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Non-habitual Residence in Portugal

Changes to NHR in Portugal

Despite the undoubted success of NHR in Portugal, political pressure has signalled the end of the current system and the beginning of a new one.

Whilst the NHR regime was highly beneficial for wealthy retirees, it is claimed that increases in the cost of living, and in particular housing, have not been so great for the average Portuguese national.
The government has, therefore, produced a draft budget, which will see the end of NHR in Portugal and the introduction of a new initiative designed to encourage certain professionals to choose the country as their tax base.

It will take time to implement all of the changes. However, those currently benefitting will continue to do so until the end of their 10-year exemption. Similarly, anyone who applies for NHR in Portugal before the end of 2023 and whose application is completed by the end of March 2024 will still qualify. These dates are yet to be officially confirmed.

Existing benefits related to the NHR regime

As a reminder of the current system, anyone with NHR status benefits from being taxed at 0% or 10% on foreign-sourced income, depending on when it was applied for.

There are still ways to minimise Portuguese tax, even if you either don’t have the NHR status at all, or are going to lose it in the next few years. I’ll have more comments on that issue later.

The new system focuses on the employed and business owners and is more akin to the various digital nomad schemes recently introduced in Spain and other countries.

Portugal Map

Essentially, employees and business owners who qualify will enjoy significant reductions in income taxation from foreign sources. Although NHR in Portugal is ending, the country still needs to attract highly qualified people in certain sectors, including science and research. If the new scheme works, the Portuguese economy should benefit and compensate for the loss of revenue from NHR holders.

Tax-saving options

So, what tax-saving options will still be available for existing NHR and non-NHR Portuguese individuals?

UK pension plan holders have taken advantage of the low tax rates since the beginning of the NHR scheme by withdrawing as much as possible to reinvest excess income into a Portuguese Compliant Investment Bond. I suggest continuing with this strategy and increasing annual withdrawals to make sure the fund is depleted by the end of the 10-year period. After that point, income will be taxed at normal Portuguese rates, which could be as much as 40%.

The Portuguese Bond would then replace the pension as a source of income. Tax rates reduce on a sliding scale from year one to eight, by which time tax is approximately 11% p.a. Even before year eight, tax rates are lower than those applied to normal income.

It also makes sense to invest in a Portuguese Bond with non-pension money as soon as possible as this will set the clock running, and the eight-year period will end sooner rather than later. Excess pension withdrawals can be added to the Bond yearly to create a phased income stream. Any amounts added over the years will become available at the lowest tax rate eight years after investment, ensuring a low tax income strategy into the (possibly indefinite) future.

It has to be stated that everyone’s situation is different, and any financial and tax planning strategy should work in context with a person’s overall position. This is certainly a situation where early planning will reap rewards in the long term if managed correctly.

If you would like more information on changes to NHR in Portugal and how they may affect you, please complete the form below:

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