Following up on previous communication regarding the proposed cancellation of the Non-Habitual Resident (NHR) program by the Portuguese Government in FY2024, we have obtained some critical insights upon the presentation of the State Budget Bill for FY2024 by the Portuguese Government to the Portuguese Parliament.
The Portuguese Government tabled the 2024 Budget Bill on Monday, October 10th, which marks the initial stage of a parliamentary procedure, which encompasses the subsequent significant dates:
- Plenary discussion: October 30th and 31st
- Committees discussion: from November 23rd to 29th. This is a phase where political parties (including the party backing the Government) file recommendations for alteration to the first version of the Bill. Numerous revisions have consistently garnered significant levels of acceptance.
- The document’s final discussion and final ballot by MPs, incorporating the modifications resulting from the deliberations held in the legislative assembly, is scheduled for November 29th. The document will reach its final state on the specified date.
Irrespective of the aforementioned and possible modifications, it is a factual observation that the preliminary version of the 2024 Budget Bill anticipates the discontinuation of the existing and widely recognized iteration of the Non-Habitual Residency (NHR) program for prospective applicants commencing from 1st January 2024. No changes in this regard are expected, given the absolute majority of the Government’s party (Portuguese Socialist Party – affiliated to the Party of European Socialists (PES)) in the Assembly of the Republic.
All individuals now benefiting from the status and those who successfully register as NHR before its expiration shall retain all existing advantages without any modifications. It is important to note that only new applicants who become tax residents in Portugal in 2023 or possess a valid residence visa issued on or before December 31st can apply.
Commencing on January 1, 2024, a revised version of the “Non-Habitual Residency” (NHR) program, referred to as the Incentive to Scientific Research and Innovation (aka “the New NHR“), is being suggested for particular groups of professionals:
- Academics in the field of higher education and scientific research;
- Employment opportunities that meet the necessary criteria within the defined realm of contractual benefits to facilitate productive investment.
- Research and development positions are intended for individuals with at least a doctoral degree insofar as these expenses qualify for particular research and development tax benefits.
Individuals who meet the aforementioned criteria and have not been considered tax residents of Portugal in the preceding five years will have access to a 20% tax rate on professional income earned within Portugal. Furthermore, these individuals will have the opportunity, as tabled in the 2024 Budget Bill, to avail themselves of a tax exemption about specific types of income derived from foreign sources, including but not limited to earnings from job or self-employment, dividends, profits from the sale of assets, rental income from real estate, and interest. However, it is evident that the scope of this “New NHR” is more limited, particularly in its preliminary iteration that will be deliberated in the Parliament.
It is noteworthy to mention a novel tax incentive that will be available to individuals who establish Portuguese tax residency on or after 1 January 2024, provided they have not been classified as such within the preceding five years. This incentive entails a 50% exemption from personal income tax for a duration of five years, irrespective of the beneficiary’s professional specialization. Notably, the previous requirement of meeting high-added-value criteria, as observed in the Non-Habitual Residency (NHR) program, will no longer be applicable. The exemption is subject to a maximum limit of 250,000 EUR per annum in terms of annual income, implying that any income over this level will be subject to taxation per the prevailing general tax rates.
In conclusion, these are the main points to be considered. It is important to consistently keep in mind that the Budget Bill is still susceptible to revisions, and it should be noted that the assessment provided is preliminary in nature.
If an individual can establish Portuguese tax residence before 31 December 2023, it is advisable to seriously contemplate proceeding with this decision until the conclusion of the current year. By doing so, one may secure the application of the existing Non-Habitual Resident (NHR) regime regulations for a period of 10 years.
If an individual cannot establish Portuguese tax residency before December 31, 2023, there are still viable alternatives to consider for the future. In addition to the potential establishment of a more comprehensive transitional framework about the existing Non-Habitual Residency (NHR) regulations through parliamentary deliberations, individuals who become tax residents of Portugal would benefit from a 50% reduction in taxation on employment and freelancing earnings for a period of five years, subject to a maximum annual income threshold of 250,000 EUR.
As such, if the Parliament ultimately ratifies the present iteration of the 2024 Budget Bill, Portugal will retain numerous tax incentives for personal income tax and corporate income tax. Consequently, the country will continue to appeal significantly to investors and expatriates whose primary income sources are employment or freelance.
Furthermore, the objective of promoting innovation and the development of the start-up ecosystem is strengthened by implementing a 12.5% corporate income tax rate applicable to the initial 50,000 EUR of taxable revenue for eligible firms, together with establishing a distinct tax framework for stock options.
However, individuals who primarily receive passive income from foreign sources such as dividends, interest, royalties, and pensions, and do not meet the eligibility criteria for the “new” Non-Habitual Residency (NHR) program, may view the proposed amendments as unsatisfactory. Nevertheless, Portugal’s other favourable tax characteristics, such as the absence of general wealth or inheritance taxes and a tax system conducive to cryptocurrencies and specific tax regimes, will continue attracting new residents.
Updates of November 14, 2023:
On November 14, the Socialist Party proposed the alterations to the Budget Bill submitted by the Portuguese Government.
Taxpayers who become residents for tax purposes by 31 December 2024 and who declare, for the purposes of their registration as a non-habitual resident, have one of the following elements (these conditions were approved at committee level on November 27, 2023):
- Promise or contract of employment, promise or secondment agreement entered into until December 31, 2023, whose exercise of functions must take place in national territory; or
- Lease agreement or other agreement granting the use or possession of real estate in Portuguese territory entered into until October 10, 2023;
- Reservation contract or promissory contract for the acquisition of a real right over real estate in Portuguese territory entered into until October 10, 2023; o
- Enrollment or enrollment for dependents in an educational establishment domiciled in Portuguese territory, completed by October 10, 2023;
- Residence visa or residence permit valid until December 31, 2023; or
- Procedure, initiated by 31 December 2023, for the granting of a residence visa or residence permit with the competent authorities under the legislation in force applicable to immigration, namely through the request for scheduling or effective schedule for the submission of the application for the granting of a residence visa or residence permit or, Also, through the submission of the application for the granting of a residence visa or residence permit.
- The taxable person who is a member of the household of the taxable persons referred to in the previous paragraph.
Notwithstanding the above, we maintain the recommendations below.
Updates of November 27, 2023:
Portuguese parliamentarians authorized a rule that modifies the tax regime for non-habitual residents by establishing that employees of startups’ are eligible to utilize the NHR.
The NHR regime is scheduled to be discontinued in the proposed State Budget for 2024. Access to it will remain restricted to individuals whose income is derived exclusively from scientific research and higher education teaching careers, or qualifying employment opportunities covered by the contractual benefits for productive investment provision of the Investment Tax Code.
The solution proposed in the State Budget for 2024, which faced significant opposition, particularly from tax experts who deemed it ineffective, was amended by the PS and approved in a specialized session today. The amendment broadened the range of occupations eligible for a 20% IRS rate for ten years.
With the PCP (Communists) and Bloco de Esquerda (Marxists/Trotskyists) voting against and Livre (Greens), PSD (Liberal conservative), and Chega (Far/Alt-Right) abstaining, the proposal was approved.
Therefore, this tax incentive for scientific research and innovation will be available to individuals who, after not having resided in Portugal for the preceding five years, obtain tax residency in the country and hold positions “in entities certified as startups” as defined by the legislation, and are both tax residents and employees of said entities.
In jeopardy are organizations that maintain an annual employee count not surpassing 250 and have an annual attrition rate not exceeding
organizations with the following criteria: an annual revenue of no more than 50 million euros, operation for a minimum of ten years, head office or representation in Portugal, or a minimum of twenty-five employees situated in the country; and, these prerequisites not being the result of a major company demerger. organizing a company.
The tax system will additionally apply to “qualified jobs recognized by the Agência para o Investimento e Comércio Externo de Portugal, E. P. E. or by IAPMEI. E. or by IAPMEI – Agência para a Competitividade e Inovação, I.P. (Agency for Competitiveness and Innovation) as relevant to the national economy, namely in the context of attracting productive investment”.
The Socialist proposition further expands the program to include “employment or other activities conducted by tax residents in the Autonomous Region of Madeira,” with specific conditions to be established through legislative decree. Particulars that will be specified through a regional legislative decree, as President of the Madeira Regional Government Miguel Albuquerque (PSD) has already declared.
Income falling under categories A (salaries) and B (self-employment income) is subject to the 20% rate.
The special debate and vote regarding the State Budget for 2024 commenced on November 23 and will conclude on November 29. concludes on November 29, the date of the ultimate vote on the State Budget for 2024 as a whole, where the future of the NHR will then be decided by the Portuguese President.
Given our historical experience and in anticipation of potential administrative bottlenecks during the festive season, we strongly recommend applications be submitted no later than November 30th, 2023, to provide a comfortable buffer for any unforeseen complications or delays.
- Establish Residency: Ensure all necessary steps to become a resident for tax and immigration purposes are completed.
- Access the Tax and Customs Authority Web portal: Ensure you have the access and information to navigate and utilize the Portuguese Tax and Customs Authority web portal efficiently.
- File NHR Application: Submit your NHR application with all relevant documentation and information per the current NHR program guidelines.
Further updates on the above guidelines may occur depending on changes to the bill proposed today.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as legal, financial, or investment advice. Please consult with professionals specialized in Portuguese taxation before making any tax-related decision.
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