Portuguese Gov’t Moves to Bring Back Watered-Down NHR Tax Regime

Portugal’s new government aims to reinstate the non-habitual resident (NHR) tax regime that the former Socialist administration axed just last year. This time, however, the preferential rates would be limited to salaried and self-employed workers.

Finance Minister Joaquim Miranda Sarmento told the Financial Times yesterday that a revived NHR regime proposal would be part of a larger package of economic reforms that the government will attempt to get approved in the country’s parliament, where it holds only 80 of 230 seats.

If approved, the new NHR scheme, like the previous one, would allow for a reduced, flat 20% income tax rate on income from employment or self-employment for ten years to foreigners or Portuguese citizens who have not been tax residents in the country for the preceding five years.

Portuguese tax residents who earn incomes from employment and self-employment (whether as NHRs or otherwise) are additionally subject to social security charges of 11%, bringing the effective tax rate to 31%.

Unlike the former iteration of the regime, however, the new version would not provide income tax exemptions or reductions on dividends, capital gains, or pensions.

This adjustment, explained the government in a statement, aims to address issues that arose between Portugal and Sweden and Finland, whose governments had complained of Portugal’s luring their retirees away with a 10% flat tax rate on pensions. Exemptions on capital gains taxes under the NHR had, in any case, been limited in scope to very particular circumstances.

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Originally introduced in 2009, the previous government scrapped the NHR regime last year, ostensibly over concerns about rising property prices in major urban centers. It did, however, maintain a transitional arrangement for applicants who applied before the end of 2023, along with a new regime targeting scientific research and innovation sectors.

While the government acknowledged that the measures were unlikely to attract capital to the same extent as the previous version – “it’s not sufficient, but it’s something,” Miranda Sarmento told the Financial Times – it does expect it to help large companies to attract highly skilled foreign workers, such as engineers, researchers, and managers.

Considering its minority in parliament, the government will need the support of either the Socialists or right-wing Chega to push through the legislation.

Miranda Sarmento acknowledged that bringing in high-earning foreigners while simultaneously attempting to resolve the country’s housing crisis would require a delicate approach:

“We need skilled workers and economic growth. We will have to balance that with more affordable houses,” he told the FT. “Obviously, if we have just one side of the policy, there will be more affordable houses but less economic growth. So we have to balance these two parts.”

Portugal’s reintroduction of the NHR would see it once again enter the European competition to attract high-earning tax residents through preferential regimes. Italy’s EUR 100,000 lump-sum tax regime has been very successful in attracting the very rich, while Greece has a lump-sum regime of its own modeled on the Italian one.

Cyprus, Malta, and Ireland also offer attractive remittance-basis schemes, while Spain’s Beckham Law offers a reduced income tax rate for up to six years. The UK recently bowed out of the competition by scuttling its non-dom regime, which had served to bring the world’s wealthy to London for more than 200 years.

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