End of NHR? The recent unveiling of the State Budget Proposal for 2024 in Portugal has stirred the financial waters for expatriates and digital nomads, marking the end of NHR, the existing Non-Habitual Tax Resident regime, as we know it. We will delve into the details of these changes, unveiling the new tax landscape and offering insights into alternative tax regimes that remain viable for the nomadic workforce.
In October 2023, a significant announcement echoed through Portugal’s tax landscape. The Prime Minister, António Costa, revealed plans to discontinue the NHR tax regime by 2024, marking an end to a system that had long drawn retirees, self-employed individuals, and digital nomads to Portugal.
The NHR Era: Fostering Investment & Navigating Housing Challenges
This regime, with its generous tax benefits, had not only stimulated foreign investment but also significantly bolstered the local real estate market post the 2008 financial crisis. However, due to a worsening housing crisis and social protests, the government has chosen to shift its tax focus.
Yet, it’s essential to note that phasing out the NHR is not a panacea for the housing crisis; rather, it appears to be a diversion from addressing the root issues, such as the supply-demand imbalance in the housing market. The government’s move might veer public discourse away from pressing for real solutions like fostering affordable housing projects or implementing policies to balance the real estate market dynamics.
This strategic change in tax policy brings us to the pertinent question: what now for digital nomads? The NHR regime’s allure has been undeniable, but with its impending termination, the horizon seems to be shifting for the globally mobile workforce.
Out with the Old, In with the New NHR
The existing NHR regime has long been a magnet for digital nomads, and freelancers, thanks to its 20% flat tax rate on employment and self-employment Portuguese and foreign-born income derived from eligible occupations and exemptions on foreign source passive income or dividends. However, as the curtain falls on this regime, a new one rises with a narrower scope but potential advantages for certain individuals.
The current NHR system will cease to exist from the 1st of January 2024, marking an end to the exemption for foreign source income, particularly passive income like capital income, rental income, and capital gains. There will still be opportunities for reduced taxation in some employment and self-employment activities.
Individuals already registered as NHR until 31 December 2023, or those who meet the conditions for registration as NHR by this date and apply for it until 31 March 2024, can still enjoy the current NHR rules. This transitional provision is particularly beneficial for those who’ve initiated the process but haven’t finalized their NHR status.
The new regime, dubbed the “New NHR,” is tailored toward fostering scientific research and innovation.
Unlike its predecessor, the New NHR encompasses specific groups:
- Careers in higher education and scientific research.
- Qualified jobs within specified sectors, including publishing activities; film, video, and television production activities; computer programming and consultancy and related activities; data processing, information domiciliation and related activities and web portals; Scientific research and development activities;
- Activities of interest to tourism, manufacturing, accommodation,
- Administrative and support service activities,
- Research and development roles for staff with a Doctorate Degree.
The Silver Lining: New NHR’s Potential Advantages for Digital Nomads
Interestingly, the New NHR regime could potentially offer more tax advantages for the digital nomad and remote worker community, particularly those engaged in tech-centric fields. The specified sectors under the New NHR include:
- Computer programming and consultancy and related activities.
- Data processing, information domiciliation, and related activities.
These categories typically encompass a broad spectrum of digital nomad and remote work professions. Thus, the New NHR regime could potentially serve as a lucrative tax framework for tech-savvy digital nomads and remote workers, fostering a conducive financial environment for them to thrive in Portugal.
Moreover, the: exemption on all categories of foreign income, including employment and self-employment income performed abroad, foreign rental income, and capital gains on foreign assets, with the exception of pension income, remains a noteworthy benefit under the New NHR regime.
Interestingly, the New NHR regime could potentially offer more tax advantages for the digital nomad and remote worker community, particularly those engaged in tech-centric fields.
As for the Portuguese-sourced income, it is still taxed at the 20% rate applicable to employment, and self-employment income, with the difference that now it must be obtained through the performance of the activities mentioned above, and not in the current High Value-Added List.
There is however a paradigm shift in how foreign source income is determined, with a focus on Portuguese domestic rules on income sourcing rather than interpreting Double Tax Treaties. The foreign income must be from a non-resident entity without a permanent establishment in Portugal, located in a country, territory, or region subject to a “favorable more advantage tax regime” (i.e., a blacklisted tax haven).
Alternative Path: The “Ex-Residents” Regime
Besides the New NHR, the “ex-residents” regime emerges as another viable tax option. This regime, subject to amendments, extends benefits to individuals moving to Portugal until the end of 2026, offering a 50% reduction of the taxable base on employment and self-employment income, capped at the first €250,000 of income.
The Simplified Tax Regime: A Persistent Beacon
For digital nomads and self-employed individuals, the Simplified Tax Regime continues to stand as a pragmatic choice. This regime applies to service providers with a turnover of less than €200,000, taxing only 75% or 35% of the income based on the services provided, and allowing the claiming of tax credits.
Conclusion
Portugal’s tax landscape is morphing, with the revamping of the NHR regime. While the New NHR narrows the scope of beneficiaries, it potentially opens up more tax advantages for digital nomads and remote workers in tech-centric fields. Alongside this, the “ex-residents” regime and the Simplified Tax Regime continue to offer attractive tax benefits for digital nomads and other expatriates.
As Portugal recalibrates its tax incentives, the essence of attracting foreign talent and investment remains intact, ensuring its position on the radar of digital nomads remains undiminished.
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Last updated November 17, 2023.
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