Non-Habitual Resident Tax Regime
Portugal’s non-habitual resident regime still offers tax appeal
Despite recent reform, Britons moving to Portugal can still enjoy ten years of tax benefits under the special NHR scheme.
Many people move to Portugal for a lifestyle change or to soak up some sunshine in their retirement years. But Portugal also offers much wider appeal, as new residents have the opportunity to enjoy a decade of generous tax breaks through the non-habitual residence (NHR) regime.
What is non-habitual residency?
Introduced in 2009 by the Portuguese government to attract ‘high value’ residents, NHR offers reduced tax rates and some exemptions for your first ten years in the country.
If employed in Portugal, non-habitual residents can benefit from a flat 20% income tax rate instead of the usual scale rates reaching up to 48%. You must work in one of the pre-defined scientific, artistic or technical professions to qualify.
NHR also offers the opportunity to receive foreign income completely free of further Portuguese tax. As a result, it can also significantly reduce the tax bill for retirees and others who are not employed in Portugal.
Tax-free foreign income
Under NHR, most income from a foreign source is exempt from Portuguese taxation for ten consecutive years, as is income that is taxable in another country.
This means that British expatriates can potentially receive most UK rental income, capital gains on real estate, interest, dividends and non-Portuguese employment income tax-free.
This can apply even if the income is not actually taxed in the home country. For example, UK dividends (excluding gains on UK shares) escape Portuguese taxation under NHR because they are taxable in Britain under the UK/Portugal double tax treaty. In practice, however, the UK’s ‘disregarded income’ rules can eliminate UK tax liability for non-residents. As a result, you could end up paying no tax – in either country – on UK dividend income.
Tax on foreign pension income
Originally, NHR allowed for most foreign pension income to be taken tax-free in Portugal. This included UK private pensions, company pensions and the UK State Pension.
However, the 2020 Portuguese Budget specifies that NHR exemptions will no longer apply to pensions; instead, there will be a flat 10% tax on all foreign pension income. The rest of the NHR regime remains the same.
The good news is that, if you already have NHR status or apply for Portuguese residence before the new regime takes effect (likely to be sometime in March or April 2020), you can still come under the previous rules. This means you will remain eligible for exemptions on foreign pension income for the remainder of your ten-year NHR period.
Even if you miss this window, 10% is a relatively low rate to pay on pensions, and significantly less than the usual Portuguese income tax rates of 14.5% to 48%.
Note that UK government service pensions – including local authority, army, police, teaching, fire service and some NHS pensions – are the exception. These pensions do not come under NHR rules as they remain taxable in the UK only.
How can you access NHR benefits?
People of any nationality (including non-EU/EEA citizens) can potentially qualify for NHR if they have not been resident in Portugal within the previous five calendar years.
You need to meet Portuguese residency rules to be eligible, however, so it will be much easier to apply in 2020 as an EU citizen with full freedom of movement. Currently, you can acquire Portuguese residency by spending at least 182 days a year or having your main home here.
Although Brexit itself will not affect eligibility for UK nationals, domestic tax rules are always subject to change. Also, the UK government could potentially negotiate special exemptions to increase taxation of Portuguese-resident nationals once it sheds its EU obligations.
So if you have recently arrived in Portugal or thinking about moving here, register for residence and apply for NHR with the Portuguese tax authorities as soon as possible to lock-in today’s benefits.
Other tax benefits in Portugal
If you do not qualify for NHR or your NHR period has ended, Portugal can still be a highly tax-efficient home.
While income outside the NHR regime attracts the usual scale Portuguese income tax rates (14.5%-48%) and investments are subject to 28%, there are opportunities to enjoy extremely favourable tax treatment on capital investments. Those who qualify for NHR can further benefit from combining these structures with the regime rules. For example, you could potentially sell a UK property without capital gains charges and reinvest in a tax-efficient life insurance bond.
Portugal has a wealth tax of sorts, but rates are relatively low and it only affects those whose ownership of Portuguese property is worth more than €600,000 (€1.2 million for couples). Portuguese inheritance tax (stamp duty) is also limited; at just 10%, it only applies to Portuguese assets, and spouses and children are exempt.
But for most people, settling in Portugal is about more than financial benefits. For those already living here, it will be no surprise that Portugal is ranked the best country in the world for expatriates’ quality of life (InterNations ‘Expat Destinations 2019’).
Overall, Portugal has much to offer Britons looking for a relaxing – and tax-efficient – move to sunnier climes. Ultimately, the best course of action for you will depend on your individual circumstances and aims. Take personalised, regulated advice from a cross-border specialist to make sure you do what’s best for you and your family and take full advantage of suitable opportunities in Portugal.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should take personalised advice.
By Matthew Krystman, Partner, Blevins Franks
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