In 2009, Portugal created a new favourable tax treatment for individuals, named “tax regime for the Non-Habitual Resident”, or short: NHR regime (in Portuguese: “regime fiscal para o residente não habitual” or “regime RNH”).
Due to its climate, diversity, cultural heritage, low crime, low cost of living, non-existence of wealth tax, expanding services the areas of private health, assisted living and related services, Portugal already is a very attractive destiny to foreigners. The NHR-regime added tax privileges to the existing good conditions, with the intention to capture pensioners and certain professional segments, in particular artists, sportsmen and other leading figures in science and culture.
The designation “non-habitual resident” seemed to be inspired by the term “non ordinarily resident” in common law tax jurisdictions. However, it is not comparable to the term used in common law countries, and possibly was not the best choice, as it may confuse those who are interested in the tax benefits provided by the Portuguese regime.
So, how do you become a Portuguese non-habitual resident? You must meet three requirements
Fist, you must become a fiscal resident in Portugal. According to Portuguese regulations, a person becomes tax resident in Portugal if, in a tax year, during any 12-month period beginning or ending in the tax year, he or she either
- has stayed in Portugal for more than 183 days, continuously or intermittently, or
- has stayed in Portugal less than 183 times but has a home on any day of this period under conditions which suggest that he or she intends to keep it as his/her usual place of residence and to occupy it.
Since 2015, the 12-month period no longer must coincide with the calendar year, allowing for partial residency during the relevant tax period, resulting in partial limited, partial unlimited tax liability within the same calendar year.
In addition, there is an extension rule according to which residence is considered starting on the first day of the new fiscal year if the person was resident on any given day of the previous year and considered ending only at the end of the year if the person becomes again resident in the following year. This extension rules serve to close gaps that would otherwise arise if the stay/living situation were temporarily interrupted. The partial residency just mentioned is therefore mainly considered in the year of the arrival or in the year of the departure of a person.
The second requirement for obtaining the NHR status is that the person must not have been a resident of Portugal in the previous five years, i.e., not have stayed in Portugal for more than 183 days or have had a home, under conditions that presume that it was intended to maintain and inhabit it as a place of habitual residence.
Last but not least, the person must apply for the status after communicating the start of his or her residency in Portugal. The status will therefore not be assigned automatically. The application must be submitted electronically via the tax authority’s internet portal by 31 March of the following year at the latest.
Therefore, you do not need to have a certain nationality to obtain the NHR status (also your right of residence in Portugal may depend on your nationality), and you do not have to practice a certain profession (also the tax advantages you may obtain depend in part on your occupation, as you will see).
Once the NHR status is granted, you may enjoy the tax benefits associated with the regime for a period of 10 years, starting from the beginning of the year of your arrival. However, it is a condition that you remain resident for the entire period. If you leave Portugal premature, your RNH-status will suspend. If you later during the remaining time of the 10 years period become again a resident, the status will be reactivated, and you may take advantage for the years left.
As far as the fiscal benefits associated with the NHR regime are concerned, two general effects can be distinguished.
Low Taxation
The first effect concerns income subject to taxation in Portugal, either because it is domestic income or because it was earned abroad, but Portugal has the primary or exclusive right to tax said income under a relevant double taxation treaty. Certain income benefits from a particularly favourable flat tax.
Fairly well known is that this is the case with foreign pension income, witch until 2020 was even tax-exempt, and nowadays is taxed with moderate 10%. What is less known, however, is that this is also the case for foreign alimony payments, as well as for foreign payments from early retirement schemes and certain expenditures by the employer for supplementary social protection of employees.
Furthermore, also income from employment or self-employment could benefit from a flat tax, also with 20% slightly higher, if the activity performed is one of those considered a high added value activity of scientific, artistic, or technical nature, and the qualification level of the professional corresponds to at least level 4 of the European Qualifications Framework or level 35 of the International Standard Classification of Education or he can prove at least five years of professional experience.
The professions eligible are enumerated in a list, which was updated last in 2019 with effect from 1 January 2020. The beneficiary professions are nowadays essentially specified with reference to the Portuguese Classification of Professional Activities (Classificação Portuguesa de Profissões – CPP), which is strongly based on the International Standard Classification of Occupations (ISCO-08). You can consult the full list with all eligible activities here.
Finally, also salaries of directors and managers of companies promoting productive investment in Portugal may be taxed with 20%, if they are assigned to projects eligible and with contracts for granting tax benefits entered into under the Investment Tax Code.
The following table summarizes the income with favourable flat tax:
| Type of income | Tax rate |
|---|---|
| Foreign pensions | 10% |
| Foreign alimony payments | 10% |
| Foreign payments from early retirement schemes | 10% |
| Foreign expenditures by the employer for supplementary social protection of employees | 10% |
| Income from high added value activity of scientific, artistic or technical nature, foreign or taxable in Portugal under a double taxation treaty | 20% |
| Salaries of directors and managers assigned to projects eligible and with contracts for granting tax benefits entered into under the Investment Tax Code | 20% |
No taxation
The second effect of NHR status, which may be of even greater interest to many people, relates to income that, in accordance with the applicable double taxation treaty, may be taxed in the source State. In this case, Portugal as the State of residence has the obligation to eliminate double taxation.
This, in general, is accomplished by one of the following two methods:
- The exemption method with progression, where the income is exempted in the State of residence, being only considered in determining the rate of tax applicable to the remaining income.
- The ordinary credit method, where the income is subject to tax in the State of residence, but the tax levied in the State of source is credited against the tax levied by the State of residence on such income, being the deduction restricted the appropriate proportion of the tax in the State of residence.
From a taxpayer’s point of view, the exemption method is the preferred method, as his tax burden will not be higher than the – usually lower – tax in the source country. However, the Portuguese double taxation agreements regularly provide for the credit method.
At this point, holders of the NHR status now have a huge advantage: they can choose to apply the exemption method for certain income.
Thus, Employees can choose the exemption method for their salaries if they are taxed in the other contracting state in accordance with a double taxation agreement.
The same applies to income from self-employed high added value activities of scientific, artistic, or technical nature, from intellectual or industrial property, from capital, from the letting or leasing of real estate, or from capital gains, if they may be taxed in the source state.
| Type of income | Option for exemption method, if… |
|---|---|
| Foreign income from employment | … effective taxation in the source State, in accordance with double taxation agreement |
| Foreign income from self-employed high added value activities of scientific, artistic, or technical nature | … possibility of taxation in the source State, in accordance with double taxation agreement |
| Foreign income from intellectual or industrial property | … possibility of taxation in the source State, in accordance with double taxation agreement |
| Foreign income from capital | … possibility of taxation in the source State, in accordance with double taxation agreement |
| Foreign income from letting or leasing of real estate | … possibility of taxation in the source State, in accordance with double taxation agreement |
| Foreign Income from capital gains | … possibility of taxation in the source State, in accordance with double taxation agreement |