Almost three weeks have passed since Prime Minister Acosta annou€nced during a television interview that the Non-Habitual Residence (NHR) Program would end for new applicants in 2024. While existing beneficiaries of NHR can continue to avail themselves of their ten years of tax incentives under that program, the announcement alluded to an ending the program’s availability for new applicants was quickly approaching. While that announcement was naturally vague on the specifics and exact timing of when that door would shutter to new applicants, some details have since come to light, so we naturally thought it would be useful to provide our clients and those who follow our blog posts, podcasts and other media with a new update on this dramatic (and for many, traumatic) policy change affecting those preparing for and/or considering a move abroad to Portugal.
- Important Dates to Know: December 31, 2023 and March 31, 2024. Portugal’s government has prepared information concerning the 2024 fiscal budget, which includes proposed key deadlines for new NHR applications. First, the initial application for NHR must be submitted by December 31, 2023. No applications for NHR status will be reviewed if they are submitted at any time in 2024 or thereafter. Thereafter, those applications submitted on time (before the end of 2023) will need to have completed the approval process by March 31, 2024. Because the approval process is largely out of the applicant’s hands and the process has traditionally taken several months, this is a potentially concerning deadline for those who are only able to complete their application for NHR towards the end of the window for applications closing on December 31.
- The New “Incentivised Tax Scheme” (ITS): Portugal’s replacement program for NHR (???) While there are very little details that have been made available as of today regarding what the ITS program will look like, those details that have been disclosed are absolutely subject to change as the policy remains on the Portuguese government’s proverbial drawing board. At the very least, we now know that there is likely to be a new program of tax incentives that the government intends to put into place in 2024 as they phase out the NHR program. Again, very little is know for certain at this time, but it appears that the salient features of the new ITS program will include (1) a 20% flat tax on income from employment and self-employment, and (2) A fifty percent (50%) exemption on “professional income,” capped at €250,000 for the first five years of tax residency.
As with the original NHR program, two prerequisites to applying for ITS have been discussed: (1) that the applicant first become a tax resident of Portugal, and (2) that the applicant cannot have been a tax resident of Portugal for any of the prior five years.
Much still remains unclear at this time. In fact, I’m not sure whether the five-year limitation applies both to employment and self-employment income as well, or if this applies only to professional income.” Moreover, I’m not sure if the exemption is capped at €250,000 or if the 50% exemption applies only to the first €250,000 of professional income. There is little doubt that these features could well look very different by the time questions like these are clarified with a finalized and codified ITS program. That 20% flat tax appears similar to certain features of NHR aimed to attract skilled labor from disearable vocations to come to Portugal to work. However, based on what’s been described about the new program, it appears to be limited to very specialized academic, scientific, R&D or very targeted and particular types of financial/investment expertise to help develop Portugal’s out-moded economy. It seems far more limited than the list of talents that qualified for the special flat tax under NHR.
The Changing Tax Landscape in PT: What It Means For Pensioners, Digital Nomads, and Other Aspiring Expats. The most striking difference between the ITS and NHR schemes so far is the complete absence of any mention of incentives for pensioners. It seems ever more likely now that retirees looking for a tax-friendly European destination should gravitate towards the Greek and Italian programs loosely modeled upon NHR that apply directly to such retirees, France, where U.S. pensions (amongst other U.S.-source income) is protected from French income tax by treaty, or even countries further due East in the EU that simply have income tax rates that compare favorably to U.S. tax rates. After all, the U.S. federal income tax rates are the floor for U.S. expats, and any country with rates at or below those rates should have little to no effect on the aggregate income tax burden for American residents. New target destinations may also become necessary for digital nomads as well as the scope and limitations thereof regarding ITS become more clear as the new budget and incentives are negotiated and refined.
By: Stan Farmer