NHR - Termination and Replacement regimes - Interested parties list - Outcome

The Portuguese Budget Law for 2024 was approved on 30 November 2023.
We can now confirm that the Non-habitual tax resident (NHR) regime was indeed revoked starting January 1, 2024.
A grandfathering regime was approved to cover some special situations.
Concerning the new proposed material incentive regime there were a few adjustments. The ex-residents regime was also clarified.
KEY TAKEAWAYS
Individuals becoming tax residents of Portugal until December 31, 2023, can apply for the NHR regime until March 31, 2024.
Individuals who become tax resident of Portugal until December 31, 2024 can apply for the NHR regime until March 31, 2025, provided they meet the grandfathering regime requirements.
Due to the approved amendments to the grandfathering regime those who are interested to move to Portugal under the NHR regime with effect to 2023 must take immediate action NOW:
For Non-EU nationals, initiate of your immigration process still in 2023.
For EU nationals (and Iceland, Liechtenstein, Norway, Principality of Andorra and Switzerland nationals):
Check the criteria of the grandfathering regime and see what you can still meet (e.g. promise or employment contract, promise or secondment agreement signed by December 31, 2023, whose duties must take place within national territory). Failing those criteria,
Obtain (i) now, asap, in December 2023, a Portuguese tax number and an access to the Portuguese tax web portal (even as non-Portuguese tax resident; several online service providers do this for a small fee), (ii) secure permanent housing in Portugal via a documented agreement (namely a standard lease – not a short-term rental – lasting for at least one year) with a starting date in December 2023, (iii) register in person in Portugal in December 2023 at the municipality of chosen residence (some require booking and slots for this are disappearing fast), (iv) request online the tax number status change to that of a Portuguese tax resident still in December 2023 (otherwise more complex procedures to retroact the requested change to 2023 will occur) and (v) apply online for the NHR regime until 30 March 2024.
Retired / pensioners and high net worth individuals living from their savings and deriving passive income only do not qualify for the new regime.
Due to the significant number of uncertainties surrounding the new material incentive regime (dubious legal wording, need for Tax Authorities’ IT updates and a clarifying Administrative Ruling, need for Ministerial Orders, Government dismissal with limited powers, political climate in Portugal with parliamentary elections in March 2024), we recommend that, if the NHR is beneficial to you, please opt for it and do not “gamble” with this new regime.
GRANDFATHERING REGIME
The existing regime continues to be applicable, until the end of the initial 10-year period set out in the Portuguese Personal Income Tax (IRS) Code, counting from the date on which the taxpayer became resident in Portuguese territory:
a) To the taxpayer who, on December 31, 2023, is already registered as a non-habitual resident in the taxpayer register;
b) To the taxpayer who, on December 31, 2023, meets the conditions to qualify as a resident for tax purposes in the Portuguese territory;
c) To the taxpayer who becomes a resident for tax purposes by December 31, 2024 and who declares, for the purposes of registering as a non-habitual resident, to have one of the following elements:
Promise or employment contract, promise or secondment agreement signed by December 31, 2023, whose duties must take place within national territory;
or,
Lease contract or other contract granting the use or possession of property in Portuguese territory concluded until October 10, 2023;
or,
Reservation contract or promissory contract for the acquisition of real rights over property in Portuguese territory concluded by October 10, 2023;
or,
Enrollment or registration for dependents, at an educational establishment domiciled in Portuguese territory, completed by October 10, 2023;
or,
Residence visa or residence permit valid until December 31, 2023;
or,
Procedure, initiated by December 31, 2023, of granting a residence visa or residence permit, with the competent entities, in accordance with the current legislation applicable to immigration matters, namely through the request for an appointment or actual appointment for submission of the request for the granting of a residence visa or residence permit or, also, by submitting the request for the granting of a residence visa or residence permit.
To the taxpayer who is a member of the household of the taxpayers referred to in the previous paragraphs.
For the purposes of the provisions of paragraphs c) and d) of the previous paragraph, the taxpayer must request registration as a non-habitual resident, electronically, on the Portuguese Tax Web Portal, after the act of registration as a resident in Portuguese territory, until March 31 of the following year, by reference to the year in which he became resident in that territory.
NEW REGIME
In what concerns the new proposed material regime, there are a few adjustments, but we highlight, as of now, the following features:
Taxpayers who, by becoming tax residents in 2024 under the terms of paragraphs 1 and 2 of article 16 of the IRS Code, and who have not been resident in Portuguese territory in any of the five previous years, can benefit from a tax incentive regime which allows them to be taxed, at a special rate of 20% on net income of categories A and B (in general; specific distinctions exist which may not allow self-employed income in certain cases) earned within the scope of the specific activities detailed in the regime, for a period of 10 consecutive years from the year of registration as a resident in Portuguese territory, without prejudice to the option for the aggregation of income to the progressive brackets.
The right to be taxed under the terms of this regime, in each year of the period referred to, depends on the taxpayer being considered tax resident in Portuguese territory, at any time during that year and continuing to earn, each year, income included in the exercise of one of the specific activities listed.
For the purposes of the provisions of the previous paragraph, it is considered that the taxpayer continues to earn income included in one of the activities listed, whenever the beginning of the exercise of the new activity occurs within a maximum period of six months after the end of the activity previously carried out.
The taxpayer who has not enjoyed the right to be taxed in one or more years of the 10-year period may resume enjoyment of the regime in any of the remaining years of that period, from the year, including, in which he is once again considered a resident for tax purposes in Portuguese territory and once again receives income from the exercise of one of the activities listed.
Cannot benefit from the provisions of this regime the taxpayers which:
Benefit or have benefited from the non-habitual resident regime;
Have opted for taxation under article 12-A (Program Return / Regressar) of the IRS Code.
In cases where registration is carried out outside the period defined in a Ministerial Order, the special taxation takes effect from the year in which registration is carried out and is in force for the remaining legal period provided for.
This regime is not applicable to income received in relation to jobs covered by subparagraph c) of paragraph 2 of article 22 of the Investment Tax Code.
This new regime provided can only be used once.
These listed activities qualify for the regime:
Teaching in higher education and scientific research, including scientific employment in entities, structures and networks dedicated to the production, dissemination and transmission of knowledge, integrated into the national science and technology system, as well as jobs and members of governing bodies in entities recognized as technology and innovation centers, within the scope of Decree-Law no. 126-B/2021, of December 31; or
Research and development of personnel whose costs are eligible for the purposes of the tax incentive system in research and business development, in accordance with subparagraph b) of paragraph 1 of article 37 of the Investment Tax Code; or
Qualified jobs posts and members of Statutory Bodies, in entities that carry out economic activities recognized by the Agency for Investment and Foreign Trade of Portugal, E. P. E. or by IAPMEI - Agency for Competitiveness and Innovation, I.P. as relevant to the national economy, particularly in the context of attracting productive investment, as well as reducing regional asymmetries.
These other listed activities, that we view as particularly relevant, also qualify:
Highly qualified professions, to be defined by Ministerial Order issued by the members of the Government responsible for the areas of finances and economy. As per a transitional Ministerial Order the current activity list of the NHR applies. Please check FAQ5 on www.nonhabitualtaxresident.com
a)I) developed in industrial and service companies, whose main activity corresponds to one of the CAE codes defined in a Ministerial Order and which export at least 50% of their turnover, in the year in which the corresponding duties started or in any of the two previous years.
The following activities (as an example) are encompassed as per a transitional Ministerial Order; i) IT consultancy and programming and related activities, ii) Information services activities (ex. data processing and web sites), iii) administrative and support service activities provided to companies.
a)II) developed in companies with relevant applications, in the year in which the corresponding duties started or in the five previous ones, which benefit or have benefitted from the ”Regime Fiscal de Apoio ao Investimento” (RFAI), in accordance with chapter III of the Investment Tax Code.
The RFAI is a tax benefit that allows companies to deduct from the tax collected a percentage of the investment made in fixed assets (tangible and intangible). However, the percentage allowed to be deducted differs according to the region in which the investment is made (Lisbon and Algarve are less attractive in this regard).
Jobs posts and members of statutory bodies in entities certified as start-ups, under the terms of Law no. 21/2023, of May 25.
The mentioned legal regime defines the concept of startup as any company that; i) has been in operation for less than 10 years, ii) employs under 250 employees, iii) has an annual turnover of less than €50 million, iv) is not the result of a transformation or split from a large company, and no large company holds a direct or indirect majority stake in its capital, v) has its headquarters or permanent representation office in Portugal, or it employs at least 25 employees in Portugal, and vi) meets one of the following conditions: 1) It is an innovative company with high growth potential, innovative business models, products or services, and falls within the scope of Ordinance 195/2018 of July 5, or has been recognized as suitable for research and development (“R&D”) activities by the Portuguese National Innovation Agency or certified through the recognition process for technology sector companies, except for promotional, intermediation, investment, or real estate development companies; or 2) It has successfully completed at least one round of venture capital financing from a legally qualified venture capital investment entity supervised by the Portuguese Securities Market Commission (CMVM) or a similar international authority, or through equity or mezzanine instruments provided by investors who are not founding shareholders of the company; or 3) It has received investment from Banco Português de Fomento, S. A., or from funds managed by it, or from its subsidiaries, or from one of its equity or mezzanine instruments.
Jobs posts or other activities carried out by tax residents in the autonomous regions of the Azores and Madeira, under terms to be defined by regional legislative decree. It is expected that the Madeira regime, which is ruled by the center-right wing party, may be significantly more favorable than the national one, something which was already publicly announced by the head of the Madeira Government. Please be reminded that Madeira also benefits from a Free Zone with a 5% Corporate Income Tax rate regime, among other tax benefits.
Additionally, taxpayers who can benefit from this tax incentive regime regarding their Portuguese employment or self-employment activities (income categories A and B), also benefit from a tax exemption (with progression) on several sources of non-Portuguese income: employment/self-employment income, capital income, capital gains, and rental income.
Ironically, the new regime set in the Proposal can potentially be more advantageous than the previous one for the qualified and employed groups of people that can benefit from it as foreign income is always exempt for all categories of income (i.e., employment income performed abroad, self-employment income performed abroad, foreign rental income, capital gains in foreign assets), with the exception of pension income, which is never exempt and will be taxed progressively up to a 53% tax rate.
As an exception, the law states that qualifying taxpayers that derive foreign income from a non-resident entity without a permanent establishment in Portugal, located in a country, territory, or region subject to a “favorable more advantageous tax regime” (i.e., a blacklisted tax haven) are subject to certain tax rules (for capital income and capital gains) that envisage an autonomous 35% rate.
This provision is not fully clear: i) does it disqualify all the non-blacklisted income from taxpayers that have blacklisted income from the benefit regime and taxes all the income of the taxpayers at 35%? ii) does it tax all the blacklisted income from taxpayers at 35%? iii) does it tax only the blacklisted capital income and gains from taxpayers at 35%? This point needs clarification.
In any case, the 35% autonomous tax rate conflicts with the Double Taxation Conventions entered into by Portugal with blacklisted tax havens, which force Portugal, at least, to grant a credit for the foreign tax paid. And, in our view, also conflicts with the European Union free movement of capital provisions, which should not enable a tax rate higher than 28%.
Since non-blacklisted foreign income is automatically exempt:
there should no longer be the need to interpret the Double Tax Treaties concluded between Portugal and the source country or the OECD Model Tax Convention and intertwine it with Portuguese source and NHR rules – which could potentially jeopardize the exemption. Portuguese domestic rules on income sourcing will determine what is foreign source income, which is a paradigm shift. This is currently a relevant issue when it comes to capital gains on securities as Portugal usually taxes such income – but with the approved amendments it will no longer do so;
the scope of the exempted self-employment income is no longer limited as it does not need to derive from a High Value-Added activity. Of course, the scope of the beneficiaries was also narrowed, but this does not change the fact that any self-employment income earned performed abroad is exempt, while it currently has to derive from a High Value-Added activity to be so;
employment income no longer needs to be subject to taxation in the source country in order for the exemption to apply.
The access to this regime implies previous registration with the Tax Authorities regarding 10. a) above; with Start-up Portugal regarding 10. b) above; with the Agency for Investment and Foreign Trade of Portugal, E. P. E. or IAPMEI - Agency for Competitiveness and Innovation regarding 10. c) above; and with the autonomous regions of the Azores or Madeira regarding 10. d) above.
This mandatory registration procedure will be regulated by a Ministerial Order that does not yet exist. Notwithstanding, regarding a) above, the new legal regime expressly states that, until the relevant Ministerial Order is approved, the mandatory registration should be made with the Tax Authorities via the Portuguese Tax Web Portal (“Portal das Finanças”); this will still imply small adjustments to it in order to be put it in practice, but the online registration procedure should be as streamlined as that of the current NHR regime. We are hopeful that this IT issue will be solved in January 2024.
Several additional layers of uncertainty exist:
The fulfillment of the necessary conditions for the individual to get a special rate of 20% on net income from categories A and B is, in some cases, out of his/her control (e.g. the company exporting at least 50% of the turnover or making certain investments).Employers will be reluctant to withhold tax at 20% on conditions that are uncertain and so employees may face excess withholdings before they can claim the tax back on their tax returns, after monitoring their employers’ performance / accounts.
The concept of “export” needs to be clarified.
The indirect link to “export” is concerning for companies given EU State Aid and WTO rules on export subsidies.
In some of the listed activities it is doubtful if a self-employed service provider can be encompassed in the regime or if only an employee can.
AMENDMENTS TO THE “EX-RESIDENTS” REGIME
Currently, there is a tax benefit in place for people who (i) became/become tax resident in Portugal from 2019 to 2023 (ii) have been previously tax resident in Portugal and left before a certain date; (iii) have not been tax resident in Portugal during the 3 years prior to the new residence; (iv) have their Portuguese tax obligations in good standing and (v) have not applied for the NHR regime.
Other current main features are:
The benefit corresponds to a cut in half of the tax base (not to be confused with tax rates) applicable to all employment and self-employment income earned (from foreign and Portuguese source);
No reduced rate as the general and progressive rates apply instead;
No need to register for it. One can apply for its benefits while filling the tax return;
No need to perform a specific activity to be eligible.
The benefit changed with the Budget Law approval: (a) it lasts during a period of 5 years and (b) the 50% exclusion of the taxable base is limited to the first € 250,000 of income from employment and self-employment income. This means that if an individual has € 500,000 of such income € 250,000 will go untaxed, the other € 250,000 being subject to the progressive tax brackets.
It is still necessary to have the Portuguese tax obligations in good standing and not apply for the NHR. A Parliamentary amendment clarified that it is still necessary to have been resident in Portugal before; on the other hand, the applicant must not have been resident in Portugal during the 5 years prior to entry into this regime.
The Proposal foresees that the regime will only apply for those who move until the end of 2026.
With this being said, the “ex-residents” regime may be a viable option for newcomers that were formerly Portuguese tax residents obtaining employment or self-employment income either abroad or in Portugal.
Keeping the ex-residents regime without the old NHR risks EU non-discrimination challenges (as ex-residents are most likely Portuguese nationals, and covertly reserving a tax regime for those is a violation of the EU free movement of citizens, and an horizontal discrimination between ex-residents and never before residents; the new Italian inpatriate regime is conscious of this problem). We expect that there will be never-before tax residents in Portugal that will challenge this issue.