Over recent years, the Portuguese government has been consistently stepping up its charm offensive directed at international investors. In the wake of the outright collapse of the Portuguese property for sale in Portugal, officials have been fighting tooth and nail to restore at least some strength and prosperity to the country’s economy. Efforts that have proved enormously effective to date and continue to pique the interests of investors and movers worldwide.
One of the most extraordinary incentives of all being the non-habitual resident in Portugal (NHR) regime, which potentially means a full decade of seriously generous tax breaks. So, if planning to make a move to Portugal for just about any reason, it could turn out to be a surprisingly lucrative decision.
What is non-habitual residency?
In order to understand the benefits of non-habitual residency, you first have to understand how the scheme works. Introduced by the Portuguese government in 2009, the NHR scheme is designed to attract high-value individuals and businesses, under the promise of an extensive tax holiday for the first 10 years. A deal that sounds almost too good to be true, but is nonetheless a reality.
For those who work in Portugal, employed non-habitual residents can qualify from an income tax rate set at a flat 20%. Which has the potential to be an enormous reduction on typical income tax rates, which can go as high as 48% in accordance with earnings. This specific tax break is exclusively open to those working in specified ‘high value-added’ scientific, artistic or technical professions.
Nevertheless, it’s the tax breaks that are available on foreign income that makes the idea of becoming a non-habitual resident in Portugal so appealing.
Tax-free foreign income
Particularly beneficial for retirees and expats generating income from foreign sources, the non-habitual resident program amounts to spectacular savings. Under the scheme, those who qualify are permitted to receive almost any form of foreign income – pensions included – completely tax-free for the first 10 years. Given that the income in question is technically taxable in another country, it is exempt from Portuguese taxation for 10 years.
This provides expatriates with the opportunity to receive their pensions, income from rental properties, capital gains on real estate, dividends, interest and income from non-Portuguese employment with absolutely no taxation whatsoever. Depending on the nature of the income in question – dividends being one example – it may even be possible to legitimately escape taxation in both countries and pay absolutely no tax whatsoever.
Unsurprisingly, things become somewhat complicated when juggling income from a variety of sources and multiple tax liabilities. Hence, it is a good idea to seek professional advice and consultancy if interested in taking part in Portugal’s non-habitual residency program.
Tax-free pension income
One of the most attractive benefits of the non-habitual residency scheme is the way in which it opens the door to tax-free pension income for the first 10 years. Despite the fact that the UK/Portugal tax treaty gives Portugal exclusive taxing rights, most types of UK pensions – state pensions, company pensions, private pensions etc. – are not taxable under the NHR scheme. This means that whichever method you choose to access your pension pot, you’re able to do so as part of the NHR, without the funds been taxed in either country.
Depending on the value of your pensions, this could amount to enormous savings. There are various exemptions where taxation is unavoidable, which include NHS pensions, military pensions and other pensions that are taxable in the UK. Once again, it’s a good idea to seek financial and legal consultancy if looking to make the most of NHR during your retirement years.
How to access NHR benefits
As things stand right now, gaining access to the incredible benefits of the NHR program is relatively straightforward. Just as long as you haven’t been resident in Portugal within the past five years, you stand every chance of qualifying for the scheme. Eligibility is determined almost entirely on meeting basic Portuguese residency requirements. If you fulfil these requirements and successfully achieve Portuguese residency, you’ll also qualify for NHR.
If you have your main home in Portugal, you automatically qualify for residency. You can also obtain official residency by spending a minimum of 182 days per year in the country.
Unfortunately, it’s impossible to know exactly how any current rules and standards may change when the United Kingdom leaves the European Union. Given that the NHR program is open to international movers and investors worldwide, Brexit shouldn’t have any direct impact on eligibility for NHR. However, the same cannot be said for taxation requirements. The way in which the British government works with international authorities on such issues could radically change post-Brexit. Which could mean that some of the available avenues for escaping excessive domestic taxation could be closed or complicated.
As such, it’s highly recommended that those considering a move to Portugal in the near future think about doing so as soon as possible. The opportunity to lock-in the incredible benefits on the table today may not be around forever.
Additional benefits and advantages
Of course, another significant benefit of obtaining official residency in Portugal is qualification for full EU residency. Once again, the way in which Brexit may affect free movement for Brits remains a worrying unknown for millions. Those who move to Portugal and qualify for residency will enjoy free movement between all EU nations.
Even if you fail to qualify for the NHR scheme, Portugal is still an extremely economical and cost-effective place to call home. For one thing, it’s worth remembering that everyday living costs are approximately 30% lower than those of the UK. Immediately amounting to significant savings on an ongoing basis.
In addition, while income tax rates in Portugal can reach as high as 48%, it is nonetheless possible to receive up to 85% of your income tax-free. The taxation structure in general being exceptionally generous for foreign investors and expats. Stamp duty (aka local inheritance tax) is set at a low rate of just 10% and is only applicable to assets within Portugal – children and spouses being exempt entirely.
Individual circumstances
As with all taxation and foreign investment schemes, it would be irresponsible to suggest that the NHR program is suitable for everyone. The best course of action varies enormously from one person to the next, in accordance with their current financial situation, long-term objectives and so on. As such, seeking professional guidance on the potential benefits and drawbacks of moving to Portugal comes highly recommended.
While rushing into these kinds of decisions is never a wise move, it’s nonetheless important to note that the current tax breaks and general incentives may not be around forever. Particularly those considering a move to Portugal from the United Kingdom. While it’s unlikely that the scheme will be radically overhauled or withdrawn entirely in the near future, there are no guarantees regarding the extent of the benefits offered.
With such enormous saving on the cards for the right candidates, now really could be the perfect time to consider starting a new life in Portugal.