NHR, Portugal’s non-habitual residency tax regime, is something that has gained a lot of international excitement and attention. But as anyone who has tried delving into the scheme will know, it can quickly become a confusing topic.
It doesn’t help that NHR status is quite a broad tax incentive but one that has different implications for pensioners, sole traders, company owners, or those who get paid in royalties (to name a few of the groups). If you have different types of income (say a pension but you also earn money as a freelancer) they are likely to both get taxed at different rates – and one may be eligible for NHR and the other not.
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Another issue is the name: non habitual residency sounds like it’s aimed at people who don’t live in Portugal. The opposite is actually true and to be eligible for the NHR scheme you need to be tax resident in Portugal. This means spending more than 183 days in Portugal in any 12 month period starting or ending in the relevant fiscal year OR spending less than 183 days in Portugal but maintaining a domicile (home) which suggests Portugal is your main and habitual residencehttps://www.onelife.eu.com/wp-content/uploads/2019/11/ONE_COPR_PT_EN_NHR-e-book_1911.pdf.
But even though the topic can be confusing, the intentions of the Portuguese government are positive. Portuguese tax rates are high and the aim of the NHR regime is to attract foreigners to Portugal.
The best way to think of NHR is a cushion. Rather than being subject to normal Portuguese tax rates, NHR cushions the blow for the first 10 years. In many cases it allows you to pay tax elsewhere or to pay a simple flat-rate. It also allows you to avoid double taxation. It doesn’t always mean that you’ll pay less tax than if you’d stayed in your home country, but it normally means you’ll pay less tax than if you were paying the standard Portuguese rates. And, you do have to consider what your taxes get you here, such as public healthcare, great weather, and access to beaches and beautiful scenery.
- Anyone who hasn’t lived in Portugal for the past 5 years (foreigners or Portuguese)
- Anyone who hasn’t been on the NHR scheme before (you can only join once)
- Anyone who satisfies both of the rules above and also become tax resident in Portugal
The following are some of the sample rates. Please note: these are examples, and may not apply to your situation.
The NHR treatment of pensions is quite straight-forward in comparison to other forms of income. Previously pensioners could receive their foreign income pensions tax-free in Portugal but, as of March 2020, and following complaints from other EU countries, it is now taxed at a flat rate of 10% under the NHR schemehttps://www.europeantax.blog/post/102g090/new-10-income-tax-charge-on-pensions-under-portuguese-nhr-regime.
This generally applies to all income that’s paid out after retirement e.g. European state pensions, IRAs, 401ks, US Social Security, LISAs, annuities, etc.
There are some exceptions. For example, UK government service pensions – including local authority, army, police, teaching, fire service and some NHS pensions. These pensions do not come under NHR rules as they remain taxable in the UK onlyhttps://www.blevinsfranks.com/non-habitual-resident-regime-nhr-portugal-tax-advantages/.
Normally if you’re an employee working remotely while living in Portugal, and your income can be taxed abroad, that’s where you’ll pay your taxes. You do also have the option of paying the 20% flat-rate if your activity is considered high value, so you will need to weigh up which is best for you.
Employees in Portugal
High value activity professionals can benefit from a 20% flat rate of taxhttps://www.lexology.com/library/detail.aspx?g=d343f685-dc44-4d9d-ae5a-fef9eb3a66ea (+ social security) which, depending on how much you’re earning, may be better than the standard Portuguese rates of tax.
Portugal has a unique list of activities that it considers high value, and this gets changed every year. Example professions that have made the list in recent years include journalists, dentists, IT professionals, linguists, general managers and executive managers of companies, hotel managers, jewellers, and electricians.
Like employees, freelancers and the self-employed need to fall into the high value activity category to benefit from NHRhttps://philippsauerborn.com/en/complete-guide-about-the-nhr-system/. If that’s the case, you would normally be subject to 20% + social security.https://philippsauerborn.com/en/complete-guide-about-the-nhr-system/
A 20% flatrate may or may not be more advantageous than where you’re currently paying your taxes. It’s generally more advantageous for higher earners whose income above a certain threshold (e.g. €40k) would be taxed at a higher rate than 20%.
However, NHR isn’t everything and you may find that, as a freelancer, the Simplified Regime offers you similar or even better tax rates. So, don’t despair if you don’t fall into the high value category and do weigh up whether the Simplified Regime is better for you.
“John recently moved to Portugal and operates a freelance business, billing clients in his home country. Last year, his invoicing totalled €75,000. As a freelancer in the Simplified Regime, he is taxed on just 35% of his total income. 65% is automatically allotted to cover operating expenses. No further accounting is required. His annual tax is €5,625: just 7.5% of his gross income, far less than the 20% flat rate charges under NHR.” https://www.eurofinesco.com/en/our-publications/sole_trader/1-simplified-regime/36-e2-sole-traders-a5-tablet-colour-cover-13th/file
Note: If you carry out multiple types of work, you may find that some of it is eligible for NHR under the high value activity rules and some is subject to standard Portuguese taxes.
Entrepreneurs – 20%
Generally speaking, most entrepreneurs (or those that own at LTD/LLC company) end up paying 20% + social security.
Some people manage to find ways around this. For example, setting up a company in somewhere like Estonia or even Malta where corporation tax is just 5%.
It isn’t quite as straightforward as that, particularly due to Portugal’s effective management rule. This rule basically asks where is the company being effectively managed from: Portugal or Malta? To get around this, many people have to hire staff and have an office there and so you really have to be earning quite a bit to make all this hassle worthwhile.
How to pay 0% tax
As discussed, most people won’t end up paying 0% tax, however, there are one or two cases where people do. This is normally on income that can be taxed abroad but, for whatever reason, isn’t. Dividends, interest, rental income from abroad, and royalties are some examples of income that may fall into this category.
A few important points
Before delving into the specifics, there are a few important points that are worth highlighting early on.
NHR is not a residency visa
A lot of people make the mistake of thinking NHR is some kind of residency visa. It’s not. NHR is purely tax-related.
If you’re from outside the EU/EEA/Switzerland and you don’t have an EU/EEA/Swiss passport, you will most likely need to obtain a residency permit (such as the D7 or Golden Visa) to move to Portugal. Once you have moved to Portugal, you will be able to apply for the NHR program then but the two are not connected.
See a list of residency permits here.
NHR is worth applying for
For most people, the NHR regime offers more favourable rates than normal Portuguese taxes. Because of this, it’s worth applying for.
Once you become resident in Portugal (i.e. officially move here) you have a window in which to apply for NHR. That window is 31st of March of the following calendar year. So, if you move in August you have until the following March whereas if you move in February, you would have until March of the next calendar year. If you don’t apply within that period, you lose the right to apply for NHR.
You may not think it’s worth applying if:
- You’re a student or even still in high school.
- You aren’t currently earning a lot of money.
- You don’t know if you’ll stay in Portugal.
Even still, because you only really get one opportunity to apply, it’s generally worth applying for.
There is a tax credit system
If you’ve paid tax elsewhere, you can use that as a tax credit against your tax in Portugal.
For example: you pay 5% tax on your pension in another country but Portugal wants to tax it at 10%. Now, you only have to pay 5% tax to Portugal.
Everything needs to be reported
Even if you won’t be eligible for tax in Portugal – for example, if you have income from a rental abroad – you still need to report those earnings in Portugal.
NHR normally means tax residency in Portugal
NHR is an extremely confusing term and many take it to mean it’s for people who don’t live in Portugal. In fact, the opposite is true: NHR is for people who live here and are tax resident here.
NHR doesn’t cover capital gains
NHR generally doesn’t cover capital gains.
If you sell a stock, for example, that would normally be subject to 28% capital gains tax in Portugal. The same applies for precious metals such as gold or silver.
If you sell a property abroad, however, you wouldn’t normally have to pay capital gains in Portugal.
Applying for NHR
Applying for NHR is as simple as ticking a box on the Finanças Portal or visiting Finanças. Note: unlike some visas where you can apply as a family, with NHR each person needs to apply individually.
Before you can apply for NHR, you need to be resident in Portugal. You don’t need to apply for NHR the day you become a resident (as it will be backdated to the day you started your residency) but you do need to apply sometime before 31st of March of the following calendar year.
For example. You become resident in July; you have until the following 31st of March to apply. You become resident in January; you have until 31st of March of the following year to apply.
Getting expert help
Some parts of the NHR scheme are relatively straightforward – pensions are taxed at 10%, for example – and the application itself is literally as simple as ticking a box within the Finanças portal online.
However, unless you have a very simple income (e.g. a pension which you know will be taxed at 10%) tax-related issues aren’t always straightforward. It may hurt to pay €100 for an hour-long chat with an accountant, but it’ll definitely be money well spent – assuming you find a good one, of course.
Because tax and finance rules change all the time, it’s generally a good idea to get an accountant, particularly if you’re self-employed.
The following are some of the most frequently asked questions about the NHR program.
What happens after 10 years?
After the 10 years are up, you would move onto normal Portuguese tax rates. It isn’t possible to rejoin the NHR scheme if you’ve already been on it.
Note: you can apply for Portuguese citizenship after 5 years (in practice it takes around 2 years to process). This is ideal for people who are mainly moving to Portugal for a Portuguese passport.
Can I pause NHR if I leave?
While most people who apply for NHR will stay for the whole 10 years, there’s no requirement to commit for the full decade. You can leave and become a tax resident elsewhere, including your previous country.
While you can’t pause those 10 years if you leave on say year 5, you can suspend it for a few years and return. You would lose out on the years that you were away but still be eligible to rejoin the program.
Can I join the NHR scheme even if I don’t live in Portugal?
Normally, you need to live in Portugal, however, there are some circumstances where you might be resident in Portugal but not be present in Portugal for a lot of the year.
- If you travel full-time, for example, and don’t maintain a residency anywhere else, you could use Portugal as your base as long as you have an address here.
- The Golden Visa program, aimed at those from outside the EU/EEA/Switzerland, allows you to be resident in Portugal but only requires you to spend an average of 7 days per year here.