Portugal’s NHR Scheme: What Expat Tax Breaks Might You Be Entitled To?
What is The Portuguese NHR Scheme?
The Portuguese non habitual resident (NHR) tax aims to attract investors and professionals who can contribute significantly to the country’s international competitiveness with their affluence, skillsets and cultural influence. By offering tax savings, the scheme entices High Net Worth Individuals (HNWIs) and professionals from certain desired fields to become tax residents in Portugal. With more than 10,000 current NHRs, the scheme is a huge success.
Who is the NHR Scheme for?
To qualify for NHR, you must live overseas, not have been a tax resident in Portugal within the last five years and achieve Portuguese residency.
Residency criteria include living in Portugal for 183 days a year or have your primary home there. We could certainly think of worse places to spend half the year than Portugal— with its warm climate, rich culture, mountainous backdrop— and choice of stunning Atlantic or Mediterranean coastlines.
What are you entitled to under The NHR Scheme?
The reputation of Portugal as a tax-free haven is often undeserved. Still, it’s not without foundation. The NHR status entitles you to various tax exemptions or reductions for the first 10 years of living in Portugal. Your entitlement could include:
A reduced tax rate on employment or self-employment income
You may benefit from a flat 20% income tax rate on your domestic Portuguese income if it’s considered a “high-value activity”. This pre-defined list changes every few years and includes professions in science, the arts, tech and business.
Tax-free foreign income
How much tax you pay on your foreign income depends on the Double Taxation Agreement (DTA) between the source country and Portugal. If there is no treaty, OECD rules apply. This means while you may be exempt from tax on your foreign income in Portugal, you’ll likely have to pay it elsewhere.
But, the NHR exemption really pays off for expatriates with passive income. This is because even when taxation doesn’t happen in practice in the source country due to exemption, DTA rules can apply.
For example, for UK non-residents, dividends come under the category of “disregarded income” so aren’t taxed. Nor are they taxed in Portugal. So, if your income comes from dividends paid out by foreign businesses, you can effectively enjoy it tax-free. The same is true for royalties, interest, income from foreign rental property and capital gains from property.
Other Portugal tax haven benefits
- No inheritance tax
- No gift tax
- No wealth tax
- Only 10% tax on pension income
Are there any downsides to The NHR Scheme?
The first is that capital gains tax (with the exception of foreign source real estate) is no longer tax-exempt. And, while capital gains on foreign property aren’t directly taxable for expats in Portugal, all is not as it seems: it’s “exempt with progression”, which means gains will be added to your annual taxable income.
Also, retirees are no longer exempt from paying tax on their pensions; there’s now a 10% flat rate applied to any foreign pension income. This is still extremely attractive compared with taxation rates in many other countries, so barely qualifies as a drawback.
You’ll also still need to pay social security. This totals 11% of gross income for employees. The self-employed have slightly more complex rules. But, it may be possible to prove an exemption if you currently pay social security in another country. And it does mean you get social security benefits, like healthcare and state schooling, if you need them.
How to apply for NHR Status in Portugal
Here are some steps to follow if you want to get NHR status in Portugal:
- Secure residency status in Portugal. You can do this without a visa if you’re an EU/EEA/Swiss citizen. Non-EU citizens must first obtain a residence permit, which is mainly achieved through the Golden Visa or Passive Income Visa.
- Apply for a Portuguese NIF – a tax identification number. You can do this at your local government finance office, and you’ll need to provide proof of residence (like a utility bill, tenancy agreement etc) and your residency certificate/visa and passport.
- Change your tax residence to Portugal. This is a relatively straightforward process, much the same as applying for the NIF.
- Apply for your NHR status. You must apply before 31st March of the year following the year in which you became a tax resident. You can apply online, and they will reach a decision within two weeks.
NHR Portugal: What happens after 10 years?
If you are a tax resident in Portugal for longer than 10 years, you no longer qualify for NHR status—your income and gains will be taxed at full rates. You can apply for full residency if you want to remain in Portugal, and there may still be some tax breaks available. You’ll need a financial adviser who’s an expert in expat tax issues to determine your best way forward.
In fact, you’ll need an expert expat financial adviser to navigate the NHR from start to finish
The nuances of the NHR mean that tax-free (ish) living is possible, but you’ll need careful tax planning. You can use a free Portugal NHR tax calculator, like this one, but you won’t be able to beat the advice of a qualified professional financial adviser specialising in expat tax planning. This will help you maximise your NHR status and get every ounce of value out of it.
Find out if Portugal’s the best place for you to grow your wealth by emailing us at info@galileo-wealth.com or completing our contact form.
Hear from an existing client in Portugal
Chris took over my plan from another adviser. Since becoming one of his clients the service I have received and the performance of my investments has been first-rate. Immediate answers to questions via email, suggestions for my portfolio, no wasting of my time and always in good humour, Chris ticks every box!
John, Portugal
