The new NHR 2.0 and the requirements for applying its exemptions
The end of Portugal’s non-habitual residents’ regime (NHR) led to the creation of a new tax regime aimed at attracting qualified professionals to the country: the Tax Incentive for Scientific Research and Innovation (NHR 2.0).
This new regime provides that, for a period of 10 years, employment and self-employment income derived from scientific research and innovation activities is taxed at a fixed rate of 20%. It also provides for a series of exemptions (with progression and subject to reporting) on foreign-sourced income, with the exception of pension income (taxed progressively up to 53%) and income from blacklisted jurisdictions (taxed at a fixed rate of 35%).
Regarding the legislative approach used in the new NHR 2.0 regime, the mechanism for applying exemptions stands out. For these to apply, the income must fall within one of the eligible categories and be foreign-sourced.
This legislative approach contrasts significantly with that of the former NHR regime, which – except for the exemption of foreign pensions (taxed at a fixed rate of 10% from 2020) – conditioned the granting of exemptions for the remaining income categories on the verification of additional requirements. For example, in the case of foreign-sourced employment income, this income had to be effectively taxed in the source state, and in the case of foreign-sourced investment income, both the residence and the source state should have taxing rights under an applicable double tax treaty (DTT) or, in the absence of a DTT, under the rules of the OECD Model Tax Convention on Income and on Capital.
Tax authorities’ rulings on early redemptions and lump-sum payments from pension plans
The difference in the methodology for applying exemptions, when analysed in light of the Portuguese tax authorities’ interpretation of pension plan payments, may allow taxpayers enrolled in the NHR 2.0 regime to benefit from a total or partial exemption on income arising from early redemptions and lump-sum payments from pension plans (a case-by-case analysis is required). This happens because, although the new regime provides for the taxation of pension income up to 53%, the tax authorities’ rulings have been reclassifying pension plan payments and stating that, under certain rules, early redemptions and lump-sum payments should be regarded as employment income and/or investment income – both categories for which the exemption under the new NHR 2.0 regime only requires that the income be foreign-sourced.
Thus, while under the previous NHR regime the Portuguese tax authorities’ reclassification was disadvantageous for the taxpayer because it tightened the criteria to benefit from exemptions (as mentioned above), the opposite effect occurs under NHR 2.0.
In light of the above, the author believes that the tax authorities’ interpretation partly subverts the spirit of the NHR and NHR 2.0 regimes. This is because, under the former NHR regime – which aimed to provide a more favourable tax regime for pensioners – the tax authorities’ reclassification of early redemptions and lump-sum payments as employment and investment income made it harder to access the exemption (or the 10% tax rate for beneficiaries from 2020). However, under NHR 2.0, which is not intended for pensioners, the tax authorities’ interpretation now allows for the exemption.
What can NHR 2.0 beneficiaries expect from the Portuguese tax authorities?
If the tax authorities were to reclassify income arising from early redemption or lump-sum payments from pension plans as pension income (so that it would not be exempt under the new NHR 2.0 regime), this would mean that the thousands of beneficiaries of the former NHR regime would become eligible for the exemption or the fixed 10% tax rate on pensions.
Additionally, since NHR 2.0 is still in its early stages, in the coming years there will likely be more taxpayers registered under the former NHR regime than in the new NHR 2.0, especially considering the high number of new registrations in the final year in which it was still possible to apply for the regime (2024). These taxpayers will still be able to benefit from the old NHR regime for 10 years starting from the year of registration.
At least for now, there does not appear to be much incentive for the Portuguese tax authorities to change their interpretation on pension plan income, meaning that the true beneficiaries of the status quo might be those who, under the new NHR 2.0 regime, happen to receive income from an early redemption or a lump-sum payment from a foreign pension plan.
