Portugal’s Prime Minister, Antonio Costa, has announced that the Non-Habitual Residence Scheme will end at the end of 2023.  The scheme which gave non-EU residents in Portugal tax advantages has been ended by the socialist government due to its impact in driving up house prices following public protests about high house prices.

The Non-Habitual Residence (NHR) scheme has been very popular with retirees moving to Portugal who become tax resident in Portugal if they spend more than 183 days a year in Portugal. The scheme gives a flat tax of 10pc on pensions from a foreign source, as well as a tax exemption on foreign-source income, including rental payments from tenants if it is taxed in the country of origin. 

It also applies a special tax rate of 20pc on income from “high value added” activities.  This typically includes doctors, architects and other professional roles.

The benefits also apply to Portuguese citizens who have lived abroad for at least five years.

The scheme lasts for ten years and although the scheme will end in 2024 for new applicants, those who already benefit from the scheme will not be impacted.

More than 50,000 people had benefited from the scheme by 2020 and the amount of foreign income that went untaxed due to the policy was around £1.3bn according to official statistics. 

The scheme was introduced following the 2008 global financial crisis but, Portugal’s Prime Minister, Antonio Costa said: “To maintain this measure in the future would prolong a fiscal injustice that is not justified, and would continue to inflate the housing market in a skewed way” and said it “no longer made sense”.  

The Times reports that the decision follows after thousands of Portuguese took to the streets of Lisbon and 20 other cities across the country to ask for stronger government intervention against unaffordable housing prices.

According to a study by the Francisco Manuel dos Santos Foundation between 2012 and 2021, housing prices increased by 78 per cent in Portugal compared with 35 per cent in the European Union as a whole, A 65 per cent increase in Lisbon rents since the start of the tourism boom in 2015 has made apartments unaffordable for many.

Sale prices have jumped 137 per cent in that period, according to housing data specialists Real Estate Confidential.

This decision to end the NHR scheme follows the announcement earlier this year to end its golden visa programme for foreign property buyers which was also driven by concerns about high house prices in the country.

Portugal Resident reports that Gavin Scott, Senior Partner for Portugal at Blevins Franks, said:

“Despite the proposed change, Portugal will continue to offer an attractive tax regime with no wealth tax, gift tax or inheritance tax.

“These changes emphasise the need for professional advice in order to benefit fully from all of the tax advantages, but the attraction to live here remains as strong as ever.

“People are attracted to the sun, security and lifestyle in Portugal and that will continue to be the case. There are few places that rival what Portugal offers, including the tax regime, with careful planning.

“We have been advising clients on Portuguese tax planning for over 25 years; the taxation system has evolved considerably in that time and will continue to do so but the attraction of retiring to Portugal is undiminished.”

No specific date was initially announced, but further detail was provided in the State Budget Law Proposal for 2024, published on 10 October 2023. This confirmed that the regime will cease to apply for those who relocate to Portugal from 1st January 2024. However, the scheme should still be available to taxpayers who:

• Are already registered for the NHR scheme and still within the 10-year period that the sceme applies; and
• On 31st December 2023 meet the conditions to qualify for the NHR scheme and hold a valid residence visa on that date. Registration will need to be completed by 31st March 2024.

The final version of the State Budget Law Proposal for 2024 is to be voted on 29th November 2023 and enter into force on 1 January 2024, but given the government has a majority, significant amendments are unlikely.