Non-Habitual Residence in Portugal: What Tax Advantages Does It Bring?

If you are planning to relocate to Portugal, you may be interested in considering the opportunity of obtaining the status of a non-habitual resident in the country. This is not a legal residence status. Rather, it is a special tax regime that is available to those people who spend considerable periods of time in Portugal. Non-Habitual Residence (NHR) in Portugal will make your foreign income tax-exempt in the country. Your income made in Portugal will be taxed at a flat (rather than a progressive) rate. The tax exemptions and tax reductions will be available for 10 years. The status of a non-habitual resident cannot be extended.

Who is eligible for NHR in Portugal?

Both Portuguese and foreign nationals are eligible to apply for NHR in Portugal. You can qualify for NHR in the country if the following conditions are satisfied:

• You have been a tax resident of another country for at least five years;
• You have been legally residing in Portugal for the last 183 days or more.

As you can see, the central issue to solve before you can apply for NHR in Portugal is acquiring legal residence in the country.

Methods of acquiring legal residence in Portugal

A foreign national can become a legal resident in Portugal if he/ she marries a local person but we are not going to dwell on this issue here. Instead, we will discuss two other methods of obtaining legal residence in the country that look more realistic.

First, you should realize that Portugal wants to attract highly qualified specialists in a number of areas. The country especially welcomes artists, doctors, engineers, architects, designers, university lecturers, and people of many other professions. A job contract with a Portuguese employer will make you qualified for legal residence in Portugal.

We must note, however, that having a job agreement with a local company is NOT a guarantee of obtaining a legal residence permit in Portugal. It greatly improves your chances of getting the permit but it does not guarantee that you can get one.

Personal income is taxed at a progressive rate in Portugal. The NHR status will let you save on taxes if you earn more than 10,000 euros per year while working in the country (see below).

The second way of acquiring legal residence in Portugal if you come from another country is by investment. For a number of years, Portugal administered a ‘golden visa’ program that allowed foreign investors to obtain legal residence in the country in an easy way. In particular, purchasing a piece of real estate in the country was enough to qualify for a residence permit. The required investment amount could be lower than 300,000 euros if the property was located in an underdeveloped region of Portugal and/ or needed repairs. The personal presence requirements were also very relaxed. The golden visa holder had to spend only a week a year in Portugal to keep the residence permit. As things stand for now, however, the golden visa program is going to be terminated at some point in 2023, probably closer to the end of the year.

Why would the Portuguese authorities drive foreign investors away by closing the golden visa program? The matter is that the demand for houses and apartments in Portugal on the part of foreign investors drove up the prices for real estate significantly. This fact certainly did not make the local people happy and they pushed the Government to stop issuing residence permits to foreigners buying real property in Portugal. First, the cities of Porto and Lisbon as well as the region of Algarve were excluded from the golden visa program and soon you won’t be able to qualify for legal residence in Portugal no matter where in the country you purchase property. The opportunity will be gone by the end of the year.

However, things don’t actually look as gloomy as you might think. One thing is that terminating the golden visa program is not a simple task that can be completed quickly. The executive body (the Portuguese Government) does not have the legal power to end the program: the matter has to go through the legislative body (the Parliament) first. Legislators seldom make fast decisions and the golden visa opportunity is going to be available until the new law is passed and published. So there is still time to apply for a golden visa to Portugal even though it’s running out.

When the Portuguese immigration authorities stop accepting applications for golden visas from foreign investors into real estate in the country, they will continue extending the visas that have been issued before. The only thing is that golden visas will turn into D2 (entrepreneur) visas with a reduced personal presence requirement.

A D2 visa serves as a temporary residence permit in Portugal but the standard personal presence requirement that it entails is 183 days per year. Golden visa holders, however, will not have to meet this requirement. They can still spend as little as 7 days in Portugal every year to keep their residence permits.

In addition to that, some other ‘windows of opportunity’ may remain open for foreign investors wishing to acquire legal residence permits in Portugal. The option to invest in real estate is not the only investment option that the golden visa program offers. You can qualify for a golden visa (or a residence permit, which is the same) if you invest into Government bonds, deposit money in a Portuguese bank, or create new jobs in the country. The required investment amount is higher but the legal opportunity exists anyway.

We do not know what ultimate results the discussions in the Portuguese Parliament are going to yield. We can only make a reasonable conjecture. The golden visa program brought about one major problem: the housing prices have gone up. (We would like to note in parentheses that the country’s authorities might have probably anticipated such an outcome.) On the other hand, Portugal has been able to attract a few billion euros in foreign investments while the program has been in operation. We believe that it is reasonable to assume that the option to invest in real estate to qualify for legal residence in Portugal will go while all other investment options will stay. We won’t have to wait for a long time to find out if they will or they will not.

Tax benefits that the NHR status brings

As we have noted above, personal income is taxed at a progressive rate in Portugal. If you make up to 7,112 euros per year, the tax is 14.5%. If you make more, the rate goes up and when you reach the level of about 80,000 euros per year, you will have to pay more than half of the outstanding amount as the income tax. Yes, taxes are high in Portugal.

If you become a Non-Habitual Resident in Portugal, your income tax is going to be 20% no matter how much you make. Please note that this tax rate applies to the income made in Portugal: to the salary paid to you by a local employer, for example, or to the income that you make as a self-employed individual while living in the country. Things look even more attractive if we consider the income made abroad.

A (habitual) tax resident of Portugal has to pay a 28% tax on dividends, interests, royalties, capital gains, and rental income. A non-habitual resident of Portugal has to pay 0% in Portugal if the income is made in a foreign country. Isn’t it an attractive opportunity indeed?

We have to make an important note at this point, however. The zero-tax opportunity is available only to citizens of those countries that have double taxation avoidance agreements with Portugal. Portugal has not signed such agreements with all countries of the world. At the same time, more than 70 countries have these agreements with Portugal and you are welcome to inquire with us if your home country is on the list.

Portugal is also a popular place with retirees who like to spend their golden years in a sunny country on the seashore. Before 2020, pensions received in foreign countries were not taxed in Portugal and now they are taxed at 10%. The rate applies if the retiree holds the NHR status and it is considerably higher if the retiree is a resident of Portugal for tax purposes.

There is one more important note that we have to make. The 0% tax on foreign income is available to a non-habitual resident of Portugal if he/ she comes from a country that has a double taxation avoidance agreement with Portugal. The 10% pension tax is available to the pensioner residing in Portugal even if his/ her home county has not signed such an agreement with Portugal on the condition that the country is not on the black list of tax havens that the Portuguese authorities maintain. The list contains about 80 jurisdictions and you are welcome to inquire with us if your home country is on the black list. If it is, your pension tax is going to be anywhere between 14.5% and 48% in Portugal.

Requirements for becoming a non-habitual resident in Portugal

We would like to reemphasize that NHR is not a legal resident status in Portugal. Rather, it is a special tax regime available to those foreigners who already hold a legal residence permit in the country. It is also available to the Portuguese nationals who resided in a foreign country for tax purposes for 5 years or more. That is to say, the NHR status is an opportunity to save on taxes for those Portuguese natives who have spent a long time living outside the country of their birth. Please note that all applicants for NHR in Portugal (Portuguese nationals or not) have to have resided in a foreign country for tax purposes for at least five years.

The second essential requirement that you have to meet to qualify for NHR in Portugal is living in the country for 6 to 12 months before filing an application for NHR. Filing such an application means filing an application for a change of tax residency, as a matter of fact. The requirement to spend more than half a year in the country to become eligible for tax residency there is a commonly practiced approach. In the case of Portugal (as well as a number of other national states), you do not have to spend consecutive six months in the country to qualify for tax residence. Spending more than half a year in Portugal within a calendar year is enough.

Finally, you have to acquire a Portuguese tax identification number (a NIF, as it is abbreviated in Portugal). You have to contact the tax office in the region of Portugal where your place of residence is located and file an application. You have to have a tax representative in Portugal in order to do that. A lawyer who is a Portuguese citizen or a legal firm registered in Portugal can act as your tax representative in the country. Offshore Pro Group has partners in the country who can fulfill the role of your tax representative in Portugal.

Please note that citizens of EU countries also have to register with the Portuguese tax authorities if they wish to acquire the NHR status. It is true that an EU citizen can live and work in any country that is a member of the Union but taxes are payable at the national level anyway. So if you would like to gain access to the tax incentives that Portugal offers to foreign nationals, you have to acquire a NIF in the country in any case.

Your NIF is going to be a unique nine-digit number and you will have a plastic card or a certificate that carries the number. You will also have an account at the Portuguese fiscal service website. Probably, you will have already opened a bank account in Portugal when applying for a NIF. After all, you will have been residing in the country for at least six months prior to filing the application and a bank account is required to pay the utility bills, for example. If you don’t have a bank account in Portugal, you will have to set one up to acquire the NHR status anyway. We will be happy to assist you in the matter.