The new Non-Habitual Residency (NHR) 2.0 regime in Portugal offers tax advantages to those working in specific scientific, research and innovation fields. It is not open to retirees. However, Portugal continues to provide attractive tax benefits to those seeking a fulfilling retirement in a country renowned for its exceptional quality of life.
Portugal’s original Non-Habitual Residency (NHR) regime was launched in 2010 to attract foreign nationals to live in Portugal and contribute to the local economy. Over the following 13 years it became increasingly popular with British and other retirees, professionals, entrepreneurs and digital nomads seeking sunshine, safety and a comfortable lifestyle alongside generous tax breaks.
NHR 1.0 offered a 10-year window of reduced taxation on foreign income and pensions, making it one of Europe’s most attractive destinations for retirees. But the original NHR programme officially closed in early 2024. In its place, Portugal has introduced what is commonly known as ‘NHR 2.0’, although its formal title is the Tax Incentive for Scientific Research and Innovation or IFICI.
So, what does this mean for retired British expatriates? Is NHR 2.0 still a viable option, or is it time to rethink your retirement strategy?
What was the original NHR regime?
The original NHR regime allowed new Portuguese tax residents to benefit from 10 years of tax advantages. It included a flat 20% tax rate on qualifying Portuguese-sourced employment income; exemptions on other foreign-sourced income, and no tax on foreign pension income until a flat 10% tax began being imposed in April 2020.
The reduced rate on Portuguese employment income was limited to those with a ‘high added value’ profession, but retirees could also apply and receive the tax breaks on foreign income and some capital gains. This made Portugal especially appealing for British retirees with UK pensions and capital investments, enabling them to reduce their tax burden while enjoying a high quality of life.
What has changed under NHR 2.0?
NHR 2.0 (IFICI) is much more restrictive. It specifically targets highly qualified professionals in fields such as science, technology, education and innovation. While the old NHR broadly referred to ‘high added value’ employment, NHR 2.0 restricts access to specific categories and professions. Individuals will need to ensure that they perform qualifying employment activities each year.
It is not designed for retirees and those with passive income.
As previously, it is only open to new tax residents and the NHR term is limited to 10 years. Many, but not all, of the tax benefits remain the same.
What tax benefits does NHR 2.0 offer?
The following benefits apply for 10 years:
- A reduced 20% flat rate of tax on Portuguese-sourced employment and professional business income.
- Exemption from Portuguese tax on foreign-sourced income, such as:
- investment income (dividends, interest, distributions from trusts, etc)
- capital gains
- rental income
- employment and professional business income
The exemption on foreign-sourced investment income is technically an ‘exemption with progression’. This means foreign income and gains are added to the taxable income for the year, thereby increasing the applicable tax rate on anything that is taxable at the Portugal scale rates. Income and capital gains sourced in tax havens do not benefit from any exemption and are taxable at 35%.
Pension income is not exempt and no longer benefits from a reduced rate either. Under NHR 2.0, pension income is fully subject to Portuguese income tax.
How do you qualify?
To qualify, applicants must:
- Be a Portugal tax resident. (NHR itself does not grant tax residency.)
- Not have been a Portuguese tax resident in the previous five years.
- Hold academic or professional qualifications and be able to prove experience.
- Work in an eligible profession or for a qualifying company.
- Apply through the official channels and supply all supporting documentation.
The relevant Portuguese authority or institution governing your profession or category must approve each application. The process is much more closely monitored than NHR 1.0.
What does this mean for retirees? Should you still consider Portugal?
Yes, indeed, Portugal has much to offer and remains a highly attractive destination for your retirement years. While you won’t be eligible for the same tax breaks as previously, it continues to offer other tax benefits.
While some people may choose to live in a particular country purely for tax purposes, for most of us lifestyle comes first. Find the country that appeals to you, then take specialist advice to fully understand the local tax regime and establish how you could use it to legitimately reduce your tax liabilities – with careful planning, you may find your tax burden is considerably lower than initially expected.
For example, investment income can be taxed very efficiently here in Portugal, with some arrangements offering beneficial tax treatment. When it comes to UK pensions, Portugal can offer attractive tax options for residents in a position to encash their funds.
Portugal’s equivalent to inheritance tax, a 10% ‘stamp duty’, only applies to non-direct family members and only on Portuguese assets. Your spouse, children, grandchildren and parents are exempt. Portugal does have a form of wealth tax, but it is limited to high-value properties located within Portugal and can therefore be avoided.
If you own a UK company and are semi-retired or approaching retirement, there are a couple of limited, specific opportunities within NHR 2.0 where you may consider undertaking an activity to take advantage the regime. One possibility is to establish a subsidiary of your UK company to provide consultancy services to the UK company or supply goods or services through it. You could take a basic salary from the Portuguese company while receiving other UK income, such as dividends from your UK company, that are exempt with progression. If you are in this position, contact Blevins Franks to learn more and establish the most suitable approach for you.
What about those with existing NHR 1.0 status?
Anyone with NHR status under version 1.0 continues to benefit from all its tax advantages, including the 10% rate on foreign pension income, until your 10-year term comes to end. You cannot then apply for NHR 2.0 (but nor was your original status renewable).
However, you currently have a unique and limited opportunity to dispose of assets, potentially without any tax at all.
Don’t leave it too late. Take specialist cross-border advance well before your NHR term ends to allow time to restructure your assets for the most tax-efficient transfer out of NHR possible – whether you stay in Portugal or move to pastures new.
Making the most of Portugal’s tax benefits
At Blevins Franks, our clients are usually very pleasantly surprised by how much tax our expert knowledge and strategic financial planning can save them and their family and heirs.
With our expertise, the Portuguese tax regime provides compliant opportunities to enjoy extremely favourable tax treatment on capital investments. Retirees who reinvest real estate gains into these tax-efficient arrangements may also be exempt from the capital gains tax that would have been due on the property. There can also be very attractive tax options for encashing UK pensions, making it comparable to the old NHR benefits.
Portugal has much to offer. With the right planning, you will enjoy a comfortable, rewarding and financially secure retirement there. Get in touch and we’ll help you put your plans into action, guiding you through your journey and protecting your long-term wealth.
