This article aims to clarify the outcome of the discussions in the Portuguese parliament and what you can expect in 2023 and beyond.
What is the NHR program?
To comprehend the nuances of the ongoing debate surrounding the non-habitual resident ("NHR") tax regime and its impending transformation into "NHR 2.0," it is crucial to grasp the fundamentals of the Non-Habitual Resident Program in Portugal.
The Non-Habitual Resident Program, introduced in Portugal, has been a key driver in attracting foreign individuals seeking tax advantages and a favourable fiscal environment. This program, as we have known it for several years, grants qualifying individuals the status of non-habitual residents, providing them with unique tax benefits.
The core features of the Non-Habitual Resident Program include:
- Tax Exemption on Foreign-Sourced Income: One of the primary attractions of the NHR program is the exemption it offers on various categories of foreign-sourced income. This encompasses dividends, interest, and rents, allowing non-habitual residents to enjoy favourable tax treatment on income generated outside of Portugal.
- Duration of Benefits: Under the existing NHR regime, beneficiaries are entitled to enjoy the prescribed tax benefits for a period of 10 years. This has been a pivotal factor in the program's appeal, offering a decade-long window of advantageous fiscal treatment.
- Qualifying Criteria: To become eligible for the NHR status, individuals must meet specific criteria, including not having been a tax resident in Portugal for the past five years and engaging in qualifying activities as recognized by the Portuguese Government.
As the existing NHR program approaches its conclusion on December 31, 2023, the anticipated transition to "NHR 2.0" aims to retain many of these benefits. However, it is crucial to note that some modifications, particularly in the narrower scope of beneficiaries and applicable criteria, are expected.
Deciphering the Future of NHR in Portugal
There is no other way of saying it: the current NHR, a fixture for several years, is slated to conclude on December 31, 2023. The subsequent framework, which we will be referring as "NHR 2.0," will come into effect from January 1, 2024, replicating most benefits (excluding those tied to pension income) but with a revised scope of beneficiaries – a potentially broader scope to those living in Madeira or Azores and a narrower scope for those living in Mainland Portugal.
For those seeking access to the "old NHR" post-December 31, 2023, consideration must be given to meeting specific grandfathering provisions that will enable applying for the NHR until 31 December 2024:
- Initiating a residence visa or permit procedure by December 31, 2023, in accordance with current immigration legislation.
- Holding a valid residence visa or permit until December 31, 2023.
- Possess a signed promissory or employment contract, promise, or secondment agreement by December 31, 2023.
- Having a lease or property use contract in Portuguese territory concluded by October 10, 2023.
- Holding a reservation or promissory contract for property acquisition in Portuguese territory concluded by October 10, 2023.
- Enrolling dependents in a Portuguese educational establishment by October 10, 2023.
The special grandfathering rules also apply to a person who is a member of the household of taxpayers covered by one of the conditions above.
To clarify, existing NHR beneficiaries registered as NHR on December 31, 2023, can benefit from the regime for the designated 10-year period.
The future of NHR in Portugal: Key Insights and Strategic Considerations
The “NHR 2.0” regime will also span a decade and apply to individuals becoming tax residents in Portugal (without residency in the preceding 5 years). NHR 2.0 entails a 20% rate for employment/freelance and exemptions for various foreign-sourced income categories, in the same way as the now soon to end NHR (except for pension income).
NHR 2.0 is still subject to regulation through a regional decree but is expected to have a far-reaching and positive impact to those willing to relocate to Madeira or Azores. For those contemplating a move to mainland Portugal, "NHR 2.0" may still be applicable, albeit with narrower criteria, requiring beneficiaries to be involved in start-ups, research and development companies, or qualified jobs recognized by the Portuguese Government.
Keep this in mind!
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