Non-Habitual Residency in Portugal

Fad or the Future?

Portugal, a country with a wonderful climate and warm-hearted people, has become the hottest destination¹ for immigration in Europe since introducing its Non-Habitual Residency Regime (NHR).

NHR is a strategic part of Portugal’s socio-economic policy developed to address the significant demographic and structural challenges of an ageing and declining population.

The purpose of NHR is to encourage people of financial means to relocate to Portugal, bringing with them much needed direct investment and skills to stimulate the rebirth of the Portuguese economy.

A Resounding Success

During an interview in November 2020, the Minister of internal Administration¹, Eduardo Cabrita, stated that for the first time, skilled and wealthy foreign residents in Portugal exceeded 500,000 people i.e., just over 5% of the population. The European Commission also confirmed that Portugal was the second-fastest-growing territory in the EU² through immigration. However, unlike the first placed territory, Portugal’s population growth is fuelled by skilled professionals, entrepreneurs and people of a higher net wealth as opposed to economic and political refugees.

Furthermore, direct investment from foreign nationals now resident in Portugal exceeds €4.5 billion of direct investment into Portugal as of 2020³.

These statistics support the success of well-thought-out initiatives with positive economic and social outcomes for Portugal. The question that remains is what makes NHR so attractive?

Tax and EU Residency

The incentive behind NHR is a low tax environment³ for those that qualify. Whilst the details need consideration, the tax principles behind NHR are zero tax of foreign earnings and investment income not remitted to Portugal and a 10% tax on the remittance of foreign pensions income into Portugal. Furthermore, these incentives last for a decade meaning they will have a meaningful impact on the wealth of the NHR over that time and with NHR being linked to Portugal’s Golden Visa programme. The latter giving NHRs the ability to get residency in Portugal and with it the freedom is open to all residents of the European Union.

However, the use of taxation to incentivise migration has been cited as highly detrimental to the country from which the individual moves and that such practices fall under the OECD’s definition of harmful tax practices⁴.

Sovereignty and Law

Portugal has been criticized by other high tax territories in the EU that their NHR programme is unfair and unlawful.

However, the European Court of Justice has ruled that each Member State has the sovereign right to develop a legal system that meets its needs, including social security, labour, and tax laws⁵. This position on tax sovereignty is also confirmed in the Article 65 Treaty of the Functioning of the European Union⁶ and the legal interpretation of this right is affirmed by settled European case law⁷.

Whilst Portugal’s approach is supported by EU law, political pressure has resulted in some subtle changes to NHR, but these have not eroded the tax benefits in any meaningful way and NHR remains a highly compelling consideration for individuals.

The Future

Portugal’s success with NHR has seen Italy⁸ and Greece⁹ introduce similar projects underpinned by preferential tax regimes for wealthy individuals supported by residency and visa programmes and it is expected that other EU territories will follow suit depending on the success of these territories.

What is clear is that globalization and the ease at which people can relocate to a different country means governments need to look after their wealthy citizens. France is a case in point that lost 12 thousand millionaires post changing tax laws¹⁰, irrespective of strong economic growth in the country at that time.

So, governments stand to lose their wealth creators, entrepreneurs, skilled professionals and those that have track records in job creation and enhancing economic activity if they continue to pursue policies of high taxation of these people as they have a growing choice in respect of where they live and what level of tax they wish to pay.

All that is certain is that we are in a time of change but are these countries setting the direction to a new norm… we can only speculate but time will tell.

Note: OTAP offers a Personal Pension Plan specifically for individuals who are taking up NHR in Portugal. Speak to your financial adviser in respect of our services in this regard.