NHR Update - Draft Budget for 2024 Released
Update from 29 November 2023: Latest NHR reporting – Today the Parliament has voted the Budget Law and has approved the end of the NHR. This includes a grandfathering regime for NHRs registered and others that will register until 31 December 2024. The Budget also includes a new incentive regime targeting individuals relocating to Portugal and designed to foster scientific research and innovation. The texts below are therefore no longer relevant and for the latest update please click https://www.korepartners.com/insights/end-of-nhr to read our report.
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Update from 15 November 2023: Latest NHR reporting - Yesterday, two relevant proposals were made available by the party supporting the Government that retains majority in the Parliament, increasing the likelihood of this being the final measures to be approved.
1. End of the NHR and new grandfathering regime
The proposal to end the NHR as it is proposed initialy advances as from 1 January 2024 onwards.
The existing regime continues to be applicable for registered NHR (i.e. granthfathered), until the end of the initial 10-year period set out in the Law expires. This includes any taxpayer that on 31 December 2023 is registered as a resident and applies for NHR thereafter.
The grandfathering rule will also include taxpayers that only become a resident for tax purposes the follwing year - by 31 December 2024 - if one of the following conditions is present:
a. Promissory employment agreement or promissory secondment agreement (or employment or secondment agreement) signed by 31 December 2023 to perform activities in Portugal; or
b. 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
c. Reservation or promissory contract for the acquisition of property located in Portugal concluded before 10 October 2023 (day when the NHR withdrawal was officially announced); or
d. Enrolment or registration for dependents at Portuguese educational establishment by 10 October 2023 (day when the NHR withdrawal was officially announced); or
e. Residence visa or residence permit valid by 31 December 2023; or
f. Procedure, initiated by 31 December 2023, of granting a residence visa or residence permit, with the competent entities, in accordance with the current immigration legislation, namely through the request for an appointment or actual appointment for submission of the request for the granting of a residence visa or residence permit or, also, by submitting the request for the granting of a residence visa or residence permit.
g. The taxpayer who is a member of the household of taxpayers covered above.
2. New tax incentive for scientific research and innovation (new NHR)
Taxpayers becoming tax residents in 2024 under Portuguese domestic law that 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, as long as they carry out activities that fall within:
a. 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
b. Qualified jobs within the scope of contractual benefits towards productive investment, in accordance with chapter II of the Portuguese Investment Tax Code; or
c. Qualified jobs recognized by AICEP Portugal Global - Trade & Investment Agency or by IAPMEI - Agency for Competitiveness and Innovation, as relevant to the national economy, particularly in the context of attracting productive investment; or
d. Research and development personnel, whose costs are eligible for the purposes of the tax incentive system in research and business development, in accordance with the Investment Tax Code; or
e. Jobs in entities certified as startups under the Portuguese Start-Up Law; or
f. Jobs 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 classes 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 activities/jobs.
Under the current proposal, the eligible taxpayers will be exempt on foreign income from several categories of income (namely employment income performed abroad, self-employment income performed abroad, foreign rental income, capital gains in foreign assets), except for pension income. Income derived from blacklisted tax havens will be subject to 35% rate.
The registration of beneficiaries with entities and communication with the tax authorities will be regulated by Ministerial Order.
This special regime can only be used once and is not available for taxpayers which benefit or have benefited from the non-habitual resident regime or opted for partial exemption under a special regime for ex-residents.
NOTE: There are alternative proposals by other political parties, including one proposing postponing the end of the NHR regime to 2025, and therefore changes and ammendments to this proposals could happen, with final approval of the Budget Law being set for 29 November and the official publication on 31 December 2023.
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Update from 10 November 2023: Latest NHR reporting - There is no stability to provide any type of informed advice, simply because even though Tuesday's abrupt resignation of the prime minister and the call of general elections in March, the President has announced the Budget Law process will continue its legal process. One should therefore proceed based on the assumption that the measures to revoke the NHR as outlined below will advance as proposed in the draft delivered in the Parliament. The final approval of the Budget Law is set for 29 November and the official publication by 31 December 2023. During next week, several proposals are expected to enter the Parliament to amend or adjust the provisions of the Budget Law, including the NHR related provisions. The outcome is therefore unpredictable at this stage.
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Update from 10 October 2023: Latest NHR reporting: The Draft Budget Law for 2024 was released in Parliament on 10 October 2023. After several discussions with Government officials in the last days to defend the structural importance of the non-habitual residents’ (NHR) regime, it was not possible to change the initial position to revoke the regime for individuals arriving in 2024.
For existing NHRs, the grandfathering rule will mean that tax residents will continue to benefit from the same rules currently applicable, and this includes:
1. The NHRs that are already registered as such will continue to benefit from the current regime until the end of their 10-year period.
2. Tax residents at 31 December 2023 that met the conditions to register as NHR (including the holders of a valid residence visa on that date) may benefit from the regime until the end of their 10-year period, to the extent that they apply for the regime by 31 March 2024.
This means that technically speaking the NHR will therefore only end in FY2032 when the 10 years formally elapse to the tax residents starting their Portuguese tax status in 2023.
For new tax residents arriving after 1 January 2024, the NHR regime as such will no longer be available.
The Draft Budget Law for 2024 includes some provisions regarding tax incentives for individuals that include:
1. 50% of income from employment and independent business income is excluded from tax levied at progressive rate up to a maximum Euro 250,000 and for a period of 5 consecutive years for new residents arriving between 1 January 2024 and 31 December 2026. The only condition is that such persons have not been resident in Portugal during the prior five years from the arrival.
2. Special tax incentive for scientific research and innovation applicable for 10 years to those who have not resided in the 5 years prior to its application in Portugal. The regime is applicable to; (i) higher education and scientific research work (private and public); (ii) qualified jobs within the scope of eligible contractual tax benefits for productive investment; and (iii) R&D jobs eligible for the purposes of the tax incentive system. This special incentive includes exemption of foreign-source income. This benefit is not applicable to persons that have applied the NHR or opted for the 50% exclusion regime.
The Draft Budget Law will now enter a phase of discussion for the next weeks to arrive to a final text by 29 of November. New rules are only applicable as from 1 January 2024 onwards. We plan to report when new updates to the rules are released or if any major change is made.
Click here for the Portuguese Version.
Thank you
Kore Team
© 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