What is the Non-Habitual Resident (NHR) tax regime?

In 2009, while the world was experiencing a financial crisis, the Portuguese government introduced a new tax scheme to attract more foreigners to their shores.

Portugal's Non-Habitual Resident (NHR) tax regime was launched amidst controversy that caused substantial debate over the years. But now it appears the NHR tax programme is on its last legs. The government has chosen to cease accepting any new entrants to the NHR tax scheme in 2024, according to Portuguese Prime Minister António Costa.

“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.”

NHR scheme gives tax exemption and low fixed tax rate

The scheme gives high-net-worth people, retirees, professionals and entrepreneurs the advantage of tax exemption on foreign-sourced income, and a 20% fixed tax rate on Portuguese-sourced income. Income derived outside the country like dividends, royalties and interest is also exempt from taxation, provided it is taxed in the country it is sourced from. Furthermore, there is no taxation on capital gains from foreign property transactions. These tax benefits are applicable for ten years.

The tax scheme also allowed tax-free foreign pension income to be paid into Portugal, which played a huge role in the attractiveness of Portugal for many pensioners. This was amended in 2020 to a 10% fixed rate for all new applicants. There is an optional tax credit structure to avoid double taxation.

Requirements of the NHR status

Any nationality may apply, provided they satisfy the entry requirements. They should not have been resident in this country during at least the previous 5 years and they must register as a tax resident of Portugal, which means that they need to spend more than 183 days in the country during a 12-month period, or have a place that they use as their habitual home. This means the scheme is only open to new residents. However, applicants must apply for legal and tax residence in Portugal separately before qualifying for NHR status because NHR is not a type of residence.

In 2021, the Tax and Customs Authority reported the total tax exempted under the scheme amounted to over €1 billion after jumping from €770 million in 2019. This is from over 10,000 individuals in the scheme and this number has been steadily growing over the years. 

NHR tax benefits caused property price sharp increase

Portuguese citizens not on any tax exemption scheme are taxed up to 48%.

Between 2012 and 2021, property prices soared by 78% in Portugal, whereas the EU saw only a 35% increase. Portuguese protested inflated housing prices in cities all over Portugal demanding better government action.

In further efforts taken by the government to address the housing crisis, there is now a mandatory rental of apartments which have been standing unoccupied for over two years. The government plans to reduce lending interest rates for two years to give about one million families a kickstart in the property market.

NHR tax holders in Portugal urged to prepare for the end of the scheme

The discontinuation of the NHR scheme is expected to be finalised when parliament votes ob the final bill relating to the future of its tax regimes for expats in Portugal on the 29th of October 2023. There may be a lag before the new legislation is enforced thus buying more time to apply.

According to a survey from Portugal Pathways, a team of experts providing services to relocate in Portugal, published this month, just 27% of expats currently benefiting from the NHR tax status have made advanced preparations for the conclusion of their ten-year qualifying period under the NHR tax regime. The report is based on interviews with more than 1,000 expatriates living in Portugal.

Experts believe those individuals who are already in the process of applying for residency would still be granted NHR status. The NHR tax regime will remain valid for individuals who gain tax residency in Portugal by 31st December 2023, have a valid residence visa until 31st December 2023, or are granted NHR status within the specified cut-off time.

Alternatives to the NHR tax scheme: Cyprus

Cyprus may be an appropriate alternative for those no longer eligible for Portugal's NHR tax scheme under the proposed changes.

Experts believe that Cyprus' Non-Domiciled (non-dom) Tax Residency has similar,  if not better, tax benefits than Portugal. Cyprus offers more tax benefit options and the validity of the tax status is longer. Additionally, Cyrus has a 60-day rule that states to maintain the tax status you are only required to live there for 60 days.

Other advantages of Cyprus are the good healthcare; zero inheritance, wealth and gift tax; the individual can enjoy all the benefits of a full EU membership; and enjoy non-dom status under the Special Defence Contribution (SDC) for 17 out of 20 years that translates to zero tax on worldwide income. 

Additionally, the Cyprus non-dom status gives you access to a specific tax scheme for foreign pension income. The first €3,420 per year is exempt from tax.  A 5% tax is applicable over that limit. Individuals who work in Cyprus and earn over €100,000 annually are exempt from tax on 50% of their local income for ten years.

An EU/EEA citizen can buy property and live in Cyprus with no limitations. Non-EU/EEA nationals can own one property. Property ownership in Cyprus allows the owner to get a multiple-entry national visa.

Another quick alternative to gaining a permanent residence permit is to buy property over the value of €300,000.

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