NHR: A closed door but an open window

The announcement at the beginning of October '23 regarding the proposal for the end of NHR in 2024 was unexpected and has caused quite a stir amongst those who had longer-term plans to move to Portugal, as well as for those who may be concerned about the attraction of Portugal going forward

The end of NHR?
At the time of writing, the NHR was abolished on 31^st December 2023. However, the government has most recently announced a ´transitory NHR regime´ to ease in the new rules throughout 2024. This will guarantee the right of certain individuals to apply for NHR, but interestingly it also leaves the possibility open for the next government (elections to be held early March 2024) to either continue with the abolition, alter the current NHR rules, or maintain NHR in its current state.

Whilst the future of NHR is still very much uncertain, the transition rules mean that instead of a hard end to NHR at the end of 2023, qualifying individuals can still apply for NHR during 2024. This grandfathering in ensures that those who have been strategically planning their move and making life changes will not be left disadvantaged by a sudden withdrawal of the scheme.

Qualifying individuals are those with:

• A promise of employment or secondment, or a work contract before 31^st December 2023 and where the work is performed in Portugal.
• A contract in respect of purchase, lease or use of property in Portugal concluded before 10^th October 2023.
• A reservation or promissory contract over a property in Portugal before 10^th October 2023 i.e. a `contrato-promessa de aquisição de direito real sobre imóvel`.
• Enrolment or registration of dependants in education within Portugal before 10^th October 2023.
• A residence permit or visa obtained prior to 31^st December 2023.
• A residence or visa process registered with the relevant authority before 31^st December 2023.

Missed the boat?
More careful planning will be needed for those who move after the deadline has passed or do not meet the qualifying criteria.

As always, planning should ideally start in your originating country so you can make a ‘road map’ to take advantage of any windows of opportunity and tax reliefs in both countries. But the need for effective planning will be even more important with the uncertainty and potential end of NHR as new residents will immediately be subject to the standard rates of tax and will not have the grace period of the NHR period to soften the tax blow if restructuring is required.

Some important considerations for individuals in this position still contemplating the move are:

• If still working, there will be no 20% ‘high value’ activity option and earned income will be taxed at scale rates of 14.8% to 48% (plus the potential for solidarity tax at 2.5%/5%). If you can choose how you are remunerated, it may be more beneficial to opt for dividends which are taxed at 28% and do not attract a social security liability.
• For retirees, a change to the low 10% tax on pensions could affect how or when you decide to access your pensions. Standard residents are generally taxed at scale rates, but the ultimate tax basis does depend on the type of pension.
• Those with large investments should look to restructure as interest, dividends and capital gains (on an arising basis i.e. sale/switch of funds, even if not withdrawn), are all taxed at 28%. There are tax-efficient structures available to Portuguese residents that offer a shelter from tax in the accumulation stage and provide more beneficial rates of tax on drawdown.

Current NHRs
One positive is that those with NHR can retain the advantageous tax status but even so, you should begin planning for the end of your NHR. Some important opportunities exist if you are planning to sell foreign property as the gain is tax-exempt during NHR but taxable afterwards, or if you are drawing tax-free dividends, which will be taxable at 28% post-NHR.

Planning now will allow you to time and control your tax position – this may be switching how income is generated, creating tax structures, or realising capital for the future. Leaving it too late may result in an unfavourable and irreversible outcome.

Not all doom and gloom
Regarding the end of NHR, we will just have to wait and see, but even if 2024 does spell the end of the scheme for new arrivers, Portugal can still be a very tax-effective place to live. With the right structuring, many wealthy Portuguese nationals and expats enjoy the same or even lower rates of tax than under NHR.

What has happened?

The NHR (Non-Habitual Residence) 10 year tax incentivised scheme to new residents will officially end from 1st January 2024.

There is a new 10 year scheme introduced as a result of the 2024 Budget Law that offers benefits to select individuals. This is aimed at attracting those involved in the scientific research and innovation fields and will apply to those with roles in higher education and specific high value sectors.

Key points

Residency obtained after 1st January 2024

Those who obtain Portuguese residence after 1st January 2024 will not be able to apply for the NHR scheme unless you meet one of the transitional criteria below.

Those who cannot claim NHR status will be subject to the standard rates of Portuguese tax.

Transitional rules: applications open until 31st December 2024

Those who become resident in 2024 may still be able to apply for NHR if certain conditions are met. These are individuals with:

• A promise of employment or secondment, or a work contract before 31st December 2023 and where the work is performed in Portugal
• A contract in respect of purchase, lease or use of property in Portugal concluded before 10th October 2023
• A reservation or promissory contract over a property in Portugal before 10th October 2023 i.e. a `contrato-promessa de aquisição de direito real sobre imóvel`
• Enrolment or registration of dependants in education within Portugal before 10th October 2023
• A residence permit or visa obtained prior to 31st December 2023
• A residence or visa process registered with the relevant authority before 31st December 2023

Existing NHR individuals
Those with NHR already will continue to benefit from the scheme until the end of the 10 year period.

Final words
It is expected that there will a high volume of applications for NHR and for embassy appointments so if you can, take action now.

If you do miss the NHR boat, Portugal can still be a very tax efficient place to live however more careful planning will be needed both before and after your move.

Mark Quinn BA ATT APFS

Tax Adviser & Chartered Financial Planner 

The Spectrum IFA Group

Email : mark.quinn@spectrum-ifa.com

Tel (Portugal): +351 289 355 316

Tel (Head office): +34 936 658 596

Address: Rua Sacadura Cabral, Lote 262, Loja C, 8135-144 Almancil, Portugal