The other side of the coin and the NHR regime

In 2019 a report on tax benefits and incentives was issued in the framework of a mandate for a working group to carry out an in-depth study on the tax benefits, aimed at providing a systematization of those incentives and individual assessment.

In this article we delve with an interesting part of the report relating to the assessment of the non-habitual tax regime (also known as NHR) with data and statistics.

This data is interesting not only because for the first time such information is made available but also because it provides insights on how to tackle some misconceptions on the NHR regime (quickly explored by mainstream media). 

To start a very basic introduction on the NHR regime (for inbound expatriates) that was introduced almost 10 years ago and which has basically two key features:

• A special flat rate of 20% (plus surtaxes) applicable to domestic employment and self-employment income from a Portuguese source derived from “high value-added activities”, as per a list of professions published by the tax authorities; and/or

• A tax exemption (with progression) for qualified foreign-sourced income (pension, employment income, self-employment income, rental income, certain capital gains, interest, dividends, etc.), provided certain conditions are met. The conditions vary from income category with some being subject to a requirement of tax being effectively levied at source (e.g. employment), tax may be potentially taxed at source (e.g. dividends) or not being sourced in Portugal (e.g. pensions).

According to the data published, Portugal had 29.901 NHR requests accepted since the inception of the regime back in 23 of September 2009. The yearly distribution and percentage of yearly increase may be summarized on the following table:

In reality we know the regime was a slow starter for many reasons, which include; (i) formalist approach of the tax authorities to requests leading to denials (solved in 2013); (ii) uncertainties of interpretation and approach by the tax authorities (some solved through time); (iii) lack of confidence of foreigners on a new regime; (iv) obscurity of Portugal as a place to reside; (v) political and financial instability that lead to 2011–14 international bailout to Portugal. So it is without surprise that only when Portugal gives signs of recovery by late 2013 is when the NHR start increasing steadily.

The working group chose to depict this as a 1.472% increase if one compares 2014/2018 with 2009/2013. This seems a rather biased way of depicting statistics, specially because external factors and financial stability are prevalent on the post-2014 increase. Actually if one looks at recent numbers the increase of NHR seems to stabilize again likely resulting from external factors in home countries.

Another interesting piece of data that is relevant is to see the decomposition per-country of the NHR applications. The table below depicts the 10 countries which represent 82% of the total NHRs.

This list requires also some reading between the lines. Brazil is likely the second if not the first country of the list because many of their nationals are using their second EU nationality (mostly Italians and Portuguese). Both France and Brazil have several external factors at their home turf especially in years 2014 to 2017. Perhaps the NHR slowdown in 2018 and reduction projected for 2019 may be directly correlated with regained stability on those two countries. The prevalence of EU countries (with the exception of Brazil) is natural due to the additional immigration constraints for non-EU nationals and the problems on the investment visa program (leading to delays usually not compatible with changes of residence). Finally, statistically it could be interesting to see if Brexit had any impact on the positioning of UK as second on the list (but this would require numbers per year).

The data on value added activities (necessary for the ones that want to apply to the 20% flat rate on active income) is also very interesting and demonstrates two key points: (i) only 7% of the 29.901 NHR have a value-added activity awarded; (ii) almost 50% of the value added is “senior management”.

The report also includes the number of NHR deriving foreign pensions (in FY17), which was 9.589 (32% of the total NHR numbers). The working group also chose also to depict the ten main countries of NHR and there we see a similarity with the table above with two changes (Finland and Switzerland enter the Top-10 and Spain and Germany exit).

The final data refers to NHR tax collections (per category of income) and a calculation of a “tax expenditure” of €592 million for 2018 (compared with €508 million for 2017). There is no much detail on how the calculation was made beyond a reference to the “revenue forgone approach” (reassessing tax considering NHR regime would not exist). One would have preferred a more neutral approach as HMRC produces for non-domiciled taxpayers in the UK. Yet, credit has to be given to the working group which, in a rather cryptic-way, alerts that any assessment of the NHR regime needs to look at the “externalities”. It could be either a “revenue gain approach” (which would indicate the behavioral responses to change) or a comparison with additional income obtained through indirect taxes and duties (in non-exempt income) plus consumption taxes.

Ultimately, we only hear about the “negatives” but there are many positive “intangibles” that are not captured by any static assessment. We need not to forget the benefits in terms of entrepreneurship, network of worldwide connections and financial strength that such persons bring to the Portuguese economy. Many of such positive signs are there and many available to be developed should Portugal succeed in unlocking the value potential of the NHR regime.

There is definitely another side of the coin and needless to say UK, Switzerland, Spain, Italy and more recently Greece all seem to understand this. 

© 2021 Kore Partners.