Portugal’s Non-Habitual Tax Regime (NHR) has long been an attractive tax incentive for individuals moving to the country, providing them with significant reductions on certain types of income for a period of 10 consecutive years. However, when an individual no longer qualifies for this regime—whether because they have reached the end of the 10-year period, failed to meet the residency requirements, or opted to discontinue participation—there are important tax consequences to consider.
The Non-Habitual Tax Regime (NHR) Overview
Introduced in 2009, the NHR regime aimed to attract foreign retirees, professionals, and entrepreneurs to Portugal. By offering tax benefits on foreign income, Portugal positioned itself as a desirable destination for individuals seeking to benefit from favorable tax treatment.
Under the NHR, individuals could enjoy:
- Exemption or reduced taxation on foreign-sourced income: For instance, pension income was exempt from Portuguese tax, and foreign-sourced income from employment or self-employment was generally taxed at a flat rate of 20%, if you had a designated high value activity.
- Tax exemptions on foreign pensions: Foreign pension income could often be exempt from Portuguese tax, especially when taxed in the country of origin under a double tax treaty and the NHR status was obtained prior to March 2020.
- Preferential treatment for certain professional incomes: Professionals with “high-value” roles, such as architects, engineers, and IT consultants, enjoyed reduced tax rates of 20% on income from Portuguese sources.
These benefits made Portugal an attractive option for retirees and expatriates looking to reduce their overall tax liabilities while enjoying the country’s warm climate and quality of life.
Tax Consequences of Ending the Non-Habitual Tax Regime
When individuals no longer qualify for the NHR, the following tax consequences typically apply:
- Loss of Exemption for Foreign Income
One of the most significant benefits of the NHR was the exemption or reduction in taxation on foreign-sourced income. Upon ending the regime, individuals will lose this advantageous treatment.
- Pensions: Foreign pensions, which were previously exempt under the NHR, will now be subject to Portuguese taxation. Depending on the specific tax treaty Portugal has with the country where the pension originates, the income may be taxable at the Portuguese domestic tax rate (which can range from 14.5% to 48%, depending on the income amount). If there is no tax treaty or specific agreement, the pension may be fully taxable in Portugal.
- Employment and Self-Employment Income: Income earned abroad from employment or freelance work, which enjoyed a favorable tax treatment under the NHR (often taxed at a flat 20% rate), will now be subject to the general tax regime. This means that such income could be taxed at Portugal’s progressive tax rates, potentially much higher than the previous flat rate under the NHR.
- Investment Income: Investment income from foreign sources (such as interest, dividends, and capital gains) may no longer be exempt or subject to favorable rates under the NHR. These types of income may now be subject to standard taxation rates.
- Domestic Income Taxation
Under the NHR, foreign-source income was given preferential treatment, but Portuguese-source income (like income from employment or real estate within Portugal) was still taxable under regular rates. However, the tax rates applicable to individuals who are no longer under the NHR regime will be higher, as they will be subject to the full Portuguese tax system:
- Progressive Income Tax Rates: Income from Portuguese sources (including salaries, rental income, or business profits) will be taxed under Portugal’s progressive income tax brackets, which range from 14.5% to 48%, depending on the total taxable income.
- Rental Income: Portuguese rental income, for example, will be taxed at regular progressive rates or subject to a specific flat tax for certain types of rental activities (typically around 28%).
- Real Estate Capital Gains: The taxation of real estate capital gains, which were often subject to favorable treatment under the NHR, will revert to the standard capital gains tax regime, where gains can be taxed up to 24% depending on the circumstances.
- Implications for Business Income
Entrepreneurs and self-employed individuals who benefited from the NHR regime’s 20% flat rate on Portuguese income from qualifying professions (like architects, engineers, and certain consultants) will now face standard taxation rates.
- Income Tax: Depending on the nature of their business activities, individuals may see their business income taxed at progressive rates, which can reach as high as 48%. Additionally, the tax treatment of specific deductions and allowances may change, leading to higher overall taxation.
Conclusion
Ending participation in Portugal’s Non-Habitual Tax Regime can have significant tax consequences for expatriates, retirees, and self-employed individuals. The main impact is the loss of favorable tax rates on foreign income, including pensions, employment, and business income. This transition can result in higher overall tax liabilities, as foreign income that was previously exempt or taxed at a reduced rate will be subject to Portugal’s regular progressive income tax rates. Additionally, individuals may face higher taxes on Portuguese-source income, real estate, and business profits.
While the NHR regime has been a major incentive for many to relocate to Portugal, it is crucial for individuals to plan for the tax implications when this benefit ends. Understanding how income from both domestic and foreign sources will be taxed in Portugal after the end of the regime is vital for effective tax planning and avoiding surprises in future tax filings. For those considering staying in Portugal long term, it may be advisable to consult with a local tax expert to navigate the transition out of the NHR regime.