Portugal's NHR: Changes on the horizon in 2024

Introduction

In 2009, during the financial crisis, the Portuguese government introduced the Non-Habitual Residency (NHR) program to encourage foreigners to move to Portugal. This initiative offered some remarkable tax incentives, including a 20% flat tax rate on employment and self-employment income, while income from foreign sources remained mostly tax-exempt. The NHR program became increasingly popular among expats, but its success brought about some unforeseen challenges.The influx of newcomers led to rising property prices and overcrowding in certain areas, creating concerns for the Portuguese government. The current socialist government, led by Prime Minister Antonio Costa, has voiced its worries about the NHR program's impact on the housing market and other aspects of the economy. Two weeks ago, they made a significant announcement: the decision to discontinue the program due to what they have called a 'fiscal injustice' in favor of foreigners.It's important to note that the decision to eliminate the NHR program is not finalized. If the government proceeds with this plan, it's likely to affect those intending to move to Portugal in 2024, with 2023 still being a safe year.

Understanding Portuguese tax residency

Portugal determines your tax residency based on the date when you change your fiscal number (NIF) to a Portuguese tax address. For example, if you updated your NIF to a Portuguese address in July 2022, you would be considered a tax resident in Portugal from that point onwards. Another critical date to remember is the application deadline for NHR. Continuing with the previous example, if you became a Portuguese tax resident in July 2022, you had until March 31, 2023, to apply for NHR.

The future of NHR

While the future of the NHR program remains uncertain, it is anticipated that the Portuguese government will stop accepting new applications for the tax year 2024. Existing NHR holders are likely to be unaffected by these changes. Professionals in higher education, scientific research, and certain related fields may continue to benefit from a 20% tax rate on professional income in Portugal, along with exemptions on various foreign-sourced income categories, provided they haven't been Portuguese tax residents in the past 5 years. However, the scope of these benefits in the "new NHR" is expected to be more limited compared to the previous regime, pending discussions in Parliament.But there's good news too! Starting in 2024, new Portuguese residents (who haven't lived in Portugal for the last 5 years) might enjoy a 50% tax break on their income, whether it's from a job or freelance work. It would only apply to incomes up to 250,000 EUR per year. If you earn more, you'll pay regular tax rates on theexcess part.

What about future expats?

For individuals planning to move to Portugal and apply for NHR, here's what you need to know:

Act before December 31, 2023:

Portugal is expected to continue accepting NHR applications for the tax year 2023. To do so, update your NIF to a Portuguese address this year. Keep in mind that it is not mandatory to buy property to become a resident; renting a property is also a valid option.

Finalize before March 31, 2024:

After becoming a Portuguese tax resident in 2023, you’ll likely have until March 31, 2024, to submit your NHR application.

Stay informed about the evolving NHR program to make the most of Portugal's tax incentives while they are still available. If you have questions or need advice, register at www.tytle.io.