Intro to Changes in Portugal

Heading into 2023, U.S. (and non-U.S.) expat immigration to Portugal was on an absolute tear.  Over the past several years, Portugal has morphed from a popular choice for British retirees (pensioners) to retire and live in or near the southern coastal region of the Algarve into a country whose resort and urban areas have all been infiltrated by a massive influx of foreign immigrants, both working and retired.  Portugal has indeed become a hotbed for U.S. expats and immigrants from elsewhere in the EU and beyond that wish to enjoy one of the best climates in the world. But how sustainable will this trend prove to be?

Post-Great Recession Reforms Ring in A New Era of Programs to Attract Expats 

A key driver of Portugal’s newfound popularity as an American expat destination were tax and legal reforms over the past decade.  First, the non-habitual residence (NHR) program was enacted to entice immigration of wealthier foreigners and foreigners with specialized, attractive professional skills. The upshot of NHR was that most non-Portuguese-source income became sheltered from Portugal’s personal income tax for the first ten years of residency in Portugal and wage earners in select vocational segments would pay only a twenty percent flat tax on their Portuguese-source earned income during that ten-year NHR period.

Other policies encouraging this immigration effort included the abolishment of gift and inheritance taxes (making Portugal a more comfortable place to not just live, but also die) and the legal recognition of fiduciary entities, such as trusts, that were before unknown to the Portuguese civil law legal system. For wealthier foreigners looking for an “easier” path to Portuguese (and, therefore, EU) citizenship, the Golden Visa program also emerged. With a considerable monetary investment in Portugal-based pooled investments (mutual funds or private equity funds) OR the direct purchase of real estate in Portugal, such as a new primary residence, the Golden Visa would be offered to clear the immediate path to legal residency in Portugal and, thereafter, the ability to become a Portuguese citizen as well.

Beyond financial and immigration incentives, Portugal’s popularity for expats could also be widely attributed to the country’s low relative cost of living and access to quality healthcare.  Home prices and rental costs have been considered a bargain in comparison to those in neighboring countries in Western Europe, and routine healthcare services have been considered to be a relative bargain as well. On the downside, at least for expats looking to join the local workforce, wages and salaries in Portugal were also considered to be relatively low compared to other Western European countries. However, for digital nomads and other consultants and employees of foreign companies that tolerated or encouraged remote work, it remained possible to enjoy Portugal’s lower cost of living without having to endure the corresponding lower incomes that came with the territory. This mobility trend naturally accelerated during and in the aftermath of the global COVID-19 pandemic.

Signs of an Overheated Market:  Too Much Of A Good Thing?

But favorable legal and financial policies and favorable climate and demographic conditions can neither evade nor shelter Portugal and its residents from the inevitable market forces of supply and demand, nor from a global bout of post-pandemic inflation. The population explosion of immigrants to Portugal has driven up housing prices and rents for expats and Portuguese locals alike. Just as the explosion of tech-company-driven wealth and massive influxes of employees to Silicon Valley displaced many San Francisco area locals from their traditional neighborhoods, Portugal’s locals in Lisbon, it’s coastal neighboring community of Cascais, Porto, the Algarve and other areas are finding it difficult to maintain their homes in their communities as more and more expats compete to own and rent properties in their neighborhoods. These problems have only intensified over the past year, with record numbers of Americans immigrating to Portugal, rising prices for goods and services (no doubt including the costs to rehabilitate older properties and construct new ones), and rising interest rates.

Given these challenges created by the success of these decade-long policies, it should come as very little surprise that the political and governmental climate has begun to shift to finding new ways to curb the influx of expats and slow the inflationary pressures that are a direct byproduct of the surge of expats to Portugal. For one, the Portuguese border and immigration service, known as SEF, has from time to time made it more difficult to obtain the in-person appointments necessary to obtain or renew residence permits. This has been a source of frustration for existing and would-be residents of Portugal alike.

Changes to the Golden Visa program have resulted in more direct efforts to ebb the flow of American dollars in Portugal’s overheated real estate markets.  First, changes were made recently so that direct purchases of residential real estate would no longer satisfy the investment requirements for the program in key property markets, including Cascais, Lisbon, Porto and the Algarve.  However, investment requirements could still be made through direct real estate purchase in other areas and through indirect real estate investment via Portuguese investment funds. However, the ultimate reform to curb immigration through the Golden Visa program will soon take center stage in the Portuguese Assembly (legislature):  the outright termination of the Golden Visa program!

In February of this year, the current coalition government in Portugal made a proposal to abolish the issuance of Golden Visas. This represents an unfortunate, but understandable, policy and attitudinal shift away from policies that sought as much immigration from affluent foreigners as the country could absorb. By “understandable,” it seems logical that, in the face of a very bubbly real estate environment where the costs of living are spiraling higher, Portugal may logically decide that they are at, or close, to the point of maximum expat absorption. 

Moving Forward: Is Portugal Still a Great Option for Expats?

As of the time of this writing in early June, 2023, the Golden Visa program continues, though perhaps on its last legs. The program could be terminated by the federal legislature as soon as mid-June of this year, but we’ll have to wait and see when the proposal is voted on. The government has signaled that any and all Golden Visa applications that are submitted before the program is terminated by legislation will be honored and processed. Accordingly, if your application is in, don’t panic.  If you are thinking about making an application, perhaps professional assistance from a consulting firm that assists would-be expats through the process may be needed as time is likely running out very quickly. However, if my experience living abroad, including in Portugal, has taught me anything, it is that European bureaucracy moves at its own, deathly slow pace.  Therefore, it may already be time to start looking for avenues other than the Golden Visa program if you wish to move abroad to Portugal, just in case the Golden Visa program is abolished in the near future.

Keep in mind that the Golden Visa option, under Article 90A of Portugal’s immigration laws, is only one of several legal avenues to obtain residency, and eventually citizenship (if desired), in Portugal. The general residence program is governed by Article 77 and is most often the process that expat retirees or employed expats have used to immigrate to Portugal. As we are not immigration experts, nor consultants that assist in the immigration process, this is far from an comprehensive discussion of Portuguese immigration, but generally the important steps include showing that you have an income stream to sustain your costs of living, have arranged for a place to live in Portugal (owner’s deed or rental agreement), health insurance or eligibility determination for national health insurance, etc. This is commonly known as the D7 visa for Portugal, and it still allows a pathway to Portuguese citizenship after five years of residency. There is also a one-year temporary or two-year residence visa for self-employed and freelancers known as the D8 or “Digital Nomad” visa program. For those looking to start up a business in Portugal, there is the alternative option of Article 89 for Entrepreneurs. Expats who have been living in another EU country may be able to avail themselves of the residence programs for long-term EU residents (Article 116) or EU residents holding the EU blue card with “highly qualified” professional activities (Article 121-B, 121-K).

Conclusion – Portugal Filling Up But Still Attractive, Other Countries Are Ready to Compete

The main point here is that the Portugal government is responding to growing concerns of its citizens concerning the spiraling inflation in key housing markets in the country by proposing the removal of the Golden Visa program. This is a step that should directly reduce some future demand in those markets, but this does not close the door to Portuguese immigration by expats looking to enjoy the benefits of the NHR program. Only time will tell if there are more restrictions to come from immigration or tax  policies. If you are in the latter stages of planning, it makes sense to proceed according to plan.

However, if you are still “shopping” for a European expat destination, there are other attractive options that may provide significant bang for the buck so to speak. Italy and Greece have entered the competition for affluent expats with programs quite similar to Portugal’s NHR. You can learn more about those programs and how they compare to NHR HERE. And it is always important to remember that, as a U.S. citizen or long-term resident, your U.S. federal income, estate and gift tax obligations follow you wherever you choose to go.  Accordingly, U.S. income tax rates are the “floor,” meaning that your total income tax obligations, even with foreign tax credits, will not fall below your U.S. federal income tax obligations. In the majority of the EU countries, U.S. expat residents will find a new “ceiling” for income taxes, meaning that the net resident country and U.S. income tax bill will exceed what your U.S. federal income tax alone would total. However, if you move further East within the EU, you may find certain EU member nations with extremely attractive tax rates that keep your net tax obligations at that floor. You can learn more about those tax-attractive options HERE.

France is also an attractive option for American expats because of the exceptionally favorable terms of our tax treaty with our revolutionary allies. You can learn more about these attractive features HERE.  While Portugal struggles with how to deal with its own expat success, there are many attractive routes to Europe. You might even say that

The future’s in the air, I can feel it everywhere

I’m blowing with the wind of change

And remember, unlike retiring in Florida, there are no European equivalent  storms to “rock you like a hurricane.”  (LOL)

Stan Farmer, CFP®

You should always consult a financial, tax, or legal professional familiar about your unique circumstances before making any financial decisions. This material is intended for educational purposes only. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost.