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Are you considering relocating to Portugal and exploring your options for tax benefits? The Non-Habitual Resident (NHR) tax regime might be the perfect opportunity for you. With recent tax authority changes and future developments on the horizon, now is the ideal time to familiarise yourself with this advantageous tax program.

In this comprehensive guide, we’ll take you through the ins and outs of the NHR tax regime, its key features, recent changes to investment tax code, and the steps you need to take to obtain NHR status in Portugal. Moreover, we’ll explore the critical role of double taxation agreements in this process and discuss the future of the NHR tax regime, including the transitory regime and potential changes due to political developments.

 

Key Takeaways

  • The NHR tax regime in Portugal offers foreign residents and emigrants exemptions on income, as well as reduced rates for certain high-value professions.
  • Recent changes to the regime include a 10% tax on pension income and an upcoming amended regime by 2024.
  • Double taxation agreements provide clarity for applicants from 81 countries while potential shifts due to early elections may bring about changes to the NHR Tax Regime.

 

Understanding the NHR Tax Regime

Family reviewing the tax benefits of the NHR
The NHR tax regime in Portugal offers a unique opportunity for new foreign residents or Portuguese citizens who have been emigrated for more than five years to enjoy tax exemptions or reductions on their income. As a non-habitual resident, you can benefit from tax advantages, such as exemptions on foreign income and reduced tax rates on certain high-value professions. The Portuguese government introduced the NHR tax regime in 2009 to attract foreign investment and skilled professionals to the country.

Recent changes to the NHR tax regime, including the introduction of a wealth tax, involve a 10% tax on pension income and updates to the list of high-value professions. These alterations were implemented to generate revenue for the Portuguese government while still providing tax exemptions on most foreign source income only.

Key Features of the NHR Tax Regime

One of the main characteristics of the NHR tax regime is the tax exemption on foreign income, including capital gains, following the guidelines of the OECD Model Tax Convention. This tax regime allows non-habitual residents to enjoy exemptions on their foreign income, such as real estate income, which can significantly minimise their income tax obligations.

Another key feature of the NHR tax regime is the reduced tax rates for certain high-value professions. These professions include:

  • doctors (denoted by CPP code 221)
  • engineers
  • teachers
  • and many others, as listed in the NHR regime.

For instance, doctors enjoy a favourable tax status under the NHR tax system, making their foreign income tax exempt and effectively minimising income tax.

Recent Changes to the NHR Tax Regime

In response to growing concerns about the NHR tax regime’s fairness, the Portuguese government introduced several changes in 2020. One of the most significant changes was the implementation of a 10% tax on pension income, replacing the previous 0% rate. This new passive income tax rate was introduced to generate additional revenue for the government while maintaining tax exemptions on foreign source income.

Another recent change to the NHR tax regime is the update to the list of high-value professions eligible for reduced tax rates. Professionals in areas such as:

  • medicine
  • engineering
  • teaching
  • management
  • can now be taxed at a flat rate of 20%.

However, beginning January 1, 2024, there will be an amended regime for paying tax, called ‘incentive to scientific research and innovation’ for specific professions.

Steps to Obtain NHR Status in Portugal

Obtaining NHR status in Portugal involves a two-step process: registering as a tax resident and applying for NHR status. To register as a tax resident, proof of residency in Portugal and a stay of at least 183 days within a year are required. Once you have established tax residency, you can then apply for NHR status through the Portuguese tax authorities before March 31st of the year following tax residency registration.

Understanding double taxation agreements plays a key role in the NHR tax regime. Portugal holds double taxation agreements with 81 countries, offering potential tax relief on foreign income to NHR applicants. These agreements significantly contribute to the tax benefits under the NHR tax regime.

 

Registering as a Tax Resident

Becoming a Portuguese tax payer
To register as a tax resident in Portugal, you must first provide proof of residency, such as a lease agreement or a utility bill, and meet the requirement of staying in the country for a minimum of 183 days within a 12-month period. Non-EU citizens must obtain a residence permit through programs like the Golden Visa or the Portugal D7 Visa program to settle in Portugal.

An important part of becoming a tax resident is securing a tax identification number (NIF) in Portugal. This nine-digit number serves as an identifier for taxation purposes for tax residents. To obtain a NIF, you need to provide proof of residence, a residency certificate or visa, and your passport.

Establishing habitual residence is also essential for registering as a tax resident and availing the benefits of the NHR Scheme in Portugal. You must have a place of residence in Portugal on December 31 of that year with the aim of establishing habitual residence. A lease or loan agreement or a purchase deed can serve as documentation to demonstrate domicile.

Applying for NHR Status

Once you have established tax residency in Portugal, you can apply for NHR status through the Portuguese tax authorities before March 31st of the year following tax residency registration. Applying for NHR status involves submitting an application online through the government’s financial portal. Upon successful application, your status as a non-habitual tax resident will be applied retroactively to the date of your initial registration as a tax resident in Portugal.

NHR status is valid for a period of 10 years, starting from the year of initial tax residence in Portugal. It typically takes a couple of weeks to receive a response to your NHR application. Keep in mind that the duration of the NHR regime and the specific tax benefits available may change in the future due to political developments and proposed changes to the Portuguese tax system.

 

Navigating Double Taxation Agreements

Double taxation agreements are vital for NHR applicants as they help prevent double taxation on the same income in both Portugal and the applicant’s home country. These agreements ensure that individuals will only be taxed once, either in Portugal or their home country, depending on the conditions of the double taxation agreement made. This serves to avoid double taxation and provides clarity on the tax obligations of NHR applicants.

Portugal maintains double taxation agreements with 81 countries, significantly contributing to the tax advantages of the NHR tax regime. These agreements provide NHR applicants an opportunity to limit or eliminate income tax on foreign income sources, enhancing the appeal of the NHR tax regime for those contemplating a move to Portugal.

Overview of Double Taxation Agreements

Double taxation agreements, also known as double tax treaties, are arrangements between two countries that seek to prevent individuals or corporations from being taxed twice on the same income or assets. These agreements stipulate rules for determining which country has the primary right to tax certain types of income or assets and provide mechanisms for avoiding or mitigating double taxation for tax purposes.

Examples of countries with established double taxation agreements include the United Kingdom, Germany, and Cyprus. These agreements are critical for those considering the NHR tax regime in Portugal, as they offer potential tax obligation reductions and clarify tax duties in both countries.

Portugal’s Double Taxation Agreements

Portugal’s double taxation agreements have a major impact on the tax benefits of the NHR tax regime. By having double taxation agreements in place with over 70 countries, Portugal provides an attractive environment for foreign investment and skilled professionals seeking to minimise their income tax obligations.

These agreements hold significant value for NHR applicants, as they aim to prevent duplicate taxation on the same income in both Portugal and the applicant’s home country. With a solid grasp of Portugal’s double taxation agreements, NHR applicants can maximise their utilisation of the tax benefits under the NHR tax regime and maintain a tax-effective lifestyle in Portugal.

 

The Future of NHR: Transitory Regime and Potential Changes

The future of the NHR tax regime in Portugal encompasses a transitional period until December 31, 2024, and possible changes due to political shifts. When the State Budget was announced, the Portuguese Government announced the end of the NHR – wanting to shut it down by 31 December 2023. However, following the resignation of Portugal’s Prime Minister and the fall out of his Government; everything has been placed on hold.

The Socialist Party is proposing that those who began their application for the NHR but have not been able to complete it by 31 December 2023 will be allowed an extra year to do so if they can provide evidence of their preparations to move to Portugal during the year 2023. This transitional regime would give them until 31 December 2024 instead of the original deadline in order to complete their application for the NHR.

The transitional NHR regime provides a distinct opportunity to reap the benefits of the NHR tax regime within a specified timeframe.

Potential Changes to the NHR Tax Regime

Political developments, such as the upcoming early elections in Portugal on 10 March 2024, might also impact the NHR tax regime. The result of the elections and the following government policies will determine any potential modifications to the NHR tax regime. For those considering the NHR tax regime, staying updated on these developments and possible changes is important.

The proposed State Budget for 2024 includes the cessation of the NHR tax regime, which might impact the future tax benefits offered by the program; but again, this may change following the elections during Spring of 2024.

For existing and potential NHR applicants, it’s important to stay updated on these possible changes and their potential impact on tax benefits in Portugal.

 

Summary

In conclusion, the NHR tax regime in Portugal offers an attractive opportunity for new foreign residents and Portuguese emigrants to enjoy tax benefits on their income. With key features such as tax exemptions on foreign income and reduced tax rates for high-value professions, the NHR tax regime presents a unique tax advantage for individuals considering relocation to Portugal.

As the future of the NHR tax regime includes a transitory regime and potential changes due to political developments, it is essential for individuals to stay informed about these developments and make the most of the tax benefits offered by the NHR tax regime while they last. Embrace the opportunity to enjoy a tax-efficient lifestyle in the beautiful country of Portugal. Contact our team today to make this happen.

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