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Teresa Pala Schwalbach: The Portuguese NHR regime is soon to be over. What comes next?

1 November 2023

Our Secretary Board Member, Teresa Pala Schwalbach, is Partner in the Tax Department and Head of the Scandinavian Desk at our corporate member Sérvulo & Associados. 

In this article, Teresa provides us with the latest updates regarding the ending of the NHR regime and the future of the affected companies and individuals.

As anticipated, the State Budget Law Proposal presented by the Portuguese government for 2024 forecasts the end of the Non-Habitual Residents (“NHR”) regime as we know it.

Despite the claims for a transitory period to allow for a smoother transition, it is expected taxpayers will only have until the end of the current year - 2023 - to register as tax residents in Portugal, thus being able to complete their NHR application until the end of March of the following year - 2024.

With the end of the NHR regime, the possibility to benefit from a reduced 20% personal income tax rate on the salaries derived from high value-added activities, in addition to the exemption of several types of foreign sourced income, under certain conditions, will unfortunately cease to apply with regards to the majority of cases.

There is, however, a bright side: the State Budget Proposal also introduces, from 2024 onwards, a new tax incentive program, designed to boost Scientific Research and Innovation.

Based on this “new version of the NHR regime”, also applicable for a 10-year period, the reduced 20% tax rate will only apply to employment and business income derived from the following positions:

i. Higher education and scientific research teachers;

ii. Qualified professionals, within the scope of contractual benefits to productive investment;

iii. Research and development (“R&D”) professionals, with doctorate qualification, which contracting costs are eligible for the Portuguese tax incentive regime for R&D - SIFIDE.

In general terms, SIFIDE allows for a relevant corporate income tax deduction, with reference to R&D related costs. Together with a competitive Patent Box regime, Portugal seeks to place itself as one of the most attractive European jurisdictions for this type of enterprises.

We hope that, after the respective discussion in Parliament, the final version of the State Budget Law (to be expected, approximately, mid-end of November) will include new job activities to the restricted list above.

In addition, eligible taxpayers will benefit from a complete (and therefore broader) exemption on the following types of foreign income:

  • Employment and business income;
  • Investment income, such as dividends and interest;
  • Rental income; and
  • Capital gains - generally excluded from the scope of the original NHR regime.

Contrary to the version now in place, the new regime foresees no deadline to apply.

However, it will imply a more formal process of recognition, to be carried out with governmental authorities within the Research and Innovation areas, instead of directly with the Portuguese tax authorities.

The general requirements to access the regime remain unchanged - the individual needs to become a tax resident in Portugal, not having qualified as such in the previous 5 years.

Finally, another regime (“Regressar”) is available for a period of 5 years, foreseeing a 50% tax exclusion for employment and business income up to € 250,000 - although still being subject to progressive rates which may arise to 48%, plus a solidarity rate.

The new version hopefully to be approved by Parliament will apply to new residents until 2026, who have resided elsewhere in the previous 5 years. Previously, this regime was only for individuals who had lived in Portugal before but that no longer seems to be the case as of 2024.

None of the abovementioned regimes are cumulative.

In sum, individuals and businesses envisaging to relocate to Portugal should seek expert advice to explore the options available for their concrete situation.

Sérvulo’s Tax Team

Teresa Pala Schwalbach & Lénia Sousa

an article provided from Sérvulo & associados

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