Does Portugal Still Have An NHR Tax Regime?

Portugal’s Non-Habitual Resident (NHR) tax scheme has been a topic of significant interest and controversy in recent years.

Although the NHR program officially ended in 2023, the Portuguese government has since introduced NHR 2.0 (often called TISRI or the scientific and innovation regime, among other things). In July 2024, the new government announced plans to bring back the NHR regime – but crucially the new regime will exclude dividends, capital gains and pensions or social security.

This article examines the evolution of the NHR scheme, its recent changes, and what it means for expats and retirees considering a move to Portugal.

The End of the Original NHR Regime

In 2023, Portugal’s government announced the end of the NHR scheme as it had existed. The primary reason for its termination was the perceived unfairness to Portuguese citizens and long-term residents.

People coming to Portugal benefited from substantial tax breaks, while those who had contributed to the Portuguese system throughout their lives did not receive similar benefits. Even some expats who moved to Portugal before the scheme’s introduction felt it created an unfair two-tier system among foreign residents.

The scheme also faced criticism from other European countries, particularly Nordic nations, who saw their tax base eroded as retirees moved to Portugal to benefit from the low tax rates on pensions.

However, there was a considerable amount of misinformation surrounding the scheme with many Portuguese residents and prospective expats believing that anyone on the scheme paid no tax at all. This was at least partly down to many companies and blogs marketing it in this manner. The reality, particularly when the 0% option for pensions ended, was quite different.

Introduction of the Scientific Research and Innovation Regime (NHR 2.0)

Following the end of the original NHR scheme, the Portuguese government introduced a new regime, often referred to as NHR 2.0 or the Inpatriate Regime, officially known as the Scientific Research and Innovation Regime. This new scheme aims to attract highly skilled workers while addressing some of the criticisms of the original program.

Key features of the Scientific Research and Innovation Regime:

Targeted at specific categories of skilled workers
20% flat tax rate on qualifying income
10-year duration
Excludes pensioners, dividends, and capital gains

This regime is designed for professionals in higher education teaching, scientific research, technology positions or startups, and other highly qualified roles in specific sectors.

Key Eligibility Criteria for the Inpatriate Regime

To qualify for this new regime, individuals must meet the following criteria:

Prior Residence: Must not have been a tax resident in Portugal for the last 5 years [1 & 2].
Acquisition of Tax Residency: Need to acquire tax residency in Portugal [1].
Type of Employment: Must obtain income from either employment or self-employment that falls within the scope of the new regime. This encompasses roles in:
- Higher education teaching [2].
- Scientific research [2].
- Technology positions or startups (including board members) [2].
- Highly qualified professions in companies with significant investment applications [2].
- Jobs in industry and service companies generating at least 50% of turnover from exports [2].
- Activities conducted by tax residents in Madeira and Azores (subject to specific regional legislation) [2].

The new Inpatriate Regime offers several appealing benefits:

Flat Tax Rate: A favourable flat tax rate of 20% on income from employment or self-employment within the scope outlined above [1 & 2].
Exemption on Foreign-Sourced Income: This includes income from employment/self-employment, dividends, interest, royalties, rental income, and capital gains from selling real estate [1 & 2]. The tax exemption is calculated progressively, meaning that the exempt income is combined with other taxable income to determine the applicable tax rate [1].
Duration: These benefits are applicable for a period of 10 years, offering a substantial period of tax relief [1 & 2].

Individuals that wish to avail of these benefits are required to register with the Fundação para a Ciência e Tecnologia, I.P., the Agência para o Investimento e Comércio Externo de Portugal, E.P.E., and the Agência Nacional de Inovação, S.A., as applicable [1].

Proposed Return of a Modified NHR Scheme

In a surprising turn of events, Portugal’s new center-right government has announced plans to reintroduce a version of the NHR scheme (dubbed IFICI+). This proposed scheme is distinct from the Scientific Research and Innovation Regime (NHR 2.0) and aims to attract a broader range of workers and self-employed individuals.

Key features of the proposed new NHR scheme:

20% flat tax rate on qualifying income
Applies to salaries and professional income
Excludes dividends, capital gains, and pensions
10-year duration
Available to those who become tax residents in Portugal (staying at least 183 days per year)

Interestingly, the scheme also promised benefits for activities conducted by tax residents in Madeira and Azores. However, little information has been published as to how future tax residents of the islands could benefit.

Impact on Self-Employed and Employees

The proposed new NHR scheme would offer benefits for a wide range of workers and self-employed individuals. Unlike the Scientific Research and Innovation Regime, which is limited to specific high-skill categories, this scheme appears to be more broadly applicable to various professions.

Implications for Pensions and Social Security

One of the most significant changes in both the Scientific Research and Innovation Regime and the proposed new NHR scheme is the exclusion of pensions and social security income. This change will disappoint many retirees who were considering a move to Portugal.

The original NHR scheme had simplified taxes considerably, particularly for those coming from countries like the US, where filing is required due to citizenship-based taxation. It also made Portugal more appealing compared to other retirement destinations.

It’s worth noting that while the media often focused on “wealthy pensioners,” the original NHR scheme benefited retirees with a range of incomes, including those with modest pensions.

Portugal’s Continuing Appeal

Despite the changes to the NHR schemes, Portugal still offers numerous advantages for expats and retirees:

Accessible retirement visas like the D7 and golden visa
Ability to apply for citizenship after 5 years of residency (and even less, as of 2024)
Citizenship applicants only need to show an A2 (or above) level of Portuguese (many other EU countries require a B1)
Lower cost of living compared to many other Western European countries.
High safety ratings.
Widespread use of English, particularly in the Algarve, Lisbon, and Porto.

Many other popular expat destinations, such as Spain, France, Greece, and Italy, do not offer the same combination of benefits, particularly when it comes to the ease of obtaining citizenship.

Obviously, the new scheme(s) also make Portugal more appealing for employees and self-employed individuals.

What about the “Old NHR Regime”

If you were registered for NHR before the scheme was phased out, nothing will change. The old regime lasts for 10 years. After that point, you will no longer be able to take advantage of the NHR tax regime.

A small number of people who started their move in 2023 but completed it in 2024 will be the last few to take advantage of the old NHR regime. To qualify for this, you will need to show either:

An employment contract or confirmed offer of employment dated before 31^st of December 2023.
A lease or purchase agreement related to property ownership or habitation dated before 10^th of October 2023.
Confirmation that dependent children had been enrolled in a Portuguese educational establishment dated up to 10^th October 2023.
A residence visa or permit dated before 31^st December 2023.

The Future of NHR in Portugal

The Portuguese government’s intention to reintroduce a modified version of the NHR regime, separate from the Scientific Research and Innovation Regime, indicates a continued commitment to attracting foreign talent and investment. However, the exclusion of “dividends, capital gains and pensions” from this new scheme is partly in response to concerns raised by countries like Finland and Sweden about the impact on their tax base.

As Portugal continues to evolve its tax policies for foreign residents, potential expats and retirees should stay informed about the latest developments and consult with tax professionals to understand how these changes might affect their personal situations. The landscape of expat taxation in Portugal is clearly in flux, with different schemes targeting different demographics of foreign residents.