Fiscal Injustice?
My ‘two cents’ on sunsetting the NHR
If you live in Portugal or are planning a move to Portugal in the future, you most likely have heard that the NHR tax scheme may be sunsetting in 2024. There have been numerous recent news articles and blog posts about the NHR’s potential demise. If you’re contemplating a move to Portugal, should you still do it?
What is NHR?
Just over one year ago, I wrote an article based on an interview I did with a Portuguese tax accountant about taxes in Portugal for expats. Included in the article was a section on the NHR – what it means – and how it could benefit expats moving to Portugal. Essentially, NHR Status (Non-Habitual Residence) is a program created by the Portuguese government to attract foreigners to live in Portugal by providing more beneficial tax rates and exemptions from income from abroad for a period of ten years.
Not everyone qualifies for this exemption and since I am not a tax expert, please don’t contact me asking me for tax advice. As always, you should discuss your specific tax situation with a professional.
The reason why.
According to The Portugal News, Portugal Prime Minister António Costa during a news media interview said that the Government has decided not to prolong “a measure of fiscal injustice, which is no longer justified, and which is a biased way of inflating the housing market, which has reached unsustainable prices”.
Wait. What?
I’m sorry. I don’t get it. Admittedly I’m not a numbers girl or an expert on housing. But common sense tells me that something’s not quite right here. On the one hand, Portugal wants to attract foreigners to the country to presumably rent (in many instances, at inflated prices set by landlords and realtors) or buy property (pricing also set by the property owners or suggested by realtors), spend money at local establishments, and contribute overall to the coffers of the State, albeit through a favorable tax rate or other incentive. That seems reasonable. Incentivization is always attractive. But on the other hand, Portugal appears to want to nibble at bite off the (expat) hand that’s helping to fuel their economy. Understandably, the housing market is inflated in Portugal as in many other parts of the world, but I wonder if Portugal can really afford not to provide incentives for foreigners to attract their dollars. I think not. Read on.
Fiscal Injustice?
My ‘two cents’ - abolishing the NHR isn’t going to alleviate housing inflation in Portugal although I suppose it might deter some foreigners from moving here. This seems to me to be a band-aid political solution to a much larger problem – truly affordable housing and a living wage for the citizens of Portugal. I think that is the real fiscal injustice.
This was an attractive benefit for us.
We are not wealthy, but gratefully, we’re comfortable. We also had lived in Arizona where there were tax benefits for retirement income, so our tax liability every year was nominal compared to other states such as California. According to this resource, Portugal ranks #7 in the top personal income tax rates in Europe. Of course, as my friend and fellow Substack writer, Nancy Whiteman points out in her article about tax planning, the Portuguese tax structure is based on the progressive system. But still, even with the NHR, the taxes you may pay in Portugal may be greater than what you’re accustomed to in the U.S. depending on what state you resided. This has been our case and the NHR has certainly helped reduce the amount we would have to pay without it.
Are you committed to Portugal?
Some foreigners I have talked to tell me they’re committed to Portugal and want to be just like the Portuguese. So if it means paying higher taxes, they’re okay with that. I’m not sure if these same people understand the Portuguese tax structure. Maybe. I could be missing something.
Arguably, being committed to a country goes well beyond the tax rate. There’s a lot to love about Portugal. But there’s also a lot not to love, as in any other place you choose to live in the world since nowhere is perfect. Money is one of those things that can help you decide on your level of commitment.
This stuck with me. I think back to the recent article I wrote about the housing situation in Portugal, where Olivia Houssiaux said that Portugal is a cheap gateway to Europe. That comment stuck with me. She pointed out that ten years ago, no one knew about Portugal. There were no fiscal advantages to moving or investing in the country. So, the government implemented incentives for visas and essentially created a cheap gateway to Europe with many people starting out in Portugal to gain residency or citizenship but with the end goal of moving to another European destination. So, I wonder - how committed to Portugal are foreigners who currently live in the country but don’t actually plan to stay? And how will this affect Portugal in the future?
A shift in focus and incentives?
When Portugal introduced the D7 visa in 2007, it was one the best and least expensive ways to obtain residency in a European nation. It was attractive to retirees and folks who had enough passive income until retirement. But I sense a shift happening.
Last year, Portugal introduced a new type of visa – the D8 visa. This is commonly known as the Portugal Digital Nomad visa. Briefly, the D8 allows people regardless of age who work remotely for a foreign company to live in Portugal (temporary stay) for up to one year with the possibility to renew or exchange for permanent residency.
A new Tax Regime?
In an article in Lexology1 dated October 12, 2023, regarding the proposed end to the NHR, the following information was also included:
NEW SIMILAR TAX INCENTIVES AVAILABLE UNDER THE 2024 DRAFT STATE BUDGET LAW Employees/Contractors/Freelancers: According to the 2024 Draft State Budget Law, individuals that wish to relocate to Portugal, who have not resided in Portugal in the previous 5 years and move to Portugal between 1 January 2024 and 31 December 2026 are entitled to benefit from a 50% deduction on the taxable income, up to a maximum of Euro250,000 for a period of 5 consecutive years. In this case the standard progressive rates will apply on the remaining taxable income. Foreign source income may also be subject to tax in Portugal. For contractors and freelancers, additional deductions to the taxable income may be available during the first and second year. Those who benefit from the NHR Regime are precluded from this tax incentive.
There are also other proposals in the Draft for foreigners with certain scientific and professional credentials as well as income derived from life insurance or pension funds.
Keep in mind as of this writing, the Draft State Budget Law is still subject to amendments, so a lot could change.
I’m wondering – is there a change coming? Is Portugal becoming more focused on attracting younger, digital nomads with the D8 visa by offering an opportunity for permanent residency and attractive (although perhaps, more limited) tax incentives? Or for degreed professionals in science and research? And if so, how will this affect Portugal’s inflated housing market and “fiscal injustice?” And what will be next? The end (or modification) of the D7 visa? Only time will tell.
Would we have moved if there was no NHR?
Probably. We like Portugal. And we’re glad we moved when we did. But we would most likely have paid closer attention to the tax structure and its potential effect on our personal tax situation. Portugal is cheaper to live in overall, but it’s not cheap. For us, with the NHR (I’m assuming we’ll be grandfathered in if the current proposed legislation prevails), that’s still a few years away from now and a lot can change in that time. We’ll certainly be looking now for options to preserve as much of our income as possible. Will we stay after our 10 years with NHR is up? I’ve learned never to say “never” so who knows…
What do you think?
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Until next time…
Obrigada!
Carol.
As we are preparing for a move to Portugal, we met yesterday with a tax accountant and reviewed our financial structures and tax liabilities without the NHR. The estimated taxes that we will pay in the US and Portugal are not enough to sway us from our plans to move and we are still very much excited about moving to Portugal. For us, it was helpful to get the facts and projections so we can decide based on the facts. Thank you for the great article.
Carol, thanks for the post. A lot of good thoughts from you and your fellow readers.
We are currently not living in Portugal, however, we are or should I say we were planning on becoming Portuguese tax residents. It may or may not make fiscal sense at this time.
We found a cool calculator from mytaxes.pt, I used $42K or €39K a year in retirement income. Assuming a U.S. tax payer, married, filing jointly, and no other deduction except the standard deduction the IRS in the U.S. allows of ($27,700). Here is my quick math:
$42,000 less the standard deduction of ($27,700) = $14,300 taxable income at 10% or $1,430. That is an effective tax rate of 3.40%.
With the NHR, 10% tax on retirement income = about $4,200 per year
Without the NHR, €39,312, the calculator from mytaxes.pt came up with an effective tax of €8,634 or about 22%.
So without the NHR, the tax rate more than doubles.
My thoughts are at this point unless something changes, we will be Portuguese visitors under the 90 day tourist visa, and spend time in other non-schengen countries. €8,634 can buy at least two airplane tickets twice a year other parts of the world.