NHR 2.0 - 2020 in retrospective

The Portuguese Budget Law for 2020 (applicable as from 1 April 2020) included an amendment to the current non-habitual tax regime - also known as NHR. The amendment only targeted a specific issue dealing with foreign private pensions. All other aspects of the NHR regime (namely investment income exemption taxation) remain in place and unaffected.

Why the change?

The most contentious element of the NHR regime applying to individuals changing their tax residence to Portugal was the application of the exemption method to foreign pension income.

The outcome of Portugal not taxing pension income for the NHR 10 year period raised some outcry especially from treaty partners such as Finland, Sweden and France. This dispute even lead to the unilateral termination by Finland of the tax treaty with Portugal. Sweden has in the meantime also renegotiated the tax treaty (pending final approval) and other important treaty negotiations are ongoing with Netherlands and UK.

What changed?

The amendment provided for a 10% flat tax on foreign pension income and elimination of the option for exemption.

In addition, the definition of pension in this new provision includes expressly not only pension in annuities but also other similar payments – e.g. lump sum – to the extent they are not sourced or territorially linked to Portugal.

The 10% flat tax rate for foreign pensions will be applicable to new Portuguese tax residents – i.e. becoming tax residents after the entry into force of the 2020 Budget Law (we expect at the end of February or early March).

The amendment includes a grandfathering rule that allows NHR tax residents at the time of the entry in force of the law who made their decisions under the old law, to continue to apply the prior rule, until the original 10-year timeframe runs out.

There is also a transitional provision, which allows NHR tax residents at the time of the entry in force of the law to opt for the 10% flat tax rule.

What is our takeaway?

The NHR regime has lived for 10 years and has been a rather successful in attracting high value expatriates and has position itself in almost equal footing with Switzerland and the UK. The Portuguese move towards the 10% flat rate for pensions should be viewed as a sign of times, especially if we take note of the international context. Two positive points should be highlighted.

The first is that all other aspects of the NHR regime (namely investment income taxation) remain unaffected. The second is the inclusion of a grandfathering and transitional rule to protect legitimate expectations of current NHR.

We expect this NHR 2.0 version to be as successful during the next 10 years.

© 2021 Kore Partners.