The end of NHR?

NON-HABITUAL RESIDENCY (NHR) IS A 10-YEAR PREFERENTIAL TAX STATUS GRANTED TO NEW RESIDENTS OF PORTUGAL AND IT HAS BEEN A MAJOR DRAW TO THE COUNTRY FOR MANY YEARS. MARK QUINN AND DEBRAH BROADFIELD OF THE SPECTRUM IFA GROUP EXPLAIN THE IMPLICATIONS OF THE CHANGES NOW IN PLACE

THE ANNOUNCEMENT at the beginning of October regarding the proposal for the end of NHR in 2024 was unexpected and has caused quite a stir amongst those who had longer-term plans to move to Portugal, as well as for those who may be concerned about the continued attraction of Portugal going forward.

WHAT MIGHT CHANGE? At the time of writing, the proposal is that NHR will be closed to new applications on 31st December 2023, unless the applicant held residency at that date. These residents will have until 31st March 2024 to apply. There is also the suggestion of a new ‘incentivised tax status’ being introduced.

Details are still emerging, and it is not yet known if it will be a hard end on 1 January, a slower ceasing over 2024 or the retention of the NHR scheme but with limitations (as we saw with the Golden Visa). Either way, there are actions you can take wherever you are in your NHR journey.

RECENT AND NEW RESIDENTS If you have not yet applied or if you receive your residency status before 31st December 2023, apply as soon as you can.

MISSED THE BOAT? More careful planning will be needed for those who move after the deadline has passed. Likewise, if you are on the cusp of receiving your residency in time, you should work on a contingency plan should your timelines not align.

As always, planning should ideally start in your originating country so you can make a ‘road map’ to take advantage of any windows of opportunity and tax reliefs in both countries.

However, the need for effective planning will be even more important with the end of NHR as new residents will immediately be subject to the standard rates of tax and will not have the grace period of the NHR period to soften the tax blow if restructuring is required.

Some important considerations for individuals in this position still contemplating the move are:

If still working, there will be no 20% ‘high value’ activity option and earned income will be taxed at scale rates of 14.8% to 48% (plus the potential for solidarity tax at 2.5%/5%). If you can choose how you are remunerated, it may be more beneficial to opt for dividends which are taxed at 28% and do not attract a social security liability.

For retirees, a change to the low 10% tax on pensions could affect how or when you decide to access your pensions. Standard residents are generally taxed at scale rates, but the ultimate tax basis depends on the type of pension.

Those with large investments should look to restructure as interest, dividends and capital gains (on an arising basis, ie sale/switch of funds, even if not withdrawn) all of which are taxed at 28%. There are tax-efficient structures available to residents that offer a shelter from tax in the accumulation stage and provide more beneficial rates of tax on drawdown.

CURRENT NHRS One positive is that those with NHR can keep the advantageous tax status but even so, you should begin planning for the end of your NHR. Some important opportunities exist if you are planning to sell foreign property as the gain is tax-exempt during NHR but taxable afterwards, or if you are drawing tax-free dividends, which will be taxable at 28% post-NHR.

Planning now will allow you to time and control your tax position; this may be switching how income is generated, creating tax structures, or realising capital for the future. Leaving it too late may result in an unfavourable and irreversible outcome.

NOT ALL DOOM AND GLOOM Regarding the end of NHR, we will just have to wait and see, but even if 2024 does spell the end of the scheme for new arrivers, Portugal can still be a very tax-effective place to live. There are many wealthy Portuguese nationals and expats enjoying life in Portugal, and you can too with the right planning.

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