NHR 2.0: What's New In Portugal's Non-Habitual Tax Regime?

The Non-Habitual Tax Residency (NHR) program in Portugal was established in 2009 to attract foreign investors and residents by offering significant tax advantages, such as a flat 20% income tax rate on specific Portuguese income and exemptions on foreign income for ten years. However, as of January 1, 2024, the NHR program has been abolished. Parliament extended the scheme until 2024 for applicants who could prove they had prepared their transfer to Portugal in 2023 after the previous government scrapped it as a "fiscal injustice" last year.

In its place, the new Portuguese government is introducing the Fiscal Incentive for Scientific Research and Innovation (IFICI) program, which aims to stimulate economic growth by providing tax incentives specifically for scientific research and innovation activities.

Although this new program is touted as driving technological advancement and positioning Portugal as a hub for high-tech and research-oriented sectors, the abolition of the traditional NHR program is largely due to resistance from opposition groups. On the one hand, Portugal must reduce tax rates and improve investment conditions to attract a skilled workforce and foreign capital. On the other hand, it struggles to lower taxes and enhance conditions for its own citizens and companies. 

This has led to a confusing policy shift despite the old NHR program's previous success in attracting skilled workers and foreign investment. The new program obviously targets professionals who contribute significantly to the economy through their skills, innovation, or expertise and create above-average value in their work or business activities.

However, countries are often unwilling or unable to sustain inconsistent economic policies or implement realistic reforms needed for a productive economy. You should act now to secure your future and protect your hard-earned wealth from government policies. With over 20 years of experience and a professional team, I am here to assist you with your Plan-B.

In this article, I will explain the details of the Fiscal Incentive for Scientific Research and Innovation (IFICI) program and highlight the differences between the old Non-Habitual Residency (NHR) program and the new IFICI initiative.

The Scientific Research and Innovation Tax Incentive Program (IFICI) aims to boost Portugal’s economy, offering a 20% reduction in personal income tax (PIT) as a benefit

HISTORY OF NON-HABITUAL TAX RESIDENCY

The Non-Habitual Tax Residency (NHR) program was launched in 2009 to attract foreign investors and skilled professionals to Portugal by offering significant tax incentives. The NHR program provided a 10-year tax benefit period, which included exemptions on foreign-sourced income and a flat 20% tax rate on certain Portuguese-source incomes.

To qualify, individuals needed the right to reside in Portugal and must not have been tax residents in Portugal for the preceding five years. The program attracted over 10,000 participants, significantly boosting Portugal's economic growth and international appeal.

The Portuguese government decided to end the NHR program as of January 1, 2024, due to various socio-economic factors, including concerns about housing affordability and the program's perceived benefits to high-income individuals rather than the broader population. Individuals who enrolled in the NHR program by December 31, 2023, will continue to enjoy its benefits for the remaining 10-year eligibility period.

INTRODUCTION OF THE IFICI PROGRAM

The Fiscal Incentive for Scientific Research and Innovation (IFICI) program aims to boost Portugal's economy by offering fiscal incentives specifically for scientific research and innovation. The new program offers tax breaks for entities involved in scientific research and innovation, encourages foreign investment in high-tech and research-oriented sectors, and provides a more targeted and sector-specific approach than the broader NHR program. This focus aims to foster technological advancement and innovation in Portugal.

However, please remember that the government has announced the new NHR program and is awaiting Parliament's approval.

The primary benefit of this new program is a 20% reduction in the personal income tax (PIT) rate on employment income. Additionally, you can benefit from tax exemptions on various foreign income sources, such as employment, independent work, capital investment income (interest or dividends), royalties, capital gains, real estate income or gains. However, foreign pensions are not exempt and will be taxed in Portugal at progressive rates ranging from 14.5% to 53%. Thus, pensioners from other EU countries who came to Portugal to improve their living conditions were locked up in their own country.

The new program was designed to attract professionals in specific fields, including those holding positions within organizations approved by IAPMEI, the Agency for Competitiveness and Innovation

REQUIREMENTS FOR THE IFICI

First, you must be a new resident of Portugal and have not lived there in the past five years. Additionally, you should not have participated in the previous NHR regime, which ended in 2024, or any other "ex-residents" program.

The new program is mainly designed to attract professionals in specific fields. This is to support the government's value-added growth argument against claims of fiscal injustice. It seeks to garner public support by arguing that the fiscal incentives offered to productive, skilled professionals will contribute to economic growth. 

These professionals include:

• Researchers with PhDs or those involved in R&D projects within Portugal's scientific network; 

• Directors or employees of Portuguese-based organizations producing knowledge;

• Professionals employed by businesses benefiting from Portugal's investment support tax regime (RFAI) and companies in qualified industries that export at least 50% of their revenue; 

• Positions within organizations approved by IAPMEI (Agency for Competitiveness and Innovation) or AICEP (Portuguese Trade & Investment Agency), promoting economic activity and innovation; 

• Individuals whose research expenditures qualify for the R&D tax incentive program (SIFIDE) in Portugal; 

• Directors or employees of accredited Portuguese startups showing significant development potential or venture financing; 

• Residents of the Azores and Madeira have roles specified by local laws.

To qualify, professionals must meet one of the following criteria: 

• They should hold at least a level 4 qualification under the European Qualifications Framework (EQF), which typically includes post-secondary non-tertiary education like vocational training, or a level 35 qualification under the International Standard Classification of Education (ISCED), generally equivalent to a Bachelor's degree;

• Alternatively, if they do not have these educational qualifications, they must have at least five years of proven professional experience.

TAXES ON FOREIGN SOURCE INCOME

Under the IFICI regime, most foreign-sourced income is exempt from Portuguese taxation for ten years, provided it originates from a country with a Double Taxation Agreement (DTA) with Portugal.

• Employment income under the NHR regime is either exempt from tax or taxed at a flat rate of 20% if not from an eligible profession;

• Self-employment income is tax-exempt if from an eligible profession in a DTA country; otherwise, it is taxed at standard progressive rates and subject to social security contributions;

• Royalties and income from financial assets are tax-exempt if from a DTA country or a non-blacklisted tax haven; otherwise, they are taxed at 28% or 35%;

• Real estate income and capital gains are tax-exempt if from a DTA country or a non-blacklisted tax haven;

• Capital gains from the disposal of securities are taxed at 28% or 35% if from a blacklisted tax haven;

• Pension income is tax-exempt if from a DTA country.

Related content: What Is A Territorial Tax System?

For non-EU citizens, a residence permit is required, typically obtained through the investor visa or the passive income visa (D7), via the Immigration and Borders Service or a Portuguese embassy

TAX ON PORTUGUESE SOURCE INCOME

• Employment income is taxed at standard progressive rates if not from eligible professions; otherwise, it is taxed at 20% or the lower progressive rate.

• Self-employment income follows the same rules: it is taxed at standard progressive rates if it is not from eligible professions or at 20% or the lower progressive rate if it is eligible.

• Real estate income and capital gains have rental income taxed at 28% or standard progressive rates, while net capital gains are taxed at 50% of the standard progressive rates.

• Pension income is consistently taxed at standard progressive rates.

COMPARISON BETWEEN NHR AND IFICI PROGRAMS

Here is a brief explanation to show the main differences between the two programs:

• Scope: NHR was focused on individual tax benefits for a wide range of professions. IFICI targets companies and entities involved in scientific research and innovation.

• Tax Benefits: NHR offered broad tax exemptions on foreign income and a flat rate on Portuguese income. IFICI expects to offer incentives directly linked to research and development activities.

• Economic Goals: NHR attracted a diverse group of foreign residents and investors. IFICI aims to boost specific sectors and drive technological advancement in Portugal.

APPLICATION PROCESS

First, you must establish your legal right to reside in Portugal. European Union, Europe Economic Area, and Swiss citizens who want to register as residents in Portugal can do so by going to their local city hall. They must bring their passport and European Health Insurance Card (EHIC). This process establishes their legal residency in Portugal and does not require them to prove their current address.

Non-EU citizens must obtain a residence permit, commonly through the Residency Permit for Investors Visa or Passive Income Visa (D7), either online via the Immigration and Borders Service or at a Portuguese embassy.

A NIF (tax identity number) is necessary for business or legal activities. Non-residents can get it through a representative or lawyer, while residents can obtain it at local tax offices with their ID and proof of residency. Once you have your NIF, register as a tax resident at the local tax office.

You must register with your NIF, email, phone number, and fiscal address on the government website. You'll receive a password by post in about two weeks. Complete the application with documents proving you were not a tax resident in Portugal for the previous five years, the last five years' tax returns, and a rental agreement or property deed in Portugal.

Beyond all the restrictions and challenges, the hostility of the Portuguese people towards expats, claiming they are the source of the problems, makes Portugal a much less attractive place

CONCLUSION

The transition from the Non-Habitual Tax Residency (NHR) program to the Fiscal Incentive for Scientific Research and Innovation (IFICI) program marks a strategic shift in Portugal's approach to attracting foreign investment. While the NHR focuses on providing broad tax benefits to diverse individuals, the IFICI aims to stimulate economic growth by targeting companies and entities engaged in scientific research and innovation.

With the IFICI program, Portugal is no longer as attractive of a destination for expats as it was under the old NHR program. NHR 2.0 seems designed to eliminate expats who are ready to contribute to the economy. On top of all these new challenges and restrictions, the hostility of the Portuguese people towards expats, claiming that they are the source of the problem rather than part of the solution, makes Portugal much less appealing. There are much better options where expats’ talents and investments are appreciated and very welcome. If you are exploring options to create the perfect Plan-B to protect your wealth, I'd be happy to help. To stay up to date, you can subscribe to our newsletter.