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Will the NHR program in Portugal end?

Fact vs Fiction: a perspective from a native tax advisor

Portugal's Non-Habitual Resident (NHR) tax scheme has been controversial and getting more famous by the day since it was introduced over 10 years ago, at the height of the global financial crisis. The program has gone through many changes and debates over the past decade. Now, there are signs that the NHR scheme may be nearing its end, as Portugal considers ending it by 2024. The impending sunset of the NHR program marks a turning point after years of policy shifts surrounding the controversial tax regime. What comes next for Portugal's approach to attracting foreign high-net-worth individuals remains to be seen.

Birth of Portugal's NHR scheme

The NHR program was conceived during a tough economic phase to lure foreign talents, investors, and pensioners to Portugal. The scheme offered attractive tax breaks such as a 10-year exemption from Portuguese taxes on foreign and passive income including dividends, interest, royalties, and capital gains. Certain professions got an additional sweet deal - a capped income tax rate of 20%, significantly lower than Portugal's highest personal tax rate of 48%. To be a part of the regime, one had to become a tax resident and meet specific criteria like not having been a resident in the previous five years.

Why the NHR scheme was introduced

The NHR program was motivated by two primary goals. First, it was designed to kick-start the Portuguese economy, which was suffering from the mass exodus of skilled locals during the crisis. Second, it aimed to pull in foreign investment, talent, entrepreneurs, and the wealthy. The tax breaks provided by the program served as a carrot to encourage migration to Portugal, bringing in spending and stimulus during the downturn.

How the NHR program evolved

The NHR program has seen its fair share of changes since its launch with Lei n.o 249/2009, de 23 de setembro. Due to being too tax aggressive when it comes to taxes on pension, sometimes a full exemption (that resulted in countries terminating the international  tax Agreement in force with Portugal), in 2020 the regime was amended to tax pension income at a 10% flat rate and reducing the high value-added jobs list. In 2023, the government announced plans to completely phase out the NHR by 2024, except for existing beneficiaries who might still enjoy a grandfathering period for the remaining years.

Mudam-se os tempos, mudam se as vontades”. — Luís Vaz de Camões

Effects of the NHR regime

The NHR program has been a magnet for foreign direct investment since 2009, pulling in professionals, investors, and high net worth individuals, and giving the economy and employment a significant boost. However, the tax incentives have also sparked problems like gentrification, housing unaffordability, inequality, and local frustration. Wealthy NHR beneficiaries escaping standard taxes were viewed as unfair by Portuguese citizens facing 48% tax rates. Cities like Lisbon saw housing demand soar due to the NHR, causing housing prices and rents to skyrocket and displacing lower-income residents.

Fast facts on the NHR

Public data on the NHR program reveals that:
  • Most NHRs are French, British, and Italian, with only 6% being Portuguese citizens.

  • NHRs represent 0.3% of taxpayers but contribute to 3.2% of income tax revenue.

  • The main sectors for NHR beneficiaries are science, IT, healthcare, and consulting services.

  • The average age of NHR beneficiaries is 43 years, with 75% being between 30-49 years old.

  • Lisbon and Faro are home to 65% of NHRs, followed by Porto and Setúbal.

  • NHR tax expenditure grew by 40% from 2020 to 2021.

  • The number of new individuals benefiting from the program had a steep increase from 2015-2021, from less than 2,000 to approximately 8,000 per year.

  • The total number of tax residents with the NHR increased 83% from January 2017 to August 2018.

  • The tax expenditure with the NHR regime was 1,507 million euros in 2022, an 18.5% increase from 2021.

Critiques of the NHR scheme

The NHR scheme has been under fire for giving substantial tax breaks to wealthy foreigners, which many Portuguese and non-beneficiaries paying up to 48% tax see as unjust. Left-wing parties have argued that the NHR scheme creates a "first-class" status for foreign residents while treating Portuguese citizens as "second-class". The influx of NHR beneficiaries has also made housing unaffordable for many Portuguese citizens in cities like Lisbon and Porto due to gentrification. Moreover, critics argue that the lost tax revenues could have been used for public services and infrastructure for Portuguese citizens. Some experts have even raised concerns that the scheme represents unfair EU tax competition and state aid.

What's next for the NHR Scheme in Portugal?

Under pressure from various stakeholders, Portugal has tightened NHR rules and benefits in recent years. The Prime Minister recently announced plans to completely phase out the program by 2024, except for existing beneficiaries who will continue to enjoy the benefits. The aim is to control the growing expense and social inequality that has been partially fueled by the NHR tax incentives.

Challenges on a potential NHR ending

The proposed NHR phase-out in 2024 brings several uncertainties to the fore. It could disrupt the economic and real estate markets, risk the departure of international stakeholders and companies, trigger a surge in applications before the scheme's closure in 2023, and pose the challenge of crafting policies to sustain growth post-NHR.

Different stakeholders, different views on the NHR ending

Stakeholders all have their unique perspectives on the NHR phase-out. The Portuguese government seeks a gradual wind-down to avoid economic shocks and regain control over taxation. However, it faces challenges in creating effective post-NHR incentives. Future beneficiaries and investors are naturally worried about this change in plans that they based their finances on. Portuguese citizens mostly welcome the phase-out due to the inequality and unaffordability caused by the NHR scheme. Meanwhile, the real estate and immigration industry fears that the end of the NHR scheme will hurt demand and investment. Other European countries with similar tax incentives are likely relieved.

Food for thought for Portugal's government

The Portuguese government should consider diverting some of the regained revenue towards social programs, affordable housing, and infrastructure to counter criticisms of economic damage. Strategic, transparent tax incentives could still draw investment and talent without overusing and creating inequality through the NHR scheme. The government could tap into remote work and climate-driven migration to sustainably expand the talent pool without putting excessive stress on housing. Enhancing public services such as healthcare, education, and housing assistance can shield ordinary citizens amid economic changes. Regular impact assessments, public consultations, and citizen input will enable balanced policymaking during the potential transition.

Scenarios for Portugal to brace for

As Portugal braces for a potential end to the NHR scheme, it should prepare for various scenarios. This includes a sudden exodus of NHR beneficiaries, a surge in applications before the NHR closure, and the crafting of new incentives targeting priority skills and sectors. It also needs to leverage remote work and lifestyle appeal to maintain Portugal's attractiveness beyond the loss of NHR incentives.

The road ahead

As Portugal potentially transitions away from the NHR program post-2024, policymakers have some options to drive growth in a more balanced manner:

  • Continue to attract foreign investment and talent with strategic tax incentives.

  • Streamline visa and residency policies to bring in global skills and capital.

  • Implement stronger urban planning policies to prevent excessive pressure on housing.

  • Use the revenue gained from phasing out NHR tax breaks to fund public housing, healthcare, and education.

  • Regularly monitor and refine post-NHR policies.

Adapting polices

As the global landscape shifts, Portugal must stay nimble in adapting its policies beyond the NHR phase-out to seize new opportunities while shielding its citizens. Comparing Portugal's talent attraction policies against programs in other progressive jurisdictions can provide insights and best practices. Exploring partnerships with the Portuguese diaspora worldwide could encourage a two-way exchange of skills, capital, and ideas. Regional development initiatives can spread economic gains more equitably across Portugal, not just in the major cities.

In conclusion

The NHR tax scheme has sparked intense debate in Portugal over its more than 10-year lifespan. While the generous incentives stimulated the economy, they also led to unintended consequences like worsening inequality and housing unaffordability. As Portugal now potentially phases out the NHR by 2024, complex challenges lie ahead. Navigating the transition will require nuanced policymaking across fiscal planning, public messaging, targeted replacement incentives, and impact monitoring.

Final thoughts from a native tax advisor

The journey of transitioning from the Non-Habitual Residency (NHR) scheme and instituting new policies is undoubtedly complex. Yet, by integrating a consultative approach, Portugal can steer itself towards an inclusive, sustainable growth path - similar less tax aggressive incentives are not an uncommon practice by other EU countries e.g., Italy, Spain.

Having watched Portugal's transformation from a less developed nation to a globally praised paradise, I believe that the majority of NHR incentives have been effectively implemented, achieving their goals. The upcoming presentation of the 2024 budget law marks the next crucial phase in this process.

The NHR scheme, while beneficial, has introduced new international tax challenges for local tax authorities, courts, and service providers. Opposed to its termination, a refined focus of the NHR, aimed at incentivizing habitation of Portugal's more remote regions could safeguard our cherished relaxed lifestyle and rich Portuguese culture. Changing the list of high value-added jobs could also bring benefits for professions that are in high-demand in Portugal or that require a physical presence in the country, such as doctors.

Despite the rising cost of living, Portugal's economy is brimming with opportunities, thanks to its impressive growth. However, curtailing this growth could lead to employment challenges that could see a reduction in job offers, this coupled with the immigration and expansion policies could lead to more instability, even as it addresses housing concerns.

A strategic revamp of the NHR and other incentives, along with the promotion of housing development in more remote areas, could serve as a roadmap for balanced, sustainable growth. This not only benefits local communities but also capitalizes on international interest from immigrants, retirees and most recently U.S. citizens among other stakeholders.

It should also be noted that Portugal has in 2023, around 2 million citizens living abroad, a great part of them highly qualified that could potentially benefit from this regime when retiring or even by coming back to the country while working remotely or managing their investments, this could be seen unfair mainly to those who had to emigrate in the past due to the lack of opportunities within its territory. Actually there are some programs targeting returning citizens that allow for tax reductions but they are not as close as beneficial as the NHR.

It's crucial not to ignore the declining popularity of the Socialist Party among Portuguese citizens since the last elections. This announcement might be seen as an additional measure to reverse this trend, such as potential amendments to the "alojamento local" rules in the pipeline and recent EU infringement proceedings against Portugal’s CPLP residence permit warrant attention. Therefore, the complete phase-out of the NHR and closing to new applicants already in 2024 may not be as straightforward (still subject to a lot of analysis and assessments) or strategically wise as it seems.

Nevertheless, I advise the readers who are on the fence to not take my word for it and make sure they do not miss out on their application timeline in 2023. For more information feel free to get in touch.