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Introduced in 2009, the NHR regime targets individuals becoming tax residents in Portugal who haven't been residents in the country in the preceding five years. This includes both Portuguese nationals and foreigners. To be considered a tax resident under this regime, one must stay in Portugal for at least 183 days annually.

Contrary to popular belief, the NHR doesn't grant a blanket tax exemption. It distinguishes between domestic and foreign income sources. For income sourced within Portugal, no exemptions apply. However, certain high-value-added professional activities might benefit from a reduced 20% IRS rate. This encompasses professions such as doctors, architects, artists, musicians, university professors, IT consultants, and more. In contrast, foreign-sourced incomes might enjoy tax exemptions, though this doesn't apply across the board.

So, the notion that NHR beneficiaries pay no IRS is a myth. Many do, and at rates similar to the general population. Moreover, they're not exempted from other taxes and fees, such as VAT, property transfer tax, stamp duty, municipal property tax, additional municipal property tax, road tax, and social security contributions, among others.

What’s Coming?

Portugal's fiscal environment is poised for transformation, as evident in the State Budget proposal for 2024. A major change on the horizon is the conclusion of the favorable tax regime for non-habitual residents. This means non-residents will no longer have the advantage of a reduced Personal Income Tax (IRS) rate when declaring various forms of income in the nation.

The changes won't be immediate; they're slated for 2024. Those securing their registration within this year will still benefit from a reduced rate for the next decade. Similarly, individuals who meet the criteria by December 31, 2023, will have until March 31, 2024, to complete their registration.

Anticipating this change, there was a notable increase in registrations in 2022, suggesting a surge of individuals aiming to capitalize on the favorable rates before they expire.

Weighing the Pros and Cons

While critics might point to the perceived loss in direct tax revenue due to the NHR regime, they often overlook the indirect economic benefits. Most NHR beneficiaries might not have chosen Portugal without such incentives, thus contributing to indirect tax revenues and stimulating sectors like tourism, construction, real estate, legal, and accounting services, to name a few.

That said, there are valid concerns. For instance, digital nomads benefiting from NHR might enjoy an undue advantage due to higher salaries coupled with tax exemptions. Such disparities need addressing.

Why It Matters

The announcement by the Prime Minister regarding the eminent end of the NHR regime sent shockwaves across the expat community. But is the regime truly detrimental to the Portuguese economy?

The NHR has undeniably played a pivotal role in attracting skilled human capital, enhancing corporate competitiveness, and boosting sectors from tourism to construction. The regime has spurred job creation in multiple sectors, fostering opportunities essential for retaining the youth in the country.

But all these achievements stand to be jeopardized with the abrupt end of the NHR. Beyond the immediate repercussions, there loom potential systemic risks for the financial sector due to declining property values impacting loan securities.

In Our Opinion

The government's approach towards the NHR regime appears impulsive, risking more harm than good. Solutions to housing problems and political survival shouldn't come at the cost of well-thought-out fiscal strategies. Portugal's reputation as a favorable destination for investors and professionals hangs in the balance, even as competing nations watch keenly.

State Budget 2024: How It Affects Real Estate in Portugal (urbamarkt.com)
Understanding Recent Updates to Housing Loans: Your Essential Guide (September 2023) (urbamarkt.com)
Working in Portugal: Your Guide to Visas & Work Permits (urbamarkt.com)

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Marisol Ferreira