One of the major developments in my practice has been the considerable uptick of expats considering (and consummating) a move to Portugal. Having lived briefly in Lisbon years ago, it’s been a true pleasure to see Portugal not just register on the American expat heatmap, but to become an epicenter of sorts. Portugal’s Non-Habitual Residence (NHR) tax program is a key driver behind this trend.
One of the more negative aspects of American expat life in Europe tends to be the cost of living. This is often the case when it comes to housing, goods, transportation, etc., but it is even more true when it comes to TAXES. Both income taxes and wealth transfer taxes (gift, estate, or inheritance taxes) tend to be much higher in Europe than in the United States. Because the United States uniquely practices “citizenship-based” taxation, this basically means that U.S. federal tax rates are the floor for an American’s global tax liability. However, when a U.S. expat takes up residence in a country with higher tax rates, the new residence country’s tax rates become a higher ceiling. Portugal has managed to attract American expats by substantially lowering that ceiling for a 10-year period of time, and they’ve been wildly successful in attracting U.S. expats as a result.
But before you go buy that dream home in the Algarve, Cascais, Porto, or Cintra, you should get very well acquainted with the NHR program and make sure you understand its details, requirements, and limitations. We’ll get you started on that homework by discussing three important aspects of the program.
Most “Non-Portugal-Source” Income Is Not Taxed In Portugal
If you opt into the NHR Program, which you must do after obtaining a residence visa and before you’ve completed your first year as a tax resident, much of your income from foreign sources are excluded from Portuguese income tax. There are important caveats or exceptions. First, the program changed in 2020 (March 31) regarding foreign pension income (e.g., IRA, 401k, defined benefit pensions, etc.). For those entering the NHR program after March 31, 2020, Portugal will tax foreign pension distributions at the flat rate of 10%. For Americans, this is a change with little consequence, as the Portuguese tax on pensions produces a foreign tax credit that can be used to reduce the remaining U.S. tax liability from those distributions. Also, U.S. Social Security payments and payments from a U.S. federal, state, or local government pension (e.g., a transportation authority pension, the federal TSP, a state government pension, or public school system retirement plan) are only taxable in the U.S., by treaty.
Second, U.S.-based portfolio income (intangible personal property), including dividends and capital gains in taxable brokerage accounts (i.e., not pensions), may still be taxed in Portugal at the Portuguese standard tax rate of 28%. The issue is somewhat unclear under the program, but most Portuguese tax preparers tend to take the conservative position that these sources of income are taxable and not excluded under the NHR program. We would encourage you to find and consult with a tax preparer in Portugal to make the final determination on that issue.
Finally, I would point out that income from consulting or other services performed for businesses outside of Portugal may also be excluded from Portugal’s income tax during the NHR period. For this very reason, Portugal has become a haven not only for U.S. retirees but also for the so-called “digital nomads” working remotely for U.S. (and non-U.S.) companies.
Working in Portugal Is Still Tax-Advantaged While in the NHR Program
The NHR program is not just for retirees, independent contractors/consultants, and digital nomads. If you decide to work in Portugal while participating in the NHR program, Portugal-sourced earned income is taxed at a flat 20% rate instead of those higher progressive Portuguese income tax rates. This might exceed your U.S. federal effective tax rate, or not, depending on your individual income levels. Nonetheless, it is certainly a tax break from standard progressive income tax rates that apply to earned income in Portugal. Moreover, the foreign-earned income exclusion (FEIE) and foreign tax credits from Portuguese income tax paid on earnings should substantially reduce, if not altogether eliminate, U.S. federal tax liability.
“Non-Habitual” Resident Is Not A Particularly Apt Name For This Program
The term “non-habitual resident” implies someone who transits between Portugal and their home country or suggests that NHR participants are merely visiting. However, to be clear, you can buy a home in Portugal (not required, of course), declare Portugal your adopted permanent home, and still qualify for the NHR tax status. The tax benefits of NHR expire after 10 years, but nothing precludes a longer stay and, in fact, I’m sure the Portugal tax authority would appreciate it if many stayed and began paying normal Portugal income taxes thereafter.
Moreover, to qualify for the NHR program, you must first obtain a residence visa and become a tax resident of the country. After you become a Portuguese resident, and only in the first year of tax residency, you may then opt into the NHR program. Beware that you may need to make a significant investment (financial commitment) in Portugal to obtain a residence visa – unless you hold an EU passport – which might simplify the process considerably. In fact, if you qualify for citizenship in another EU country, obtaining such dual citizenship might expedite the process or alleviate some of the financial requirements. Consulting with one of the many immigration services skilled in the Portuguese residence programs is an essential step in the process.
Portugal has become a premier destination for expats, including American expats, looking for a home in Europe that is both comfortable and affordable. The NHR program’s intriguing benefits are worthy of serious consideration to both young globetrotters and retirees alike. As always, please feel free to reach out to Walkner Condon to discuss your specific situation.