Last Updated on December 1, 2023 by Maryam Siddiqui
The recent news has taken people by surprise. First, the news of the end of the NHR Regime in Portugal. Later, the resignation of the Prime Minister and updates to the rules of the NHR. There’s a lot of speculation and waiting, but are we hopeful? This article will attempt to uncover all that we know about the end of the NHR Regime as of December 2023.
All is not lost, folks! The government still has many incentives for expats and investors that keep the interest in Portugal alive. We’ll talk about how this regime brought about significant changes in the past and what it means for existing NHR status holders.
Keep reading to learn all about these new changes and the legal framework for the termination. The future of taxation in Portugal will still interest you because of how the system works. Tag along to find out more!
What is the NHR Regime?
The Non-Habitual Resident Regime was created in 2009 and has saved expats tens of thousands of euros in tax. Almost 15 years and counting of tax incentives helped expats invest in other markets within Portugal.
As per the law, the regime offered a Personal Income Tax (IRS) reduction for up to 10 years. This was specifically for expats of any nationality and Portuguese citizens returning home after at least five years.
What are the tax benefits for expats?
The NHR Regime targets individuals from two categories: passive income earners and highly qualified workers.
Within these two categories, the tax benefits are:
- Fixed tax rate of only 10% on passive income outside Portugal;
- Fixed tax rate of only 20% on work income in Portugal (related to some areas of activity).
For income sourced outside of Portugal, the fixed tax rate of 10% is applicable on pensions, dividends, royalties, capital gains, and property gains.
For work income within Portugal, for those who performed a professional activity, individuals were required to submit the Income Tax Declaration (IRS). The flat tax rate of 20% is applied to people who work under the category of highly qualified workers.
As for other income related to activities that didn’t qualify for the NHR Regime in Portugal, the tax rates are between 14.5% and 48%.
Impact on foreign investment and real estate market
While the NHR Regime was often a matter of debate and criticism, it brought significant investments that boosted the economy.
The Non-Habitual Resident status attracted foreign investors and hundreds of expat retirees who wished for a better life. As people capitalized on the tax incentives, small towns, and previously dormant or underutilized areas saw immense transformations. There was significant commercialization and development in the tourism sector.
Apart from that, the NHR also helped strengthen the real estate market through foreign investments. Partial credit also goes to the Golden Visa policies at the time.
Portugal’s property market emerged as a competitive investment option and improved the overall economic situation slowly.
Unfortunately, there were consequences.
With the constant increase in demand for real estate, a new housing crisis emerged. This drove property prices and rent too high, which led to a gap between what the locals could afford and what they were expected to pay.
This is why the end of the NHR Regime was proposed for the State Budget 2024. Now, let’s give you some more details on what we know so far.
What we know about the end of the NHR Regime
Let’s break it down from A to Z!
The NHR regime in Portugal was introduced as a tax benefit but ended up being misused by non-targeted groups.
This led to potential revenue losses for the Portuguese government. As a result, the EU raised concerns regarding the regime unintentionally acting as a gateway for tax competition and tax evasion risks.
With these political and legal questions raised, Portugal had to think about putting an end to the era. The country is now reevaluating its tax system to ensure it complies with global standards due to evolving international tax agreements.
Let’s divide the reasons in two for a clearer understanding:
The political and economic context behind the decision
The Portuguese government must reevaluate its tax system to secure long-term sustainability. The government needs to ensure its policies align with international standards and balance the budget effectively.
To summarize, domestic and political dynamics and priorities influenced the proposed end of the NHR regime in Portugal.
NHR’s unprecedented consequences of revenue losses and the unequal distribution of benefits sprung the argument that it disproportionately favored expats over Portuguese citizens. To settle these disputes, the government decided to introduce tax strategies to prioritize the welfare of the nationals.
A new minimum wage of €820 has been approved, and the government plans to introduce significant tax cuts. The sentiment is to balance attracting foreign investment and ensuring locals benefit from the economic growth.
Official statements and legal framework for the termination
The ex-Prime Minister confirmed the possible end of NHR by introducing other tax incentives. However, things have changed after his recent resignation; keep reading to know more details.
The regime is seen as “a measure of fiscal injustice, which is no longer justified and which is a biased way of inflating the housing market, which has reached unsustainable prices” by the ex-PM.
As pointed out, tax evasions were being conducted through manipulation of NHR, so the EU pointed to the end of it as the solution.
The end of the NHR Regime in Portugal won’t be sudden; people still have time. With that being said, let’s talk about how this will affect people who currently have NHR status.
Updates after PM resignation: Current NHR Rules
On November 7th, Prime Minister António Costa resigned from his position. What does this mean for the end of the NHR Regime in Portugal?
Well, it means that the regime will survive for another year till December 31st, 2024. According to Article 167 of the constitution, the State Budget proposal has been declared null and void.
Therefore, a transitory regime has been published as an amendment to the State Budget proposal, presented by the Socialist Party (PS).
During this transition period, anyone wanting to apply for the NHR can apply under certain conditions. To qualify, you must submit documents proving you initiated your relocation plans in 2023. Here are some documents you can submit for proof:
- Property lease contract proving your ownership until October 10th, 2023.
- Reservation contract or promissory purchase contract with rights over the property until October 10th, 2023.
- Enrollment in an educational institution until October 10th, 2023.
- Residence permit valid till December 31st, 20223.
- The residence visa procedure is initiated by December 31st, 2023.
- Promise of work contract or employment initiated by December 31st, 2023. Work duties must be performed within the country’s territory.
- Keeping a residency permit or visa valid through December 31st, 2023.
- Filing of an immigration case by December 31st, 2023.
The NHR Regime will continue even after 2024 but with limited scope. As per current information, the NHR will then only target those employed by Portuguese businesses with special statuses.
There is also an exception for Madeira and the Azores. These two regions will still be able to provide benefits to new NHR status holders even after 2024.
As of now, we encourage all our clients and potential expats to rush and get their applications submitted if they have all the required documentation. To understand the process better, book a meeting with professionals from Viv Europe and start your application now!
How does this affect existing NHR status holders?
If you’re an existing NHR status holder, you should know that your current benefits will continue until the end of the specified time frame outlined in your NHR status.
So, expats already enrolled in the NHR regime in Portugal will continue to benefit from the tax exemptions that were initially granted to them when they first obtained the status. And if you become a tax resident by 31st December 2023, you will still receive the same benefits.
For expats who do not have NHR status yet, you can still apply as per the information above.
Regardless, it is best to stay informed about the official announcements in case of any further changes in the tax regime that might affect you.
The good news is that the possible end of NHR does not mean the end of all tax benefits for expats!
According to the State Budget Proposal, there are new tax incentives for the following:
- Higher education careers and scientific research teachers;
- Qualified jobs within the scope of contractual benefits to productive investment;
- R&D jobs for workers with doctorates within the scope of SIFIDE.
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Tips and advice for individuals affected by the NHR regime’s end
We know some investors are questioning their decision to move forward with investments because of the possibility of new laws.
Currently, the end of the NHR Regime is not near, and individuals can still apply.
While we understand that certain investment decisions make logical and financial sense, it is also necessary that the government takes measures that are important for the country.
Portugal is a tax haven for many other reasons too! We’ll discuss some in more detail later, so keep reading.
Apart from those, the government will still offer regimes that redirect investments into areas that need it more. In case you were making the decision to move to Portugal and are now rethinking it, take a look at the new regimes.
How does the tax system work in Portugal?
Portugal has a progressive tax system, with average income tax rates ranging from 14.5% to 48%.
Residents and non-residents are legally expected to pay taxes on income sourced through Portugal. Income sources include employment income, rental income, and capital gains.
Other than that, Portugal has indirect taxes like VAT, car tax, wealth tax, and property tax. To know more about timelines, when and how to pay, and what amount to pay, check out our detailed article on the Portugal Tax System: Easy Breakdown For Expats.
How to file your taxes in Portugal
Here’s a list of the types of incomes that are taxed in Portugal:
- Employment Income;
- Self-Employment and Business Income;
- Pension and Social Security Income;
- Investment Income;
- Rental Income.
To file your income tax in Portugal, you must have your Passport or Portuguese ID card, your NIF Number, income statements, and your relevant deductions or expense receipts.
You will then fill out the income tax return form from Modelo 3 on the Portuguese Tax Authority’s official website. At this step, it’s important to do it slowly and mindfully because all the provided information must be correct.
The payment of income tax must be made by August 31st of the same year after you’ve filed your taxes.
- Read Also: How To File Your Income Taxes In Portugal.
The future of taxation in Portugal
The good news is we have information regarding the future of taxation in Portugal. Since there is still time, you can file your application through Viv Europe, and the authorities will also be taking a look at pending applications for the NHR Regime.
To counter any disturbances, the government might allow a transition period to process all the pending requests. Meanwhile, we also have news on other developments and tax incentives being offered by the government.
The government’s intentions regarding new tax policies
The Portuguese government knows and understands that these tax incentives have helped the economy greatly. Therefore, protecting the interests of expats is of utter importance.
First, the introduction of the “transition” period for all applications is in the works also because of the delays in processes from SEF. They will also focus on resident visa applications for workers and pensioners from outside the EU, Brazil, or Portuguese-speaking African Countries (PALOP).
The second tax incentive for expats focuses on attracting qualified talent through another regime. With this aim, the government has introduced tax incentives for scientific research and innovation. As mentioned in the OE2024 proposal, this regime will aim to retain highly qualified staff in the fields of business development, investments, and scientific research.
People who meet the set requirements will benefit from an IRS tax rate of 20% on two categories of income. Category A refers to dependent work, and Category B refers to independent work.
From the date of the applicant’s registration as a legal resident in Portugal, the tax incentives will be applicable for a period of 10 years! The same rules of the NHR Regime in Portugal apply to this new regime. That is, you must not have been a tax resident in Portugal for the last 5 years.
Tax-saving tips for expats
So, the big question is, how can expats save on taxes if they don’t qualify for these regimes?
We’ve got a comprehensive article on the Top 10 Tax-Saving Tips For Expats, but let’s summarize a few of our top tips for you:
- Keep in mind the currency rates – For financial transactions involving currency conversions, like property sales or investments, consider exchanging them for euros to optimize your tax position.
- Take advantage of Personal Tax Deductions in Portugal – You can claim certain expenses as deductions to reduce your taxable income.
- Study the taxes on property investments – Explore IMT rates and exemptions.
- Know the Portuguese succession laws – Helps minimize taxes for your heirs.
- Double Taxation Treaties – Take advantage of double taxation treaties that Portugal has signed with over 100 countries.
- Consider pension schemes – Avail tax advantages by transferring your pension to a Portuguese pension scheme.
- Reduced corporate tax rates – Corporate tax rates are 21% but are reduced to 17% for SMEs.
The MOST important out of all the tax-saving tips you could get is consulting a professional who can guide you according to your situation. Consulting a tax professional from Viv Europe will help you educate yourself on the many ways you can take rightful advantage of tax exemptions as an expat in Portugal!
Do you need help filing your taxes in Portugal?
Those were all the updates you needed to know about the end of the NHR Regime in Portugal! It might’ve been confusing if you already had a plan in mind. But don’t worry! If you need to understand the tax situation better and need help crafting a plan, consult our tax experts at Viv Europe!
Get started on your relocation journey by saving time, effort, and money – join our Facebook Group – All About Portugal For Expats. Our platform helps with queries, inspiration, and to make connections with other expats from all around the world.