By: André Reis de Pinho, Head of Tax Department at Legal|Square
The proposal for the State Budget of 2024 presented to Parliament by the Portuguese Government, puts an end to the Non-Habitual Resident (NHR) regime starting from January 2024.
The regime, which came into effect in 2009 in the midst of the Portuguese financial crisis with the purpose of bringing high-net-worth individuals to reside in Portugal has been a major success over the expat community with over 77.000 citizens currently benefiting from the program. In order to do so the applicants, regardless of their nationality, need to (i) become tax residents in Portugal and (ii) have not been tax residents in Portugal in any of the previous 5 years. By being beneficiary of the program, which is valid for 10 years, the individuals shall benefit from:
- Exemption from income tax in Portugal on certain types of foreign income; and
- Reduced 20% flat personal income tax rate on active income (even if from Portuguese source).
Despite its success, and catalyzed the Portuguese housing crisis, the Portuguese government announced their intention to terminate the program. However, it will continue to be applicable to individuals who have already registered as NHR, who will be able to maintain their status for the 10 year period, and for those who meet the access conditions for the regime until the 31st of December 2023, which includes holding a valid residency visa (not residency card) at that time, as long as the NHR registration process is submitted by the 31st of March 2024.
Simultaneously, the proposal includes the creation of a new special tax incentive for Scientific Research and Innovation. This regime will apply to individuals who become tax residents and have not resided in Portugal during the previous five years and fall into the following categories:
- Academic and scientific research roles, including roles in entities, institutions, and networks dedicated to the generation, dissemination, and transmission of knowledge, integrated within the national science and technology framework;
- Specialized positions within the framework of contractual incentives for productive investments, as outlined in Chapter II of the Fiscal Investment Code;
- Roles in research and development, primarily targeted at individuals holding a Ph.D. qualification.
Individuals seeking to avail themselves of these benefits must 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 and will be able to benefit from similar benefits as the NHR holders.
In addition, a new tax incentive is introduced for individuals who become Portuguese tax residents starting January 1, 2024 and who have not been tax residents in the country in the last 5 years. This new tax incentive will grant a 50% personal income tax exemption for salary from employment or freelance for 5 years, regardless of their field of expertise. However, this exemption is capped at 250,000 EUR annually, with income exceeding this threshold subject to regular tax rates.
It is also worth mentioning that in Portugal continue to prevail relevant tax advantages, such as the absence of general wealth or inheritance taxes and a crypto-friendly tax environment, combined with specific tax regimes, that will remain unchanged.
Even though the proposal still needs to be discussed and voted, the fact that the ruling Government holds majority of the seats makes it very unlikely for the program to continue unchanged. However, there have been several specialized newspapers announcing that the government is considering the creation of a transitional regime, applicable to immigrants with pending visa/residence permit applications, who would be at risk of not being able to apply for the NHR tax regime within the deadline. More updates on this are expected in the future.
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