The Portuguese parliament approved the State Budget 2024 on 29 November, effectively terminating the Non-Habitual Resident (NHR) special tax regime, which offers reduced tax rates to qualifying foreign residents for their first 10 years in Portugal.
Termination of the NHR regime will not affect those individuals who are already NHR-registered or who meet the conditions for NHR registration by 31 December 2023; but foreigners moving to Portugal (or applying for residency) after 31 December 2023 will no longer qualify.
Although the NHR special tax regime is to be closed to new entrants from 31 December 2023, the Budget legislation included transition provisions that will enable certain individuals who have already committed to becoming resident in Portugal to access the NHR regime during 2024 provided that they meet the following specific criteria by having:
- An employment contract or a secondment agreement (or promise of either) that is signed by 31 December 2023 and where the work is to be performed in Portugal.
- Lease or other contract granting the use or possession of property in Portuguese territory, which was concluded by 10 October 2023.
- A reservation or promissory contract (Contrato-promessa de aquisição de direito real sobre imóvel) in respect of a property in Portugal, which was concluded by 10 October 2023.
- Enrolment or registration of dependants at an educational establishment within Portuguese territory, which was completed by 10 October 2023.
- A current Portuguese residence permit or visa that is valid until 31 December 2023.
- An application for Portuguese residence permit or residence visa that is initiated and/or registered with the relevant authority by 31 December 2023.
The NHR scheme will therefore be phased out to new entrants during 2024 and fully terminated by 2034 when the final ten-year periods expire.
"Now that the state budget for 2024 has been approved, this decision on the NHR regimen is final. However, we await a detailed response from the Portuguese tax office on its interpretation and acceptance of these transition provisions," said Shelley Wren
"Currently the tax office is not permitting registration of clients that meet some, or indeed all, of the above criteria. We anticipate that it will start to accept registrations on a case-by-case basis from 1 January, but it seems likely that many cases will be subject to an appeals' process."
Closure of the NHR regime was a political decision. According to data released this autumn by Portugal's Tax and Customs Authority, the annual amount of tax exempted by the government under the NHR regime crossed the €1 billion mark for the first time in 2021, having risen from €770 million in 2019 to €1.21 billion. It did not specify the total number of NHRs benefiting under the scheme, but it is understood to exceed 10,000 and the number of applicants has been steadily growing each year.
"In 2024, special taxation for non-habitual residents will end. Whoever has it will keep it," said Portuguese Prime Minister Antonio Costa in October. "There was a time when it was necessary. This measure made sense. In the first 10 years, 59% of people who had benefitted continued to reside in Portugal, in spite of the regime having ended. But right now, it does not make sense."
The Portuguese government set out its proposals in the 2024 Budget Bill, which was presented to parliament on 10 October, but Costa then announced his resignation in early November after prosecutors had detained his chief of staff in an investigation into alleged corruption. Prosecutors said Costa himself was also the target of a related investigation.
After accepting Costa's resignation, President Marcelo Rebelo de Sousa announced that he would dissolve the country's parliament only after lawmakers had passed the Budget legislation in December. New elections are scheduled to take place in March 2024.
Incentive to scientific research and innovation
As well as terminating the existing NHR regime, the Budget legislation also sets out that a new, more limited beneficial regime – called the "incentive to scientific research and innovation" – will be introduced for specific categories of professionals from 1 January 2024.
Individuals who have not been tax residents in Portugal in any of the previous five years, and who earn income from the professional activities listed below, may be taxed at the special rate of 20% on net income from employment (Category A) and self-employment (Category B) in Portugal for a period of 10 consecutive years, starting from the year in which they become tax residents in Portugal.
Eligible individuals for this regime will also be able to access an exemption on several categories of foreign-sourced income, such as employment or freelance income, dividends, capital gains, real estate income or interest. taxation on any income earned abroad. Pension income and income paid by entities that are domiciled in low tax jurisdictions will not be eligible for exemption.
The relevant professional activities are as follows:
- Higher education teaching and scientific research
careers
These professions must be practiced in entities that appear on the list of Entities of the National Science and Technology System, which includes universities, R&D Centres, laboratories, among others. - Research and development professions
Eligible individuals are those with minimum qualifications of Level 8 of the National Qualifications Framework (Doctorates), who carry out R&D activities in the service of corporate entities that are subject to Corporate Income Tax (IRC). It should also be noted that in terms of IRC, the costs of these employees will be increased by 120% of their amount.
It is important to note that this regime is accessible to an individual only once. Individuals who have previously benefited under the NHR regime or the 'Former Residents' (Programa Regressar) tax regime are not eligible for this new scheme.
Former Residents tax regime
The 'Former Residents' tax regime was introduced in 2019 as an incentive to encourage former residents of Portugal to return home after spending time abroad. The Budget legislation extends this regime to taxpayers who become tax residents of Portugal (and who have not been considered tax residents of Portugal in any other of the previous five years) up to 2026. The previous requirement of prior residence in Portugal no longer applies.
Under the regime income from work and other business activities (regardless of the sector) will be tax exempt for 50% up to a maximum of €250,000 annually for a period of five years. Earnings above that threshold will be taxed at the standard progressive tax rates.
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