Budget Law for 2024 - End of the NHR and Replacement Measures

Today the Portuguese Parliament has voted the Budget Law and has approved the end of the NHR. The Budget also includes a grandfathering rule to protect ligitimate expectations and a new incentive regime targeting individuals relocating to Portugal that is designed to foster scientific research and innovation. The following provides a first overview of the rules:

1.      End of the NHR for tax residents by 31 December 2023

The NHR regime is no longer available for new residents as from 1 January 2024 onwards. The existing NHR regime continues to be applicable for individuals registered as NHR (i.e. grandfathered), until the 10-year period set out in the Law expires.  This includes any taxpayer that by 31 December 2023 is considered officially registered as tax resident in Portugal and applies for NHR for FY23 thereafter.

Example 1: Person A is an NHR registered since 2020 in Portugal. Person A is not impacted by the end of the NHR regime and will continue to apply the existing NHR rules as they stand until the 10-year elapses on 31 December 2029.

2.      Special grandfathering regime for persons arriving by 31 December 2024

There is a special NHR grandfathering rule for taxpayers that only become officially resident for tax purposes the following year and may registered by 31 December 2024 and still apply for the prior NHR regime.

To fall within the special grandfathering rule, one of the following conditions needs to be present:

• Promissory employment agreement or promissory secondment agreement (or employment or secondment agreement) signed by 31 December 2023 to perform activities in Portugal; or

• Lease agreement or other agreement granting the use or possession of property located in Portugal and concluded before 10 October 2023 (day when the NHR withdrawal was officially announced); or

• Reservation or promissory contract for the acquisition of property located in Portugal concluded before 10 October 2023; or

• Enrolment or registration for dependents at Portuguese educational establishment by 10 October 2023; or

• Residence visa or residence permit valid by 31 December 2023; or

• Procedure, initiated by 31 December 2023, for granting a residence visa or residence permit with the competent entities, in accordance with the current immigration legislation.

This special grandfathering rule also applies to a person who is a member of the household of taxpayers covered by one of the conditions above.

Example 2: Person B is a German tax resident with a promissory employment agreement signed with a Portuguese based company to initiate activities by May 2024 in Portugal. Person B may register as tax resident in Portugal in May 2024 under the NHR regime applying the special grandfathering rule. Person B will secure the 10-year regime.

Example 3: Person C is a UK tax resident with a submitted a golden visa before 31 December 2023 that is pending for securing a residence visa. Person C may register as tax resident in Portugal by maximum 31 December 2024 under the NHR regime applying the special grandfathering rule. Person C will secure the 10-year regime.

Example 4: Person D is resident for tax purposes in United States and is married with Person A that is tax resident in Portugal. Person D may relocate to Portugal by maximum 31 December 2024 under the NHR regime applying the special grandfathering rule. Person D will secure the NHR 10-year tax regime.

Note: The registration as NHR in 2024 will mean that the person does not elect for any other special regime applicable in Portugal, including the special tax regime for scientific research and innovation or the former tax residents regime further explained in the next section. We recommend carefull evaluation of the conditions as the scope of application are very different.

3.      New tax incentive for scientific research and innovation

Taxpayers relocating to Portugal as from 1 January 2024 and becoming tax residents under Portuguese domestic law, provided they have not been resident in Portugal in any of the prior five years, may benefit from a specific tax incentive for scientific research and innovation, if they carry out activities that fall within:

• Teaching in higher education and scientific research, including scientific employment in entities, structures and networks within the national science and technology system, as well as jobs and members of governing bodies in entities recognized as technology and innovation centres; or

• Qualified jobs and members of the governing bodies of entities that fall within the scope of contractual benefits towards productive investment, in accordance with chapter II of the Portuguese Investment Tax Code; or

• Highly qualified professions, to be defined in a Ministerial Decree, developed in: (i) Companies with relevant applications in the year of start of work or prior 5 years that benefit or have benefited from the Tax regime for investment promotion (RFAI); or (ii) Industrial and service companies (with activities in areas to be defined by Ministerial Decree) that export at least 50% of their turnover in the in the year of start of work or prior 2 years; or

• Other qualified job positions and members of the governing bodies of entities that carry out economic activities recognized by AICEP or by IAPMEI (investment public agencies) as deemed relevant to the national economy, notably in the context of attracting productive investment as well as reducing regional asymmetries; or

• Research and development personnel, whose costs are eligible for the purposes of the R&D tax incentive system as set out in the Investment Tax Code; or

• Job positions and members of the governing bodies of entities certified as startups under the Portuguese Start-Up Law; or

• Job positions or other activities carried out by tax residents in the autonomous regions of the Azores and Madeira, under terms to be defined by regional decree.

The taxpayer who meets the requirements as new tax resident as from 2024 onwards and falls within one of the positions listed above, may be taxed at a special rate of 20% on employment or entrepreneurial income earned within the scope of the said activities for a period of 10 consecutive years. The right to be taxed under the terms of this regime requires that the taxpayer continues to earn active income with a maximum interim period of 6 months between eligible activities/jobs.

Under the current proposal, the eligible taxpayers will also be exempt on foreign income from several categories of income, namely employment income performed abroad, self-employment income performed abroad, foreign rental income and capital gains on foreign based assets. This exemption does not include pension income. Certain items of income derived from sources in blacklisted jurisdictions will be subject to flat 35% rate.

The registration of beneficiaries with entities and communication with the tax authorities will be regulated by Ministerial Decree. Until the approval of such Ministerial Decree the activities qualifying as “high added value activities” are the ones applicable currently for the NHR regime and the registration of beneficiaries is made directly with the tax authorities as in the NHR regime.

This special regime can only be used once and is not available for taxpayers that benefit or have benefited from the NHR regime or opt for partial exemption under a special regime for foremer residents.

Example 5: Person E is an Italian tax resident. Person E will be employed as a director in 2024 by a Portuguese company that has secured contractual tax incentives with Portugal (investment projects with minimum investment of EUR 3 million) that qualify as strategic economic interest. Person E may register as tax resident in Portugal in 2024 and apply for the new tax incentive that will be valid for 10 years.

Example 6: Person F is a Brazilian tax resident. Person F applied for a residence permit under the Start-up visa regime to work as CTO for a Portuguese start-up that is already certified as such in Portugal. Once the residence permit is issued, Person F may register as tax resident in Portugal and apply for the new tax incentive that will be valid for 10 years.

4.      Former residents tax regime

A 50% relief capped at EUR 250,000 of employment and business income applies to former Portuguese tax resident’s that become residents in the years 2024 to 2026. The regime is available only for former tax residents that are not tax resident in Portugal in the prior five years of their application. The relief applies for five years and may not be cumulated with any other special regime.

Example 7: Person G is a Spanish tax resident that ceased to be tax resident in Portugal in 2018. Person G may become a tax resident in Portugal in 2024 and apply for the former resident’s tax regime applicable on the employment and entrepreneurial income.

Conclusion

The final outcome to suddenly eliminate the Portuguese NHR regime without this forming part of the Government electoral programme or explained with data points or technical argumentation was surprising. A broader transitory regime allowed to cover some situations of persons that could not conclude their change of tax residence timely and will be allowed to conclude the process by 31 December 2024. Time will tell if the replacement regimes minimize some of the negative effects arising from the cancelling of the NHR. In a first reading the incentive for scientific research and innovation is rather complex and the success depends very much on how it will be applied and perceived by the several stakeholders.

© Kore Partners, 2023. This briefing provides for general information and is not intended to be an exhaustive statement of the law. Although we have taken care to provide accurate information, this should not replace legal advice tailored to your specific circumstances. This briefing is intended for the use of clients and selected recipients. Queries or comments regarding this, including joining our mailing list, can be directed to kore@korepartners.com