The Portuguese Non-Habitual Resident Regime, created by the Portuguese government, brings many advantages to investors, retirees and highly qualified professionals.
But with the new changes to the rule, namely RNH 2.0, the tax rates and deadlines have changed.
In this article we’ll understand what the change in the law means, who will benefit, how to apply to become a Portuguese Non-Habitual Resident, and how it compares with the country’s tax residents.
Have a good read.
What is the NHR – Portuguese Non-Habitual Resident Regime?
The Portuguese Non-Habitual Resident Regime (NHR) is a tax mechanism created with the aim of attracting new residents to the country, especially those with the potential to generate significant income.
This regime offers a wide range of tax incentives, including tax exemptions and reductions on specific types of income, making Portugal a favorable destination for highly qualified professionals, retirees and investors.
What are the main tax benefits for a non-habitual resident in Portugal?
The main tax benefits granted by the Portuguese Non-Habitual Resident Regime include exemptions and reduced IRS (income tax) rates for specific types of income.
In the case of individual investors with income from venture capital funds (e.g. those eligible for the Golden Visa) who decide to become NHRs, only 10% tax will be levied.
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How do I qualify for Portuguese non-habitual resident status?
To obtain NHR status, the individual must not have been a tax resident in Portugal for the last five years prior to the application.
In addition, the applicant must establish their tax residence in Portugal, which can be proven by a physical presence in the country for at least 183 days, consecutive or not, during a 12-month period, or by the possession of a dwelling that indicates the intention to reside permanently in Portuguese territory.
The process of registering with the NHR must be done with the Portuguese tax authority, and it is essential that the application is submitted by the end of March of the year following the change of residence.
What has changed in version 2.0 of the Portuguese Non-Habitual Resident?
In the original version of the NHR, capital income from abroad, such as dividends and interest, was totally exempt from IRS, as long as the country of origin had a Double Taxation Agreement with Portugal and was not considered a tax haven.
But pensions from abroad were also exempt, which made Portugal a highly attractive destination for retirees.
What was once largely exempt has now been adjusted, especially for retirees and individuals with income from qualified work, reflecting a more restrictive tax policy.
Taxation and RNH 2.0 rules
The individual must take up residence in Portugal from 2024, without having been a resident for the five years prior to the date of settlement.
Once the benefit has been granted, it will last for ten years.
Maintaining resident status and tax benefits is conditional on maintaining tax residence in Portugal.
If the resident moves abroad, the benefit will be suspended, but can be resumed if the individual returns to Portugal, without losing the remaining period.
The benefit applies to employment income that is taxed at a special rate of 20%. These specific activities include jobs listed in article 58-A of the IRS Code, such as:
- Teaching and scientific research: university professors, scientific researchers and activities integrated into innovation centers, in accordance with Decree-Law No. 126-B/2021.
- Qualified work and positions on governing bodies within productive institutions, in accordance with the Investment Tax Code.
- Highly qualified professionals involved in financial and economic areas, especially members of corporate bodies.
- Companies that have not benefited from the tax support scheme in the last five years or that are new to the market.
- Industrial and service companies that are engaged in key activities and export more than 50% of their turnover.
In addition, research and development activities, jobs in start-ups, and positions in areas of special economic interest are also covered.
However, capital income from abroad, which benefited from the previous version of the NHR, is now excluded from NHR 2.0.
While version 2.0 offers a flat rate of 20%, the regular IRS regime has a higher and more progressive taxation, taking into account national solidarity, which can reach over 40%.
Is it possible for an NHR to avoid double taxation between USA and Portugal?
Yes, it is possible thanks to the Double Taxation Agreement (DTA) signed between the two countries.
This agreement aims to prevent the same income from being taxed simultaneously in both countries, creating a more favorable tax environment for those who have income in both jurisdictions.
The DTA establishes maximum tax rates and tax jurisdiction criteria, allowing taxes paid in one of the countries to be offset.
What are the tax obligations for a Portuguese non-habitual resident?
After obtaining Non-Habitual Resident (NHR) status, the individual must maintain their tax residence in Portugal, which implies spending most of their time in the country or having a residence that indicates an intention to stay.
In addition, all income, whether it originates in Portugal or abroad, must be reported annually to the Portuguese Tax Authority.
The process includes submitting an income tax return (IRS) by the end of June each year, declaring the previous year’s income.
For non-habitual residents who benefit from exemptions on foreign income, it is necessary to ensure that this income is properly taxed in the country of origin to avoid problems with the tax authorities in Portugal.
What are the tax implications for investments by Portuguese non-habitual residents?
Portuguese Non-habitual residents can obtain advantageous tax treatment when it comes to investments, especially with regard to capital income.
In the initial version of the NHR, capital income from international sources, such as dividends, interest and capital gains, was exempt from IRS, provided that the country of origin had a Double Taxation Agreement with Portugal.
Currently, capital income from abroad can be taxed in Portugal, unless another specific provision applies.
In addition, income from investments in venture capital funds continues to be favored by the regular IRS regime, with a rate of 0% for non-residents and 10% for residents.
Thus, non-habitual residents investing in Portugal can find good opportunities to optimize their investments, taking advantage of the country’s favourable conditions.
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How does the initial version of the NHR differ from version 2.0 for non-habitual residents?
The original version of the Non-Habitual Resident Regime (NHR) and version 2.0 have marked differences, especially in the treatment of income from foreign sources and capital.
In the original version, the NHR provided a total exemption from IRS on capital income from abroad, such as dividends, interest and royalties, as long as this income was taxed in the country of origin and there was a Double Taxation Agreement with Portugal.
In addition, pensioners who transferred their residence to Portugal also benefited from a complete IRS exemption on their foreign pensions.
With the introduction of RNH 2.0, these exemptions were largely eliminated. Now, foreign capital income and pensions are taxed in Portugal, although pensions are taxed at a relatively low rate of 10%. The focus of the new version is to encourage specific professional activities, with the application of a flat rate of 20% on income from work in high value-added areas.
What is the relationship between the RNH and Golden Visa Portugal investors?
The Non-Habitual Resident Regime (RNH) and the Golden Visa Portugal are closely linked, both being valuable instruments for attracting foreign capital and new residents to the country.
While the Golden Visa offers a fast track to obtaining residency in Portugal through significant investments, such as in real estate, venture capital funds or the creation of jobs, the RNH acts as a perfect complement, offering attractive tax benefits to those who qualify.
Investors who acquire the Golden Visa can then apply for Non-Habitual Resident status. This status allows them to take advantage of tax exemptions on income from abroad, as well as benefiting from a reduced flat rate on qualified employment income generated in Portugal.
This combination makes Portugal an extremely competitive destination for both relocating capital and taking up residence.
In addition, the RNH allows Golden Visa investors to optimize their tax burden while continuing to grow their investments in the country.
This is especially advantageous for those who have substantial income outside Portugal and wish to minimize their taxation.
