Under the Non-Habitual Resident (NHR) tax regime, private individuals who move to Portugal and become a resident there, are entitled to significant income tax benefits, which are particularly of interest to high-net-worth individuals, those who perform high value-added activities and pensioners who receive pension income from abroad. The special tax regime intends to increase the country’s international competitiveness and applies for a period of 10 years.
Over the years, the NHR regime attracted expats from all over the world, but mainly from the UK, France, Germany and the Nordic countries. Many Belgian residents also decided to make the move and exchange rainy Belgium for sun-drenched Portugal.
Until now, pensioners benefiting from the NHR regime were in general exempt in Portugal from any income taxation on their (private) non-Portuguese pension income. Most double tax treaties (DTTs) entered into by Portugal, allocated the right to tax to the country of residence (Portugal), meaning that the pension income would not be subject to tax at all in that case under the NHR tax regime.
As a result, formal requests were made by Finland and Sweden to change the treatment of pensions in their DTTs with Portugal, which would make the pension income taxable in the country of source instead of in the country of residence. Under pressure from other EU countries and to avoid they would make a similar request, the Portuguese Parliament approved the 2020 State Budget Law on 6 February 2020, which further amends the NHR regime.
While the new rules also adjust the treatment of self-employment income and royalties, the biggest change is that the full tax exemption of foreign pensions no longer applies. Instead, a flat tax of 10% will apply to new NHRs. The State Budget Law also appears to have broaden the definition of the different types of income that can benefit from the 10% rate, e.g. for pre-retirement income which was previously treated as salary.
Foreign expats acquiring the NHR status before 31 March 2020 (tax year 2019) or before 31 March 2021 (tax year 2020) can still benefit from the existing rules if they meet the conditions. For those expat retirees thinking of moving to Portugal, there may be little time left to secure their tax-free pension income under the original rules.
Even if you would decide to move after that, a 10% flat tax is still more beneficial than the standard domestic tax rates that in general apply to pension income in other EU countries. We believe in any case that the recent changes in the Portuguese NHR regime only contribute to its long-term stability. It is a given fact that the NHR regime is still the best of its type, compared to what is currently on offer in other white list jurisdictions.