Non-Habitual Residency (NHR) tax regime guide
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The Non-Habitual Residency (NHR) tax regime in Portugal is a special tax regime that offers favourable reduced rates of tax on pensions and non-Portugal derived income such as dividends and royalties to qualifying individuals who become tax residents in the country.
The NHR tax regime was introduced in 2009 to attract highly qualified professionals and retirees to Portugal, and it has been very successful in doing so. Individuals who qualify for the NHR tax regime can benefit from this tax incentive for a period of 10 years.
In recent years, the NHR tax regime has become increasingly popular with wealthy expats, who are drawn to the country's low cost of living, culture, favourable tax system, climate, safety and security.
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- Following the 10th of October draft bill, the Portuguese government announced that they will close the NHR tax regime to new entrants on 31st of December 2023
- The draft bill also stated that the NHR tax regime will very likely be replaced by the Incentivised Tax Scheme (ITS) in 2024
- The ITS potential benefits include a flat 20% tax rate for a decade and a 50% tax exemption on professional income, up to a cap of €250,000, for five years.
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- Flat rate of 20% on Portuguese-source income: Individuals who qualify for the NHR tax regime are taxed at a flat rate of 20% on Portuguese-source income, including employment income, self-employment income, and investment income. This is a significant reduction from the standard Portuguese tax rates, which can reach up to 50%.
- Lower tax on non-Portugal derived income: Most foreign-source income is exempt from tax under the NHR tax regime. This includes pension income, investment income, and capital gains. This is a major benefit for individuals who have income from multiple countries, as it can help them to avoid double taxation.
- Special tax benefits for certain types of income: The NHR tax regime offers special tax benefits for certain types of income, such as income from high-value activities and income from intellectual property. For example, individuals who qualify for the NHR tax regime can be taxed at a rate of 10% on income from high-value activities, such as management, consulting, and teaching.
- 10-year tax residency period: Individuals who qualify for the NHR tax regime can benefit from it for a period of 10 years. After 10 years, they will be subject to the standard Portuguese tax regime. This gives individuals plenty of time to benefit from the tax advantages of the NHR tax regime.
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- Exemption from tax on foreign-source income: Most foreign-source income is exempt from tax under the NHR tax regime, even if it is not taxed in the country of origin. This is because Portugal has DTAs with most countries, and these DTAs typically give Portugal the right to tax foreign-source income only if it is not taxed in the country of origin.
- Taxation of foreign-source income that is taxed in Portugal: If foreign-source income is taxed in both Portugal and the country of origin, the NHR tax regime provides a number of mechanisms to avoid double taxation.
- For example, individuals can claim a foreign tax credit against their Portuguese tax liability.
- Taxation of foreign-source income that is not taxed in Portugal: If foreign-source income is not taxed in either Portugal or the country of origin, it is still subject to the NHR tax regime. However, individuals can claim a "tax-sparing credit" against their Portuguese tax liability.
- This credit effectively allows individuals to receive the benefit of any tax breaks that they would have received in their country of origin.
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To be eligible for the Non-Habitual Resident (NHR) tax regime in Portugal, you must meet the following criteria:
- You must not have been a Portuguese tax resident in any of the five years preceding the year in which you apply for NHR status.
- You must establish your tax residency in Portugal.
To establish your tax residency in Portugal, you must either:
- Spend more than 183 days in Portugal in any 12-month period.
- Have your habitual residence in Portugal, which means that your centre of personal and economic interests is in Portugal.
If you meet the eligibility criteria, you can apply for NHR status by submitting a declaration to the Portuguese Tax and Customs Authority (AT). The declaration must include information about your income and assets, as well as your tax residency status in other countries.
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The following are considered high-value activities in Portugal under the NHR tax regime:
Scientific, artistic, or technical activities:
- Architects
- Engineers
- Scientists
- Doctors
- Dentists
- Teachers at universities and higher learning establishments
- Authors, journalists, and linguists
- Creative artists and performing artists
Highly skilled workers:
- Qualified industrial, construction workers and craftsmen
- Market-oriented farmers and qualified agricultural and livestock workers
- Market-oriented qualified forestry, fisheries, and hunting workers
Skilled workers in industry and construction and handicraftsmen:
- Skilled workers in metallurgy
- metalworking
- food processing
- wood and clothing
- Jewellers
- Electricians
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To apply for the Non-Habitual Residency (NHR) tax regime in Portugal, you must first obtain resident status in Portugal. There are a number of ways to obtain residency in Portugal, including:
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- D7 visa: This visa is for retirees and financially independent individuals. To qualify, you must have a guaranteed monthly income of at least €705.09 (in 2023).
- Golden Visa: This visa is for investors who invest at least €500,000 in Portuguese real estate, €350,000 in venture capital funds, or €250,000 in cultural heritage or scientific research projects.
- D2 visa: This visa is for entrepreneurs who start a business in Portugal. To qualify, you must have a business plan that is approved by the Portuguese government.
- Employment visa: This visa is for individuals who have a job offer from a Portuguese company.
- Family visa: This visa is for individuals who are the spouse, child, or parent of a Portuguese citizen or permanent resident.
EU/EEA citizens
EU/EEA citizens do not need a visa to live in Portugal. However, they will need to register with the local authorities within three months of their arrival.
Non-EU/EEA citizens
Non-EU/EEA citizens will need a visa to live in Portugal. The type of visa you need will depend on your circumstances. For example, if you are moving to Portugal to retire, you will need a retirement visa. If you are moving to Portugal to start a business, you will need an entrepreneur visa.
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Step 1: Meet the eligibility requirements
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Proof of non-Portuguese tax residency in the past five years:
- If you were employed in the past five years, you will need to provide a letter from your employer stating that you were not a Portuguese tax resident.
- If you were self-employed in the past five years, you will need to provide a declaration from your accountant stating that you were not a Portuguese tax resident.
Proof of Portuguese tax residency:
- To register as a Portuguese tax resident, you will need to complete a tax registration form and submit it to the Portuguese Tax Authority (AT).
- You can find the tax registration form on the AT website.
Proof of habitual residence in Portugal:
- This can be demonstrated by providing a rental agreement, utility bill, or other documentation that shows that you have a permanent place of residence in Portugal.
Step 2: Gather the required documents
- Copy of passport or identity card
- Copy of Portuguese tax identification number (NIF)
- Proof of residence in Portugal
- Declaration from employer or declaration of professional activity
- Criminal record certificate from home country (issued within the past six months)
- Medical certificate (issued within the past six months)
Step 3: Submit your application
The Portuguese Tax Authority will review your application and make a decision within 60 days. If your application is approved, you will receive a certificate of NHR status.
Step 4: Maintain your NHR status
To maintain your NHR status, you must continue to meet the eligibility requirements. This means that you must continue to be a Portuguese tax resident and maintain a habitual residence in Portugal. You must also submit a declaration to the Portuguese Tax Authority each year to confirm that you still meet the requirements.
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Inheritance tax
Portugal has a relatively high inheritance tax rate, ranging from 10% to 35%, depending on the value of the inheritance and the relationship between the deceased and the beneficiary.
However, there are a number of exemptions and deductions available, which can reduce the amount of inheritance tax payable. For example, there is a complete exemption for spouses and direct descendants.
Succession planning
When planning for inheritance and succession, it is important to consider the following factors:
- The testator's domicile will determine which country's inheritance laws apply to their estate.
- The beneficiaries' tax residency will determine whether they are liable to pay inheritance tax in Portugal.
- The type and location of the assets in the estate will also affect the inheritance tax planning process.
Expats with a Non-Habitual-Residency (NHR) tax status are exempt from inheritance tax on foreign-sourced assets. This means that if an expat with NHR status dies with assets located outside of Portugal, their heirs will not have to pay any inheritance tax in Portugal on those assets.
Tax planning strategies
There are a number of tax planning strategies that affluent expats can use to reduce the amount of inheritance tax payable in Portugal. These strategies include:
- Gifts: Making gifts during the testator's lifetime can be a useful way to reduce the value of their estate and, therefore, the amount of inheritance tax payable.
- Trusts: These trusts can be used to hold assets for the benefit of beneficiaries, while providing a degree of protection from inheritance tax.
- Life insurance: Life insurance can be used to provide a lump sum payment to the beneficiaries on the testator's death, which can be used to pay inheritance tax or other expenses.
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More than 53,700 affluent expats in Portugal have taken advantage of the NHR tax regime since its launch in 2009. However, according to the newly published 'Wealthy Exapts in Portugal Survey Report 2023', only 27% of NHR tax status holders have planned in advance ahead of the end of their 10-year NHR tax status and mitigate the potential for a huge increase in their tax burden under Portuguese progressive tax rates of between 28% and 48%.
Portugal Pathways experts urge NHR tax holders to start planning early in their NHR tax life, preferably in the first 2 to 3 years.
Schedule a no-obligation meeting to talk to one of our expert partners and understand how you can optimise your financial position and avoid this serious problem by taking advice now before it's too late.
Disclaimer: The information on the Portugal Pathways website and in email communications is for general informational purposes only and should not be construed as legal, tax, or financial advice. You should consult and check with a qualified professional advisor before relying on any information provided on this website or in email communications. As it relates to investments in Golden Visas or other wealth management solutions offered by regulated and professional advisors, it is important to note that past performance is no guarantee of future returns. Private equities can be highly illiquid and come with risk and should always be under professional independent advice.
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