Ryan Donaldson discusses implications of Portugal's Non-Habitual Tax Regime ending

Created in 2009 as a way of attracting high net worth individuals, qualified professionals, and international retirees to its shores, the Portuguese Non-Habitual Residents (NHR) Tax Regime provided a tax friendly incentive to international workers until Antonio Costa confirmed its planned closure in October 2023.

Chartered Fellow in Wealth Management, and Regional Manager - Europe at Skybound Wealth Ryan Donaldson has held numerous seminars and webinars in recent years on the subject of the Non-Habitual Residents Tax Regime, and here he explains what the changes mean for expats either living in or considering moving to Portugal.

Non-Habitual Residents Tax Regime – A Brief History

When the Non-Habitual Residents Tax Regime was first launched, an expat who successfully applied for this tax mitigating status was granted a 0% tax code on all foreign income coming into the country for 10 years. In March 2020, a 10% tax rate was introduced for all registrations made after this date, still for the same 10-year term.

Antonio Costa announced an end to the Non-Habitual Residents Tax Regime in October 2023, shortly before he became caught up in a corruption investigation probe that forced him to resign on the 7th of November 2023 – which just so happened to be the very morning I was holding an event on this topic in Vilamoura!

At the time, many commentators, tipped the decree would resign with the outgoing PM. However, it went through parliament in January this year and no new applicants were entertained from January 2024 if they had not already applied for their residency permit in 2023.

Whilst the actual reason for ending the NHR regime is still being debated, from a political point of view, the wealthy expats who took advantage of this tax break have contributed to an aggressive and unprecedented rise in house prices which has had a negative impact on the local Portuguese community.

So what does this all mean?

For non-residents of Portugal

The news will be unwelcome to many expats in their late 50s who were planning on retiring to Portugal in the coming years. Until recently, with a 10% income tax code (without a rising band) it was an obvious choice for high-net-worth Europeans, especially when compared against the EU average of 42.8%. And when you consider the U.K.’s even higher band of 45% on all income, you can clearly see why the attraction was there.

Of course, there are still countries in Europe with lower tax rates, but be mindful of Double Taxation Agreements (DTAs) in some of these jurisdictions. For many, places like the United Arab Emirates may look more appealing until a more favourable regime opens up.

For NHR registered individuals in Portugal

If you are already in Portugal, very little changes for the 10 years you are registered. For example, if you registered in 2017, you can still benefit from 0% tax on foreign pensions, and other income for another 3 years up to 2027. But beware, Portuguese income tax bands after the Non-Habitual Residents Tax Regime are subject to a higher rate band of 48%  - and as such – higher than the United Kingdom and overall European average mentioned previously.

Life After The Non-Habitual Residents Tax Regime

The importance of preparing for this eventuality, shouldn’t be underestimated.  When it comes to investing, I firmly believe holding a long-term view applies to protecting, as well as growing your wealth.

Even if you don’t intend to draw from your savings for a while, understanding what assets you have (Pensions, property, Investment Platforms, Insurance Based Investments, etc.) – and how these assets will be treated from a tax perspective locally where they are held and where you are based as a resident (in this case Portugal).

You can then establish how to restructure your assets and mitigate your tax liability to ensure you hold on to as much of your wealth as possible.  Even if you are a few years away from the end of your Non-Habitual Tax Residency status ending, planning in advance is highly recommended.