A backdrop: the context of Portugal and how it works

Anyone who has been following the Portuguese market, and most definitely anyone who is an active participant in the local economy, will by now have realised that Portugal presents a challenging fiscal environment. The implementation of long-term strategies and the planning of medium and long-term investment are practically impossible for the individual investor/taxpayer and small business owner, because government is known for drastic, sudden and sweeping changes that have significant financial and fiscal impact, often without offering time for the ecosystem to adjust. Bureaucracy and the slow pace of government departments and the lack of adherence to legally established time frames (including by the justice system itself) aggravate the problem. There appears to be an acceleration of the implementation of radical fiscal reform, contradicting the many expert advisers who tell their clients that “Portugal moves slowly” before any decision is implemented.

While speed of implementation is to be lauded, the ability of the government to quickly change policy affecting investment and taxation, while remaining glacier-like in respect of social, governmental and other change, means that it is clear that when required, the government is able to gather political “consensus” to effect change (or, as is the case currently, push through policy by virtue of a political majority in parliament). Additionally, there appears to be a worrying trend to apply decisions immediately. Fortunately, to date, governments have respected the long-standing rule of not applying changes retrospectively.

For anyone looking to move to the country, it is usually an absolute prerequisite to like the country, as financial and fiscal incentives are not usually enough in the long term.

The change to the NHR regime: reading the warning signs

Notwithstanding the above, it cannot be argued that the government did not provide a warning sign, in relation to some of the recent changes. In the case of the Golden Visa, the change effected in 2022, eliminating high density regions from the program, was the de facto warning provided by the government. Equally, the 2020 increase from 0% to 10% in the NHR taxation level for eligible income, followed a short period of intense debate in 2019. This debate was itself influenced by events at the European level, including the unilateral cancellation of the double tax treaty by both Sweden and Finland due to some very high profile, high net worth (HNW) individuals from those countries benefiting to the tune of millions of Euros from the scheme. These were the corresponding warning signals in respect of the NHR.

As I have written before, in Portugal it is important to be able to read the messages being sent by government. Almost inevitably, government provides “pointers” of where they are leaning. In 2020, in an article titled Changes to the Golden Visa and Non Habitual resident programmes (allaboutretirementoverseas.com) I pointed out that “rumours about the possible revision to the NHR program started in 2018.” . It is very clear that the government is on a path to eliminate fiscal policy that has now “achieved its purpose”, and now is shoring up its main voter base, who face challenges with aspects such as cost of accommodation, and many of whom form part of Portugal’s public sector, which represents around 14.2% of the country’s active population[1].

The life-cycle of the NHR regime

To understand the rationale, it is crucial to understand the purpose. The purpose of many of the fiscal incentives was to reinvigorate the economy of the country, to revitalise its inner-city centres and rehabilitate decaying real estate, as well as trying to improve services for the population at large. With the majority of the population unable to generate sufficient wealth and an increasingly higher proportion of society, including a swathe of the middle class post the 2008-9 financial crisis, finding itself in or bordering poverty, the role of the state became one of capturing and redistributing (albeit, sadly, in the usual inefficient manner) wealth.

The government had also stated that one of the primary objectives of the NHR regime was to attract Portuguese residing overseas, in order to offset the brain drain that saw the country lose more than 60,000 young, qualified adults in 2022, at an enormous cost to the local economy.

Many programmes implemented by the Portuguese government had unintended (but predictable) inflationary consequences, in particular in the real estate market. These included the recently abolished Golden Visa, which represented more than €6 billion investment into the Portuguese economy, and the probably soon-to-be abolished NHR regime[2], which saw a large influx of retirees, initially mostly from Northern Europe.

As a result, there has been a noticeable increase in tension between the benefits accruing to a non-EU Golden Visa and a (mostly) foreign NHR applicant base, and local residents grappling with a country at the top of the European taxation tables, who cannot access the same benefits. Ironically, the majority of the Portuguese population would generally not be concerned about this difference, as long as they experienced a gradual improvement in their own lives. However, with inflation putting additional pressure on household finances, several political parties have used topics such as the GV and NHR to stoke sentiment and for political negotiation.

Practical consequences of the recent announcement

The Prime Minister has commented that the NHR regime will be abolished in 2024. There is no formal proposal yet, no date set, and much of what is being said, including this opinion, is based on best guess, often using past experience as a guide.

A few things that are likely:

• The NHR regime will disappear or suffer significant change
• The mention of 2024 as the program’s end date means that 2023 is probably the last fiscal year in taking up fiscal residence in Portugal
• Although the law currently states that registration is possible until March of the year following that in which the applicant effectively becomes fiscally resident, the safest approach would be to register before December 31^st 2023

A few impacts which are too early to tell:

• Whether aspects of the NHR regime will remain
• Whether the change will have an effect on the real estate market, in particular on rentals

What should I do now?

1. Confirm your intentions

This cannot be overstated. Make sure whether you intend to live permanently in Portugal, or not. If your intention was not to move to Portugal permanently nor to do so within the next few years, then it is unlikely that NHR was a factor in your decision.

Also ask yourself if the primary reason for the move was the NHR saving, or if factors such as lifestyle, safety, weather, access to affordable healthcare and generally lower cost of living, ranked higher. If so, then NHR was always a nice to have and should not influence your decision.

If your intention was to move imminently to Portugal, or the decision was dependent on the saving you would make for the 10 years during which you would benefit from the status (for example, you were planning to save on taxes for 10 years to then return to your home country, or save for 10 years so that you could later pay higher taxes or put aside money for care), then …

1. Confirm your timing

• If you moved to Portugal in 2023, are eligible for NHR and have not yet registered, register immediately. NHR registration is a simple process, done online. Advisers are not required.
• If you had planned to move to Portugal before the end of the year, or during 2024, consider bringing forward your date to as soon as possible in 2023, and register for NHR accordingly. D7 applicants with consulate appointments until the end of October, should liaise frequently with the consulate to see if they can somehow get a response before year-end
• If your date is further in the future, then…

1. Review your finances

• If your move to Portugal was dependent on the saving offered by the NHR regime, you should take tax advice from duly regulated professionals in both your country of origin and in Portugal, to see what impact the proposed change will have on your overall financial situation
• D8 or digital nomad applicants should review this urgently as all foreign-sourced income, if previously eligible for NHR inclusion, will now potentially be taxed at prevailing local rates
• D7 applicants should consider review the situation if the main source of passive income is a retirement pension or similar, that will now be subject to local higher taxes. For retirees from the UK, it should be noted that the equivalent of a Personal Allowance does not exist, meaning that for those considering a move with pension incomes up to approximately €14,450[3] may experience a significant change of taxation

If the effects of the proposed NHR change are manageable, then consider…

1. Mitigating risks if changing residency to Portugal in 2023 is not possible

• Use any tax-free benefits in your current country of residence, whether tax-free lump sums or pension drawdowns, capital gains exemptions on the sale of primary residence or a business, etc. In other words, take advice in order to maximise benefits in your current country of residence rather than relying too much on the NHR status in Portugal
• Dispose of any assets, especially real estate assets, prior to a move of your permanent residency to Portugal
• Adjust your rental expectations, by selecting alternative locations, smaller properties, and planning any rental well ahead of time, using sites such as portugallonglets.com
• Consider purchasing off-plan property in Portugal, preferably with regular stage payments. This will allow you to benefit from the continuing trend of appreciating new-build real estate, while later allowing you to retain more of your monthly income, even if taxed, by not needing to rent (only 15% of the amount paid is deductible, up to a maximum of around €500 per annum, which is insignificant in most cases)

As with all things in Portugal, expect change. And don’t be surprised when the change goes against you. If you are a pragmatist and understand that tax efficiency is the “icing on the cake” then Portugal continues to represent some wonderful opportunities, both in terms of quality of life, lifestyle and easy access to Europe from a safe and friendly base.

An appeal to the Portuguese government

If, as the Portuguese government claims, it is serious about attracting back Portuguese talent that has been lost over the last few decades, then it could retain the regime for returning Portuguese nationals (which may have to be extended to EU citizens under the freedom of people and capitals ruling of the single market). This will help counter the loss of talent that the country has experienced over recent years. Will the government have the courage to do so?

* Disclaimer: a number of statements in this article refer to events which may happen in the future. The results may be exactly the same as, or completely different to, that which is predicted. One of the objectives of this information is to make people aware of the possible changes, some of the reasons why these changes may happen, and to encourage those interested to seek advice from duly qualified sources (of which Facebook is not one). None of this content should be taken as tax, financial or legal advice, and readers should seek advice from duly regulated sources.

[1] Portugal: Employment in General Government as a % of active population | Pordata

[2] NB! The proposal as made by the Prime Minister is that this change will only affect new applicants, after the deadline. Any applicants already approved will continue to benefit from any fiscal incentives for the full period of 10 years.

[3] Calculated at exchange rate of 6^th October 2023