Fact vs Fiction: A Perspective from a Native Tax Advisor

**Authors: Allison Baxley & Telmo Ramos |** October 5, 2023
Portugal's Non-Habitual Resident (NHR) tax regime has been controversial and yet one of the biggest pros of moving to Portugal since it was introduced over 10 years ago, at the height of the global financial crisis. The program has gone through many changes and debates over the past decade.
Now, there are signs that the NHR scheme may be nearing its end, as Portugal considers ending it by 2024. The impending sunset of the NHR program marks a turning point after years of policy shifts surrounding the controversial tax regime. What comes next for Portugal's approach to attracting foreign high-net-worth individuals remains to be seen.

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Is Portugal’s NHR Program Ending?

Unfortunately, it does look like the NHR program will end as of December 31, 2023. It started with a comment that was made by the Portuguese Prime Minister, leaving many current and future expats more than worried about their financial futures in Portugal. With the swift actions against the Golden Visa Program and the housing market earlier this year, we can only assume that more changes were coming.

A budget law was soon after introduced that marked December 31, 2023 as the deadline to apply for NHR status.

If you’re scrambling to apply under the tight timeline of this impending deadline, please consider booking a consultation with our co-author on this article, Telmo Ramos of TR Tax Advisor. He has quickly put together a Fast Track Package to help those in need of obtaining NHR status before the deadline, and he has generously offered our readers a 10% discount.

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With the deadline rapidly approaching, we understand the urgency you may feel. However, with TR Tax Advisor's Fast Track package, you can give yourself the best chance at beating the deadline!

Critiques of the NHR Scheme

The NHR scheme has been under fire for giving substantial tax breaks to wealthy foreigners, which many Portuguese and non-beneficiaries paying up to 48% tax see as unjust. Left-wing parties have argued that the NHR scheme creates a "first-class" status for foreign residents while treating Portuguese citizens as "second-class". The influx of NHR beneficiaries has also made housing unaffordable for many Portuguese citizens in cities like Lisbon and Porto due to gentrification.

Moreover, critics argue that the lost tax revenues could have been used for public services and infrastructure for Portuguese citizens. Some experts have even raised concerns that the scheme represents unfair EU tax competition and state aid.

It’s the end of NHR, so what?

The potential end of the Non-Habitual Resident (NHR) tax regime in Portugal has stirred significant concerns among locals and foreigners alike. This tax regime, which offered generous tax incentives to attract foreign residents, has been instrumental in bolstering the country's economy and real estate market. Ending the NHR tax regime without a viable alternative has left people apprehensive about the potential repercussions.

The fear is that this move could discourage foreign investment, deter wealthy individuals from residing in Portugal, and ultimately hinder economic growth. Additionally, the uncertainty surrounding the post-NHR tax landscape has created unease among current residents and investors who have built their financial plans relying on the advantages offered by the existing regime.

Specifically, those who have been dreaming of moving to Portugal, or those who are in the midst of planning a move have been stopped in their tracks. The tax haven they thought they were getting ready to enjoy may soon disappear and that’s unnerving to many.

How Would an end to the program affect u.s. expats?

The Non-Habitual Resident (NHR) program is, in principle, applicable to everyone, but it is especially beneficial to Americans. The United States reserves the right to tax its citizens regardless of tax residency status, but you can take tax credits for taxes paid to Portugal to lower your overall IRS tax burden. The U.S. and Portugal have tax treaties in place to prevent double taxation on the same income. That’s where proactive tax planning comes in.

By correctly utilizing the double taxation treaty in combination with reduced tax rates offered by the NHR program, you can significantly lower your tax bill.

Without the reduced tax rates offered by the NHR program, Americans will have to dig deep and work with qualified tax professionals to understand if their tax situations would benefit from living in Portugal and whether that’s a deciding factor in their choice to move.

The NHR paradox for American Citizens

First of all, please note that the NHR program is in principle applicable to everyone, but the sweet point of the program is that it looks like it was specifically crafted for the U.S. Citizens. This is because the NHR program has a provision saying that the income is exempt in Portugal only if the country where the income is sourced may tax it, in a user-friendly manner, most of the countries sign treaties to avoid double taxation on the same income source, we can say it sets the rules to who have the right to tax – the source country or the resident country? Sometimes it’s both, and when this happens the respective article of the treaty will state “the other country may also tax this income”, when this happens, the NHR exemption is triggered in Portugal – sometimes even in both countries since the source country could have taxed it but according to the local tax laws they prefer not to. Now, the treaty between the U.S. and Portugal (and other countries) has a specific clause, called the savings clause, which states that, no matter what, the U.S. may always tax its citizens, so based on the last paragraph you can for sure guess where this goes. As an example, imagine that you were chilling in Algarve while residing in Portugal and just got an amazing investment in the U.S. stock market and you want to sell it and realize a capital gain of 100k$, where should it be taxed? Well, the double tax treaty says that Portugal generally has an exclusive right to tax it – so the U.S. don’t have the “may tax it” right essential for the NHR, which leaves you with a 28% tax rate on this capital gain, payable in Portugal, this holds true if you are not an U.S. citizen, because if you are, the U.S. indeed may tax given the savings clause even if the respective article gives the full right to Portugal to tax it, which gets us to the NHR paradox, which can be useful under careful analysis.

How Can Obtaining NHR Status Reduce What You Owe Uncle Sam?

The Portugal NHR tax incentives can add up to major U.S. tax savings under the right circumstances and when you implement a savvy tax strategy:

The 20% flat tax rate on income earned from Portuguese is likely much lower than your top U.S. tax bracket
Under some conditions, you may pay zero Portuguese tax on investment income and gains the IRS would potentially tax at high rates
Your foreign retirement income above a certain threshold is taxed at only 10% in Portugal vs. ordinary U.S. income tax rates
Pay no capital gains tax in Portugal on profits from selling foreign stocks or mutual funds that may face American taxes

A few general examples with rough estimation values (this should not be assumed to happen in your case):

An American with $100,000 in foreign dividends would owe $0 in Portuguese tax thanks to the NHR exemption, saving $20,000+ vs. IRS taxes
An American with a $50,000 pension from the U.S. would only pay $5,000 tax in Portugal instead of ~$14,000 back home, saving $9,000 per year
An American selling stocks for a $200,000 capital gain would owe no Portuguese capital gains tax instead of ~$50,000 to the IRS

***Your specific financial and tax situation will determine exactly how much of a reduction you’ll see. You need an experienced cross-border tax professional to crunch the numbers and model different scenarios.***

A little History

Conception of Portugal's NHR Regime

The NHR program was conceived during a tough economic phase to lure foreign talents, investors, high-net-worth individuals, and pensioners to Portugal. The scheme offered attractive tax breaks such as a 10-year exemption from Portuguese taxes on foreign and passive income including dividends, interest, royalties, and capital gains. Certain professions got an additional sweet deal - a capped income tax rate of 20%, significantly lower than Portugal's highest personal tax rate of 48%. To be a part of the regime, one had to become a tax resident and meet specific criteria like not having been a resident in the previous five years.

Introduction of the NHR Scheme

The NHR program was motivated by two primary goals. First, it was designed to kick-start the Portuguese economy, suffering from the mass exodus of skilled locals during the crisis. Second, it aimed to attract foreign investment, talent, entrepreneurs, and the wealthy. The tax breaks provided by the program served as a carrot to encourage migration to Portugal, bringing in spending and stimulus during the downturn.

Evolution of the NHR Program

The NHR program has seen its fair share of changes since its launch with Lei n.o 249/2009, de 23 de setembro. Due to being too tax aggressive when it comes to taxes on pensions, sometimes a full exemption (that resulted in countries terminating the international tax Agreement in force with Portugal), in 2020 the regime was amended to tax pension income at a 10% flat rate and reducing the high value-added jobs list. In 2023, the government announced plans to completely phase out the NHR by 2024, except for existing beneficiaries who might still enjoy a grandfathering period for the remaining years.

"Mudam-se os tempos, mudam se as vontades"

"Times change, wills change"

– Luís Vaz de Camões

Effects of the NHR Regime

The NHR program has been a magnet for foreign direct investment since 2009, pulling in professionals, investors, and high-net-worth individuals, and giving the economy and employment a significant boost. However, the tax incentives have also sparked problems like gentrification, housing unaffordability, inequality, and local frustration. Wealthy NHR beneficiaries escaping standard taxes were viewed as unfair by Portuguese citizens facing 48% tax rates. Cities like Lisbon saw housing demand soar due to the NHR, causing housing prices and rents to skyrocket and displacing lower-income residents.

Fast Facts on the NHR Program

Public data on the NHR program reveals that:

Most NHRs are French, British, and Italian, with only 6% being Portuguese citizens.
NHRs represent 0.3% of taxpayers but contribute to 3.2% of income tax revenue.
The main sectors for NHR beneficiaries are science, IT, healthcare, and consulting services.
The average age of NHR beneficiaries is 43 years, with 75% being between 30-49 years old.
Lisbon and Faro are home to 65% of NHRs, followed by Porto and Setúbal.
NHR tax expenditure grew by 40% from 2020 to 2021.
The number of new individuals benefiting from the program had a steep increase from 2015-2021, from less than 2,000 to approximately 8,000 per year.
The total number of tax residents with the NHR increased 83% from January 2017 to August 2018.
The tax expenditure with the NHR regime was 1,507 million euros in 2022, an 18.5% increase from 2021.

What's Next for the Portugal NHR Tax Regime?

Under pressure from various stakeholders, Portugal has tightened NHR rules and benefits in recent years. The Prime Minister recently announced plans to completely phase out the program by 2024, except for existing beneficiaries who will continue to enjoy the benefits. The aim is to control the growing expense and social inequality that has been partially fueled by the NHR tax incentives.

Potential Fallout from the NHR Progam Ending

The proposed NHR phase-out in 2024 brings several uncertainties to the forefront. It could disrupt the economic and real estate markets, risk the departure of international stakeholders and companies, trigger a surge in applications before the scheme's closure in 2023, and pose the challenge of crafting policies to sustain growth post-NHR.

Different Stakeholders, Different Views

Stakeholders all have their unique perspectives on the NHR phase-out. The Portuguese government seeks a gradual wind-down to avoid economic shocks and regain control over taxation. However, it faces challenges in creating effective post-NHR incentives. Future beneficiaries and investors are naturally worried about this change in plans that they based their finances on. Portuguese citizens mostly welcome the phase-out due to the inequality and unaffordability caused by the NHR scheme. Meanwhile, the real estate and immigration industries fear that the end of the NHR scheme will hurt demand and investment. Other European countries with similar tax incentives are likely relieved.

Food for Thought for Portugal's Government

The Portuguese government should consider diverting some of the regained revenue towards social programs, affordable housing, and infrastructure to counter criticisms of economic damage. Strategic, transparent tax incentives could still draw investment and talent without overusing and creating inequality through the NHR scheme. The government could tap into remote work and climate-driven migration to sustainably expand the talent pool without putting excessive stress on housing. Enhancing public services such as healthcare, education, and housing assistance can shield ordinary citizens amid economic changes. Regular impact assessments, public consultations, and citizen input will enable balanced policymaking during the potential transition.

Scenarios for Portugal to Brace For

As Portugal braces for a potential end to the NHR scheme, it should prepare for various scenarios. This includes a sudden exodus of NHR beneficiaries, a surge in visa applications and NHR applications before the closure, and the crafting of new incentives targeting priority skills and sectors. It also needs to leverage remote work and lifestyle appeal to maintain Portugal's attractiveness beyond the loss of NHR incentives.

The Road Ahead

As Portugal potentially transitions away from the NHR program post-2024, policymakers have some options to drive growth in a more balanced manner:

Continue to attract foreign investment and talent with strategic tax incentives
Streamline visa and residency policies to bring in global skills and capital
Implement stronger urban planning policies to prevent excessive pressure on housing
Use the revenue gained from phasing out NHR tax breaks to fund public housing, healthcare, and education
Regularly monitor and refine post-NHR policies

Adapting Policies

As the global landscape shifts, Portugal must stay nimble in adapting its policies beyond the NHR phase-out to seize new opportunities while shielding its citizens. Comparing Portugal's talent attraction policies against programs in other progressive jurisdictions can provide insights and best practices. Exploring partnerships with the Portuguese diaspora worldwide could encourage a two-way exchange of skills, capital, and ideas. Regional development initiatives can spread economic gains more equitably across Portugal, not just in the major cities.

In Conclusion

The NHR tax scheme has sparked intense debate in Portugal over its more than 10-year lifespan. While the generous incentives stimulated the economy, they also led to unintended consequences like worsening inequality and housing unaffordability. As Portugal now potentially phases out the NHR by 2024, complex challenges lie ahead. Navigating the transition will require nuanced policymaking across fiscal planning, public messaging, targeted replacement incentives, and impact monitoring.

Final Thoughts from a Native Tax Advisor

The journey of transitioning from the Non-Habitual Residency (NHR) scheme and instituting new policies is undoubtedly complex. Yet, by integrating a consultative approach, Portugal can steer itself towards an inclusive, sustainable growth path - similar less tax-aggressive incentives are not an uncommon practice by other EU countries e.g., Italy, Spain.

Having watched Portugal's transformation from a less developed nation to a globally praised paradise, I believe that the majority of NHR incentives have been effectively implemented, achieving their goals. The upcoming presentation of the 2024 budget law marks the next crucial phase in this process.

The NHR scheme, while beneficial, has introduced new international tax challenges for local tax authorities, courts, and service providers. Opposed to its termination, a refined focus of the NHR, aimed at incentivizing habitation of Portugal's more remote regions could safeguard our cherished relaxed lifestyle and rich Portuguese culture. Changing the list of high-value-added jobs could also bring benefits for professions that are in high demand in Portugal or that require a physical presence in the country, such as doctors.

Despite the rising cost of living, Portugal's economy is brimming with opportunities, thanks to its impressive growth. However, curtailing this growth could lead to employment challenges that could see a reduction in job offers, this coupled with the immigration and expansion policies could lead to more instability, even as it addresses housing concerns.

A strategic revamp of the NHR and other incentives, along with the promotion of housing development in more remote areas, could serve as a roadmap for balanced, sustainable growth. This not only benefits local communities but also capitalizes on international interest from immigrants, retirees and most recently U.S. citizens among other stakeholders.

It should also be noted that Portugal has in 2023, around 2 million citizens living abroad, a great part of them highly qualified that could potentially benefit from this regime when retiring or even by coming back to the country while working remotely or managing their investments, this could be seen unfair mainly to those who had to emigrate in the past due to the lack of opportunities within its territory. Actually, there are some programs targeting returning citizens that allow for tax reductions but they are not as close as beneficial as the NHR.

It's crucial not to ignore the declining popularity of the Socialist Party among Portuguese citizens since the last elections. This announcement might be seen as an additional measure to reverse this trend, such as potential amendments to the "alojamento local" rules in the pipeline and recent EU infringement proceedings against Portugal’s CPLP residence permit warrant attention. Therefore, the complete phase-out of the NHR and closing to new applicants as soon as 2024 may not be as straightforward (still subject to a lot of analysis and assessments) or strategically wise as it seems.

Nevertheless, I advise the readers who are on the fence to not take my word for it and make sure they do not miss out on their application timeline in 2023.

For more information feel free to get in touch by booking a consultation below!

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