Portugal to reintroduce NHR-style tax breaks for skilled foreigners

Portugal’s new government announced that it plans to reintroduce tax breaks for foreign residents, as part of a package of 60 measures to stimulate growth that were approved by the cabinet on 4 July. The aim is to attract highly skilled workers and the proposed incentives will not be extended to wealthy expatriate retirees.

Last October, then socialist prime minister António Costa announced that the government would close the special Non-Habitual Resident (NHR) special tax status for new entrants in 2024.

Under the NHR tax regime, first introduced in 2009 during the global financial crisis, qualifying entrepreneurs, professionals, retirees and high net worth individuals could benefit from a 20% flat rate of tax on Portuguese-source income for 10 consecutive tax years, while most foreign-source income was exempt.

NHR status applied to qualifying applicants of any nationality, including non-EU/EEA citizens, provided they were tax resident in Portugal for the relevant tax years and had not been resident in Portugal in any of the five preceding years.

According to data from the Tax and Customs Authority, over 74,000 people benefited from the NHR tax exemptions in 2022, costing the state budget more than €1.5 billion, an annual increase of 18.5%.

New prime minister Luís Montenegro, who won an election in March as leader of the centre-right Democratic Alliance (AD), leads a minority government after he rejected entering a formal coalition with a far-right partner.

Speaking to the Financial Times, Finance Minister Joaquim Miranda Sarmento said the reintroduced regime would offer the same 20% flat rate of income tax but only cover “salaries and professional income”. As well as foreign nationals, the special tax breaks would also be available to returning Portuguese citizens who have lived abroad.

“It will exclude dividends, capital gains and pensions, which was a problem between Portugal and countries like Finland or Sweden,” he said.

The Nordic countries led complaints that the NHR regime, which initially made pensions exempt from tax, was attracting retirees who stopped paying tax in their home countries. In response, Portugal introduced a flat 10% tax rate on pension income received in Portugal, while capital gains were only exempt in a few cases.

“This will attract some people,” said Sarmento. “It’s not sufficient, but it’s something the government can do.” He added that the government would not reverse the previous administration’s decision to end ‘Golden Visa’ real estate investment options.

In effect, the proposals will expand the list of professions and business activities that are eligible under the Tax Incentive Scheme for Scientific Research and Innovation (IFICI) regime, which came into effect as of 1 January 2024 to replace the NHR regime and applies to:

• Professors and scientific researchers.
• Research and development activities.
• Job positions and members of the board of certified start-ups.
• Job positions or other activities carried out by tax residents in the Azores and Madeira.

This means that individuals who reside in Portugal for at least 183 days per year and establish their tax residence in Portugal will be taxed at a 20% flat rate on income from qualifying employment or self-employment in Portugal for a period of ten years, renewable.

The changes should be implementable through regulations under the IFICI regime and will not therefore require additional approval by the Portuguese parliament.

“It is imperative to take guidance on how you will be taxed in Portugal and if any of these proposed changes to the fiscal landscape may be of benefit to your personal circumstances,” said Shelley Wren, Head of Business Development at Sovereign Portugal.

The 60 measures unveiled by the government included a cut in the standard corporate income tax rate from 21% to 15% by 2027, and a new mandatory minimum tax rate of 15% for all multinationals operating in Portugal and for large Portuguese companies. Other tax proposals introduce incentives for start-ups and research and development, as well as support for tourism and defence.

For further information or to discuss the current options available for establishing residence in Portugal, please contact Sovereign Portugal by phone on +44 7718 538 758 or by email at serviceinfo@SovereignGroup.com.