However, the original NHR programme officially closed in early 2024. In its place, Portugal introduced what is commonly known as ‘NHR 2.0’, although its formal title is the Tax Incentive for Scientific Research and Innovation (IFICI).
What was the original NHR regime?
NHR 1.0 allowed new Portuguese tax residents to benefit from 10 years of tax advantages.
It included a 20% tax rate on qualifying Portuguese-sourced employment income from a ‘high added value’ profession, exemptions on foreign-sourced income, and no tax on foreign pension income until a flat 10% tax began being imposed in 2020. Retirees could apply and receive the tax breaks on foreign income and some capital gains.
What changed under NHR 2.0?
NHR 2.0 (IFICI) is much more restrictive, specifically targeting highly qualified professionals in certain categories and professions such as science, technology, education and innovation. Individuals need to ensure that they perform qualifying employment activities each year. It is not designed for retirees and those with passive income.
As previously, it is only open to new tax residents, and the term is limited to 10 years. Many tax benefits remain the same.
What tax benefits does NHR 2.0 offer?
- A reduced 20% flat rate of tax on Portuguese-sourced employment and professional business income.
- Exemption from Portuguese tax on foreign-sourced income, such as investment income (dividends, interest, distributions from trusts, etc), capital gains, rental income, employment and professional business income. (Income/gains from tax havens do not benefit and are taxable at 35%.)
The exemption on foreign-sourced investment income is technically ‘exemption with progression’. The income is added to the taxable income that year, thereby increasing the applicable tax rate on anything taxable at the Portugal scale rates.
Pension income is not exempt or taxed a reduced rate; it is fully subject to Portuguese income tax.
How do you qualify?
Applicants must:
- Be a Portugal tax resident. (NHR does not grant tax residency.)
- Not have been Portuguese tax resident the previous five years.
- Hold academic or professional qualifications and prove experience.
- Work in an eligible profession or for a qualifying company.
- Apply through official channels and supply supporting documentation.
The relevant Portuguese authority governing your profession or category must approve each application. The process is closely monitored.
What does this mean for retirees?
Portugal remains a highly attractive destination for your retirement years, and continues to offer other tax benefits.Take specialist advice to fully understand the tax regime and how you could use it to legitimately reduce your tax liabilities. You may find your tax burden is considerably lower than expected.
For example, investment income can be taxed very efficiently in Portugal. When it comes to UK pensions, Portugal can offer attractive tax options for residents in a position to encash their funds, making it comparable to the old NHR benefits.
Portugal’s equivalent to inheritance tax, a 10% ‘stamp duty’, only applies to non-direct family members on Portuguese assets. Your spouse, children, grandchildren and parents are exempt. Portugal’s form of wealth tax is limited to high-value local properties and can therefore be avoided.
If you own a UK company and are semi-retired/approaching retirement, there are a couple of opportunities within NHR 2.0 where you could undertake an activity to take advantage of the regime. One possibility is to establish a subsidiary of your UK company to provide consultancy services to the UK company or supply goods or services through it. You could take a basic salary from the Portuguese company while receiving other UK income, such as dividends, that are exempt with progression. If you’re in this position, seek personalised advice.
What about those with existing NHR 1.0 status?
Anyone with NHR status under version 1.0 continues to benefit from the tax advantages, including the 10% rate on foreign pension income, until your 10-year term ends. You cannot then apply for NHR 2.0.
However, you currently have a unique and limited opportunity to dispose of assets, potentially without any tax at all. Act well before your NHR term ends to allow time to restructure your assets for the most tax-efficient transfer out of NHR.
Making the most of Portugal’s tax benefits
If you take specialist tax and wealth management advice, you may be pleasantly surprised by how much tax you can save by reviewing and restructuring your assets and investments.
Portugal has much to offer. With the right planning, you will enjoy a comfortable, rewarding and financially secure retirement here.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
By Christopher Moore, Partner, Blevins Franks
