What are the benefits of the Portugal NHR regime?

Since its inception in 2009, Portugal’s non-habitual residence tax scheme has garnered widespread attention and praise.

However, as anyone who has attempted to go deeper into the system can attest, doing so can quickly lead to information overload.

It does not help that NHR status benefits so many different types of taxpayers, with different implications for retirees, freelancers, and business owners.

Furthermore, some people may receive a pension in addition to earnings, and these two sources of income may be subject to different tax rates under NHR, with the latter perhaps being disqualified altogether.

The scheme appears to be geared for people who do not habitually reside in Portugal, however the term “non-habitual resident” itself creates confusion. In actuality, tax residency in Portugal is required to take advantage of the NHR program.

Non-habitual residency has been misunderstood by some to be a type of visa on par with the D7 or a golden visa. NHR is not a visa but rather a tax system. To apply for NHR, you must first establish residency.

The Portuguese government’s intentions are good, and the NHR regime is meant to entice wealthy foreigners to relocate to Portugal.

This article will cover the specifics of Portugal’s NHR tax structure, including the types of high-value activities that fall under its purview.

This is for educational purposes only and not to be construed as specific tax advice. Instead, you should consult with a tax attorney or a financial counselor who is versed in Portugal’s NHR program.

Keep in mind that the information shown here may not reflect the most up-to-date NHR tax system.

What is the Portugal NHR tax regime?

In 2009, the Portuguese government introduced a tax policy for non-habitual residents of Portugal (NHRs) that provides preferential tax status.

The regime particularly targets non-native speakers. But Portuguese citizens who have not spent the previous five years residing in Portugal are also eligible for NHR.

In a nutshell, the non-habitual resident Portugal plan reduces the tax rate for eligible individuals from the maximum rate of 48% to 20% on income received in Portugal.

If an individual satisfies certain requirements (such as being a dual tax resident of another country), then income generated outside of Portugal may be exempt from Portuguese taxation.

This includes not only retirees who receive pension payments but also anyone who receives income from abroad in the form of a salary, dividends, or investment returns.

Given that Portugal is not known for having a low tax rate, this is a significant benefit. Citizens and permanent residents of Portugal face tax rates on their worldwide income anywhere from 14.5% to 48.2%.

The fundamental objective of the Non-Habitual Resident plan is to attract high-quality residents to Portugal, such as retirees or professionals. For digital nomads, this could be the perfect set-up.

The name of the Non-Habitual Resident Portugal program could be misleading to some.

Despite the “non-habitual” moniker, in order to qualify for the NHR, you must establish and keep a permanent residence in Portugal for tax purposes.

If you have any questions or want to invest as an expat or high-net-worth individual, you can email me (advice@adamfayed.com) or use these contact options.

What are the benefits of the Portugal NHR tax regime?

New residents in Portugal can take advantage of favorable tax treatment under the country’s non-habitual residency policy.

Some overseas income will be excluded from Portuguese tax; foreign pension income enjoys a unique fixed low tax rate; and local ‘high value’ employment is also taxed at a lower rate than usual.

Whether you are drawn to the Algarve’s beautiful coastline and golf courses or the ancient charms of Lisbon and Porto, relocating to Portugal could be a step toward a healthier, more relaxed way of life.

However, Portugal has far broader appeal thanks to its non-habitual residence (NHR) law, which allows new residents to benefit from substantial tax cuts for ten years.

What is a “non-habitual resident”?

People who have not made Portugal their permanent home during the past five years are eligible for this regime, hence the term “non-habitual.”

In fact, the NHR was established in 2009 by the Portuguese government in an effort to entice ‘high-value’ expats to make Portugal their permanent home. For this reason, it provides preferential tax treatment for the first ten years of continuous residence.

What are the tax advantages?

Income from high-paying jobs in Portugal are exempt from taxation.

While the majority of NHR tax benefits are only applicable to earnings outside of Portugal, those who work in Portugal and are engaged in a “high-value activity” are eligible for a flat 20% income tax rate on their employment earnings.  This replaces the graduated tax rates of 14.5%-48%.

To qualify, your occupation must fall under one of the categories of science, art, or technology.

Citizens of Portugal are subject to taxation on their worldwide earnings. However, under the non-habitual residence rule, you can bring in money from outside of Portugal without having to pay any taxes on it.

Portugal generally does not tax (but will gradually phase out) foreign-sourced income, such as that earned through investments (including dividends and interest), royalties, rents, employment, etc., provided that the foreign state has taxing rights.

This is possible even if the source country does not tax the revenue. For instance, the UK/Portugal double tax treaty exempts dividends paid out of the United Kingdom from Portuguese taxation under NHR.

However, under the ‘disregarded income’ regulations, non-residents may be completely exempt from UK taxation. Therefore, it is possible that your dividend income from the UK will not be subject to taxation in either nation.

In sum, the NHR allows British expats to possibly enjoy tax-free UK rental income, capital gains on real estate, interest, dividends, and income from sources other than Portugal.

Meanwhile, if Portugal is granted taxing rights over the gain from the sale of overseas assets through a double tax treaty, then Portuguese tax law will apply to the sale. Gains that are subject to taxation in the nation of origin are exempt in Portugal, subject to progressive taxation.

This implies that even if you are not a Portuguese citizen or resident, any profits you make from selling UK shares will be subject to full taxation in Portugal. However, under the scheme, gains from the sale of UK real estate are not subject to tax (with progression).

What does it mean to be “exempt with progression”?

Although foreign income is not taxed on its own in Portugal, it may be considered when determining the tax rate to be applied to your taxable Portuguese income.

This may cause you to enter a higher tax bracket, so increasing the effective rate of tax on income subject to direct taxation in Portugal.

How does the NHR handle taxation on pension income earned abroad?

Under the non-habitual residence regime, foreign pension income is taxed at a flat rate of 10% rather than being exempt from taxation altogether.

Those with larger pension incomes will benefit the most from the 10% tax, as income tax rates start at 14.5% and go as high as 48%.

However, pensions earned through UK government employment are not subject to taxation elsewhere outside the UK.

How do you meet the requirements for non-habitual residency status?

NHR is available to everyone who has not made Portugal their permanent home within the past five years, regardless of nationality or membership in the European Union or the European Economic Area.

If you become a tax resident of Portugal after March 31, you still have time to apply for this benefit. You will also require a Portuguese taxpayer identification number (NIF) and to be eligible for Portuguese residency.

What will happen after ten years as with the Portugal NHR status?

NHR status and benefits are no longer available after 10 years of tax residency.  Your whole worldwide income and gains will be subject to taxation at the maximum rates.

It is recommended to contact your trusted financial advisor as your tenth year of residency nears to receive guidance on efficient, legally compliant tax preparation in Portugal.

And use your NHR privileges to their full potential.  You may be able to reinvest the proceeds from the sale of a UK property in a life insurance bond without incurring any capital gains tax. If you think you might need to reorganize your finances before the 10-year mark, give yourself plenty of time to do it.

In addition to NHR, what other tax breaks are there in Portugal?

Even if you do not meet the requirements for non-habitual residence or your NHR time has finished, Portugal may still be a great place to call home because of its low taxes.

For instance, with forethought and expert guidance, one can qualify for exceptionally favorable tax treatment on capital investments.

The Portuguese stamp duty (intestate tax) is extremely low, at 10%, and exempts spouses and children.

Portugal does have a wealth tax, albeit it is limited to real estate and has low rates. If the value of your Portuguese property exceeds €600,000 (or €1.2 million for a married couple), you will not be affected.

As a whole, Portugal is a great option for British citizens seeking a more laid-back and tax-friendly lifestyle in warmer climes. The optimal next steps are determined by your specific situation and goals.

How do you apply to be qualified as a Portugal NHR?

The following conditions must be met before you can apply:

You must meet the requirements to be considered a fiscal resident of Portugal.

First, you will need to prove that you are eligible to live in Portugal legally. This is feasible, for instance, with the D7 visa or Golden Visa (for non-EU nationals) or the right of free movement inside the European Union (for EU citizens).

Establishing Portuguese tax residence is the next step. If you spend more than six months of the year in Portugal, the Portuguese government will treat you as a tax resident of Portugal.

You will also need a valid Portuguese mailing address and a tax identification number (NIF) from Portugal. You must complete your NHR application in this manner.

NHR benefits are available to those who become tax residents of Portugal for a fixed 10-year period.

The date you registered with the Portuguese tax office as your primary residence is typically used to make this determination. The specifics are on the Finanças portal.

NHR registration is required as well.

You have until March 31 of the year following the year in which you become a tax resident of Portugal to submit your application for NHR.

If you arrive between 1 April and 31 December, your registration deadline is 31 March of the following year. If you arrive between January 1 and March 31, you have until the following March 31 to sign up.

You should file your annual tax return as soon as possible so the tax office will recognize your application to be taxed under the NHR method.

If the IRS believes you are engaged in a lucrative endeavor, they will get in touch with you to request proof, such as a contract or certification.

Under the NHR tax system, how much will you have to pay in taxes?

The taxation of income from the NHR program is a topic of widespread confusion.

This overview is not meant to replace professional tax advice, but rather to give you a sense of what to expect in advance.

To find out how NHR affects your specific situation, it is recommended that you see a tax expert. Get in touch if you are looking for advice.

The NHR handling of income is heavily influenced by whether or not the revenue was earned in Portugal.

You may or may not qualify for the tax rates shown below, but these are examples of what you could get under the new scheme.

For the next decade, these tax rates will remain unchanged. The regular tax rates in Portugal range from 14.5% to 48.5%, so after that you would have to pay those.

The NHR plan imposes a 10% flat tax on pensions beginning in March 2020. If you have already paid taxes before arriving in Portugal, you may not have to do so again.

It is possible that some pensioners in Portugal would rather pay the ordinary tax rates than take advantage of the relatively small annual tax-free allowance. A qualified accountant can estimate your tax burden in both countries.

The Portuguese tax authorities have determined that two categories of professional income received in Portugal are eligible for the non-habitual residents scheme.

In the United States, employees fall into one of two categories, while independent contractors make up the other.

If your income falls into either of these categories and you earn it in Portugal (via a job or through Portuguese clients, for example), you may be eligible for a flat tax rate of 20%.

Setting up shop in Portugal as a sole proprietor can be a simple and financially astute choice if your line of work qualifies.

Whether or not your job is considered a “high added value activity” is a major factor in determining whether or not you can legally work in Portugal as a naturalized Portuguese national with residency status.

This category includes endeavors of a scientific, artistic, or technical character that Portugal sees as beneficial to its economy.

Individuals may be asked to provide documentation of their professional credentials such as EQF Level 4, or ISC Level 35, is equivalent to the European Qualifications Framework’s Level 4, and proof that they have worked in the field for at least five years.

What are the Portugal NHR high value activities?

Depending on your income level, the flat tax rate of 20% in addition to social security may be advantageous to the standard Portuguese tax rates for professionals engaged in high-value operations in Portugal.

The list of Portugal’s most important national projects is revised every few years. Some careers that have been deemed acceptable in recent years include those of journalists, dentists, IT experts, linguists, entrepreneurs, hotel managers, jewelers, and electricians.

High-value work is required for NHR, whether performed by an independent contractor or an employee. If no taxes are withheld from your paycheck when you get hired, you will have to pay 20% plus social security.

It is debatable whether the current tax system is preferable than a flat 20% rate. It is also possible that it is less advantageous than Portugal’s regular tax rates.

For those with lower incomes, Portugal’s tax-free allowance and tax credits can reduce the effective tax rate. Ask your accountant for a rough calculation of both rates so you can make an informed decision.

Most business owners that choose NHR end up paying 20% of their revenue in taxes plus their share of social security.

Portugal’s NHR tax structure is a big selling feature for the country among working professionals, alongside the country’s beautiful environment, wonderful cuisine, and easygoing pace of life.

Those who fit the criteria may file their income tax returns in Portugal using the reduced NHR rates instead of the standard Portuguese rates. Depending on your circumstances, such as your income, being taxed under the NHR regime may make a lot of financial sense.

The NHR system levies a 20% tax on all “high value activity” jobs (social security is calculated separately).

However, NHR only applies to income from “high value activities,” which leaves out other fields. The following high-value activities are now NHR-eligible as of January 1, 2020:

    112 – A company’s top executive or general manager

    12 – Administration and Business Service Directors

    13 – Production and specialized service directors

    14 – Managers and executives in the hospitality, dining, commercial, and service industries

    21 – Scientists, mathematicians, and engineers and others who work in related technological sectors.

    221 – Physicians

    231 – Dentists and other dental professionals

    2261 – College and university professors

    231 – Authors, journalists, and linguists

    264 – Performers and visual artists

    265 – Musicians and composers

    25 – Experts in technology and communication technologies (ICT)

    31 – Technicians and engineers at the intermediate level

    35 – Technicians in ICT (Information and Communication Technology)

    61 – Commercially minded farmers and agriculturists with the appropriate credentials

    62 – Commercially minded woodsmen, fishermen, and hunters with the appropriate credentials.

    7 – Skilled laborers and tradespeople in industry and construction, including specialists in such areas as metalworking, food processing, woodworking, textile production, handiwork, printing, precision instrument making, jewelers, artisans, electricians, and electronics technicians

    8 – Operators of permanent installations and machine operators, as well as assembly workers

Executives and managers at companies that lobby for more investment in production could benefit financially from laws passed on October 31st, 2014.

With the passage of Ordinance 230/2019 on the 23rd, a broader range of value-added activities that are subject to Portugal’s tax regime for non-habitual residents (NHR) have been added.

Due to the increased demand for specialized skills and the resulting difficulties in recruiting, the table, which had been in effect since 2010, has undergone a thorough revision to ensure that the activities listed therein are in line with the needs of the national labor market.

Should you consider moving Portugal for the NHR tax regime?

These new changes to tax law have made Portugal an even more attractive retirement destination, adding to the country’s low cost of living, high quality of healthcare, sunny climate, and historical stability.

To retire in Portugal, however, non-EU citizens will need to apply for a special retirement visa known as a “golden visa.”

Portugal has some of the most lenient visa rules in the European Union due to its status as a “entry point” to the continent. First, we will go over what you need to retire comfortably.

How can you retire in Portugal?

If you are not a European Union citizen and do not plan to work during your stay in Portugal but have sufficient funds coming in from other sources, you may apply for a national (residency) visa.

To apply for a retirement visa in Portugal, you will need the following documents:

•     Obtain a passport that is still valid. The minimum length of validity is six months.
•     Schengen requires two passport-sized pictures taken within the last six months.
•     Application for Portuguese nationality (visa). The application can be found on the official website of the Portuguese Ministry of Foreign Affairs and can be downloaded there.
•     Proving the existence of cash reserves. Proof of adequate funds from a pension, savings, or other lawful sources to cover your expenses throughout your intended stay in Portugal is required.
•     Acceptable proof. Proof of housing commitments in Portugal (lease, purchase agreement, etc.) is necessary.
•     Getting medical coverage. Getting travel health insurance or an international health insurance plan for expats is an absolute necessity before relocating to Portugal. Then, after you have settled locally, you can decide whether to continue your international health coverage or to enroll in a plan from a local provider.
•     Paperwork such as a birth or marriage certificate.
•     Conviction-free status must be confirmed. You must not have any pending offenses that carry a mandatory minimum sentence of one year in prison.
•     Additional documentation as required by the Embassy or SEF.

All submissions need to be made in both English and Portuguese. If you do not have access to a professional translator, you should get the document translated by one before having it notarized.

The Portuguese Embassy or Apostille may be needed to legalize certain documents, especially those dealing to civil concerns.

Get in touch with the Portuguese Embassy or Consulate in your area. Discover the most convenient place to submit your visa application.

The application can then be scheduled and submitted at a convenient time. Make sure you have the required documentation to ensure a seamless procedure.

The application fee must be paid before or on the date the application is submitted.

Please bring all necessary papers with you on the day of your visit. If the Embassy or Consulate is in a nation other than the one in which you now reside, you may be allowed to submit your application by mail instead. The visa office will send you a notification.

If the outcome is positive, the Embassy or Consulate will stamp your passport with a retirement visa. You can enter Portugal with this visa.

Schedule an appointment with the Portuguese Immigration and Borders Service (SEF) as soon as possible after arriving in Portugal if you intend to apply for a resident visa.

The Portuguese consulate or embassy may ask you to book an appointment and provide information about your intended travel dates when you apply for a visa.

There are a variety of costs associated with requesting a Portuguese retirement visa.

A national visa can be obtained from the embassy or consulate for €90.

The €83 application price for the SEF includes the cost of processing a visa for permanent residence.

A residency permit will set you back €72.

You should know that the other 26 European Union (EU) countries that are members of the Schengen Area will likewise provide you visa-free travel once you have obtained a residence visa from Portugal.

Tourists are allowed to stay in the Schengen Area for up to 90 days in any 180-day period, but they are not permitted to work, study, or settle there permanently.

How do you get a golden visa in Portugal?

In exchange for a monetary commitment, the Portugal Golden Visa program grants non-EU citizens a road to permanent residency in Portugal.

In October of 2012, the program was launched in Portugal. Since the country’s economy collapsed in 2008, the primary objective was to attract foreign investment. Since its inception, the project has helped raise around €6 billion.

Further, the Portugal Golden Visa program paves the way for potential citizens to seek for Portuguese citizenship or permanent residency after only five years in Portugal.

You can get this visa if you spend at least €500,000 on real estate in Portugal. The residency criteria for a Golden Visa are typically much less stringent than those for a regular retirement visa.

The Golden Visa is a quicker and easier (although more expensive) way to get Portuguese citizenship. If you make one of the following investments, you may apply for a Golden Visa:

•     Spend at least €500,000 on a piece of real estate.
•     Your proposal must involve an investment of at least €350,000 in real estate within an urban regeneration region in Portugal in order to be considered for SEF funding.
•     Get a million Euros over here as soon as possible.
•     Invest or buy shares in a Portuguese company for a minimum of €1,000,000.
•     Create new job openings for Portuguese citizens.
•     Donate at least €350,000 to Portuguese universities to fund research in the fields of science and technology.
•     Help restore the nation’s cultural institutions by contributing at least €250,000

Applying for a Golden Visa is different from applying for a regular retirement visa because the SEF has a dedicated portal just for Golden Visas.

After it is approved, your Portuguese residence permit will be good for one full year. Two additional five-year renewals are available to you. Five years of continuous residence in Portugal is required to apply for permanent status.

The Portugal Golden Visa Program exempts its participants from Portuguese taxes if they do not intend to spend more than 183 days in Portugal per year. After that point only do you qualify as a tax resident of Portugal.

Potential residents of Portugal can take advantage of the country’s lenient tax system.  The NHR program provides tax breaks for the first ten years of residency.

The Portuguese Golden Visa allows you to live and work in Portugal, although it is not mandatory.  You should know that Portugal has a low tax rate if you are thinking about relocating there.

Visa-free travel within the Schengen zone of Europe is available to Golden Visa holders. After five years with a Golden Visa, you can apply for Portuguese citizenship or permanent residency (and thereafter a passport).

With a Portuguese passport, you can easily visit any country that is a part of the European Union.

After five years of temporary residency, tax payments, and a clean criminal record in Portugal, a resident can apply for a permanent residence card. You need to spend at least six months a year in the country to be eligible for a permanent residence card.

To maintain residency status in Portugal after obtaining a Golden Visa, visitors need only spend about seven days in the country each year.

If you and your spouse match the requirements, you can apply for a retirement visa to retire in Portugal.

Even if your husband or registered partner does not have enough money in pensions or savings to qualify for a retirement visa, he or she can still come live with you and your minor (unmarried) children.

The following requirements must be met in order to bring family members to Portugal with you:

•     It is your responsibility to see that they are provided with comfortable lodgings in Portugal.
•     It is incumbent upon your ability to provide for their material needs.
•     Proof of kinship must be provided.
•     They have to eligible to get a visa to Portugal.

Conclusion

Portugal’s Non-Habitual Resident (NHR) tax regime offers significant advantages to expatriates and global nomads, providing compelling financial incentives.

Non-Habitual Residents (NHRs) in Portugal are eligible for a decade of tax breaks under the country’s unique tax regime, during which time they pay lower rates of tax on Portuguese-source income and no tax on most foreign-source income.

Any individual who meets the requirements to be considered a tax resident in Portugal and who has not been taxed as a Portuguese tax resident in any of the five years prior to the year in which residence is established may be eligible to take advantage of Portugal’s NHR regime for a period of 10 consecutive years.

Coupled with other attractive elements such as its mild climate, diverse culture, exceptional gastronomy, and a high standard of living, Portugal offers much more than just tax benefits.

However, it is highly recommended to consult with financial advisors when considering making use of the NHR tax regime in Portugal.

Given the complexities involved in international taxation, a professional can help you navigate the process effectively to ensure you are compliant with all tax laws and regulations.

Financial advisors are well-versed in the tax system and can provide invaluable advice to help you optimize your financial planning. They can clarify potential ambiguities and help you understand the full benefit of the NHR tax regime.

This advice can be instrumental in making the transition to living in Portugal smoother, more efficient, and financially advantageous.

The combination of a welcoming atmosphere, vibrant lifestyle, and financial incentives makes choosing Portugal as your home country a wise and appealing decision.

Portugal should firmly be in consideration for anyone seeking a rewarding and enriching living experience in a foreign country.

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