Portugal calls time on the Non-Habitual Resident (NHR) special tax regime

Portuguese Prime Minister António Costa unexpectedly announced that the government will close the special Non-Habitual Resident (NHR) tax regime for new entrants in 2024.

During a television interview on 2 October, Costa said the government had decided not to continue “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”.

Under the NHR tax regime, first introduced in 2009 during the global financial crisis, qualifying entrepreneurs, professionals, retirees and high net worth individuals can benefit from a 20% flat rate of tax on Portuguese-source income, while most foreign-source income is exempt from Portuguese taxation, for 10 consecutive tax years.

Until recently, the NHR regime also allowed most foreign pension income to be received in Portugal free of tax, but a flat 10% tax rate on pension income was introduced for new entrants in 2020.

NHR status applies to qualifying applicants of any nationality (including non-EU/EEA citizens) provided they are tax resident in Portugal for the relevant tax years and have not been resident in Portugal in any of the five preceding years. In other words, only new residents of Portugal may apply.

NHR is not a form of residence, it is a special tax status available to new residents. Individuals must have already acquired the legal right to reside in Portugal and have become tax residents of Portugal before they are eligible to apply for NHR status.

According to data recently released by the Tax and Customs Authority, the annual amount of tax exempted by the government under the NHR regime crossed the €1 billion mark for the first time in 2021, having risen to €1.21 billion from €770 million in 2019.

The data did not include the number of NHRs benefiting from the scheme, but the total is understood to exceed 10,000 and the number of applicants has been steadily growing each year.

“In 2024, special taxation for non-habitual residents will end. Whoever has it will keep it,” said Costa. “There was a time when it was necessary. This measure made sense. In the first 10 years, 59% of people who had benefitted continued to reside in Portugal, in spite of the regime having ended. But right now, it does not make sense.”

More information about the NHR discontinuation is expected next week when the Portuguese government presents its Budget law proposals to parliament. As always, the devil will be in the detail.

We expect that some scope to apply for NHR may be extended to individuals who have already applied for a residency visa that has yet to be granted. We also expect that, as is generally the case in Portugal, the legislation may take time to bring forward. This may give people more time than currently appears to be available but urgent action is advised.

Individuals who currently have the right to reside in Portugal and who wish to benefit from the NHR regime should consider becoming tax resident in Portugal and applying for NHR status before the end of this year. Individuals currently looking to move to Portugal and register for the NHR regime should also review their plans to see whether they are in a position to complete all the necessary steps before the end of the year, taking into consideration the civil requirements country to country application.

Generally, the quickest route for non-EU nationals to acquire the right to live in Portugal is via the D7 (’passive income’) visa programme. But this typically takes a minimum of six months, so anyone wishing to move to Portugal and register as NHR will need to be quick and apply for residence immediately.

“For individuals who will now not be eligible for NHR status, or whose existing NHR status is coming to an end, it may be sensible to consider a move to Cyprus,” said Shelley Wren, Head of Business Development at Sovereign Consultoria in Portugal.

“Non-Domiciled (non-dom) Tax Residency in Cyprus offers an even greater array of tax benefits than the NHR regime in Portugal – and for longer because the status endures for 17 out of 20 years. And under the ’60-day rule’ you only need to reside in Cyprus for 60 days a year to maintain your status.”

Individuals who are tax resident in Cyprus under the provisions of the Income Tax Law (ITL) can enjoy the stability of full EU membership, first-class healthcare, no inheritance tax, no gift tax, no wealth tax and the potential benefit of non-dom status under which they will be exempt from the Special Defence Contribution (SDC) for 17 out of 20 years. This SDC exemption means non-doms pay no tax on their worldwide dividend, interest and rental income.

Additional benefits of Cyprus non-dom status include a special tax regime for foreign pension income, which is exempt from tax up to €3,420 per year and taxed at only 5% above that threshold, and the ‘50% exemption rule’ for individuals who take up employment in Cyprus with an annual income of more than €100,000 per year. This exempts 50% of their income from tax for a period of ten years.

EU/EEA citizens can purchase property and reside in Cyprus with no restrictions. Non-EU/EEA nationals are permitted to buy and hold the freehold in one property in Cyprus. Owning real estate in Cyprus entitles the owner to obtain a multiple-entry national visa. There is also a ‘fast track’ permanent residence permit for those who purchase real estate valued above €300,000.

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