portuguese territory".
Disclaimer: The legal information published on Flatio is for informational purposes only and does not constitute legal advice.
