The Portuguese tax landscape for expatriates has been materially impacted by the cancellation of the non-habitual residents (NHR) regime with the Portuguese State Budget Law for 2024, despite the implementation of a transitory regime that allowed individuals who became tax residents in Portugal throughout the year to apply for the regime, as long as certain requirements were met.
The end of the NHR regime came with the implementation of the tax incentive for scientific investigation and innovation, commonly referred to as NHR 2.0.
Overview of the regime
Application criteria
NHR 2.0 has two categories of application criteria: personal and professional.
Personal criteria
The regime is applicable to individuals who:
Become Portuguese tax residents without having qualified as such during any of the preceding five years;
Have not benefited from the original NHR regime; and
Have not benefited, and are not registered, under the former residents’ tax regime.
There are no nationality requirements that must be met in order for individuals to benefit from the regime.
Professional criteria
Interested individuals must also receive income derived from eligible employment or service provision relationships; i.e.:
Teaching at university level.
Scientific investigation with entities integrated in the national science and technology system.
Employment/service activities in entities that may be legally qualified as technology and innovation centres.
Qualifying employment/service activities under the contractual tax benefits for productive investment regime, with entities covered by said regime.
Highly qualified professions in:
Companies with relevant applications, in the first year of employment or the previous five years, for the purposes of the tax regime for investment support; or
Eligible industrial and service companies that export at least 50% of obtained turnover in the first year of employment, or did so in either of the previous two years.
Qualifying activities in companies recognised as relevant for the national economy by the Portuguese Trade & Investment Agency (AICEP) or the Portuguese Agency for Competitiveness and Innovation (IAPMEI).
R&D activities performed by personnel whose wages qualify as eligible costs under the tax incentive system applicable to corporate investigation and development.
Qualifying activities in companies qualified as startups.
Specific legislation governing the application of this regime in the regions of Azores and Madeira is yet to be approved.
From a practical standpoint, the procedures for an application to NHR 2.0 must be concluded by January 1 of the year following the relocation to Portugal.
Features of the regime
Individuals who meet the eligibility requirements for the regime will benefit from:
Reduced taxation, at a flat rate of 20%, regarding employment and/or service provision income derived from eligible activities (as opposed to the general progressive rates system, which may reach 48%, with the possibility of solidarity surcharges being added); and
A tax exemption from foreign-sourced income not sourced in a blacklisted jurisdiction, with the exception of pension income.
The regime is applicable for 10 years; however, beneficiaries must qualify as tax residents and obtain income derived from eligible activities in each year of the application period.
Should an individual covered by the regime cease to be eligible for one or more years, the application of the regime may be resumed for the remainder of the period if the access requirements are met again.
Commentaries to the regime
A major difference between NHR 2.0 and its predecessor is the requirement to perform an eligible activity throughout the duration of the regime. Indeed, while the former regime did not require the applicant to be professionally active, the new regime does require individuals to conduct an eligible professional activity.
Furthermore, by establishing conditions to maintain the application of the regime throughout its duration, the Portuguese legislator introduces an additional degree of uncertainty for applicants, who need to ensure that an eligible activity will be performed for 10 years to avoid the risk of a suspension of the regime.
Under the provisions governing NHR 2.0, an interruption of eligible activities for a period that does not exceed six months will not give rise to a suspension of the tax benefits. However, in comparison with the original NHR, this feature of the new regime may be seen as a factor of instability for individuals pondering a move to Portugal.
Due to NHR 2.0 having been only recently introduced in Portuguese law, practical experience of applications to the regime is scarce. However, the necessity of having different entities, other than the tax authorities, intervening in the procedure – notably, to validate that the professional requirements associated with the regime are met – results in increased bureaucracy when compared with the fairly simple application process for the original NHR.
Even so, NHR 2.0 succeeds in maintaining Portugal’s status as an attractive jurisdiction for expatriates and foreign businesses.
Final thoughts on NHR 2.0
NHR 2.0 creates an interesting opportunity for individuals who perform eligible activities – due to the tax exemption generally applicable to foreign-sourced income, with the exception of pensions – and for companies that intend to establish themselves in the Portuguese market to develop activities covered by the material scope of the regime.
Recent international developments regarding tax regimes applicable to expatriates – notably, the abolition of the UK’s non-dom regime – could encourage a flexibilisation of the criteria that individuals must meet to benefit from NHR 2.0, which could further cement Portugal as an attractive jurisdiction for expatriates and foreign businesses.
