Portugal Tax Benefits

Non-Habitual Resident Status

On Friday afternoon I spent about 15 minutes on a Zoom call with our relocation specialist. We were applying for NHR (Portugal’s Non-Habitual Resident status) for Denise and me. I always thought this a rather odd name. But if it saves us money….

Income Taxes

I have always laughed to myself when I hear Americans complain about the rate of Federal income taxes. And when the GOP argues that lowering the tax rate spurs growth, I simply chalk it up to “fake news”. When compared to other “high-income countries” the U.S. is pretty far down the list. And, of course, the wealthiest Americans benefit the most from the thousands of pages of the I.R.S. code.

In 2018, taxes at all levels of US government represented 24 percent of gross domestic product (GDP), compared with an average of 34 percent for the other 35 member countries of the Organisation for Economic Co-operation and Development (OECD). - Tax Policy Center

So when moving to Europe where tax rates as a percentage of GDP can be as high as 47% one might hit pause.

2018 tax rates as a percent of GDP of high-income countries.

I will admit, we did look into taxation before making the move. We immediately learned three important things:

1. "The USA is one of the few countries of the world which levies personal income tax on all its citizens: not only on its residents - citizens or non-citizens - but also on its citizens who do not live in the country. All citizens of the United States are taxed under the same personal income tax system, regardless of whether they live in the country or abroad." — Taxes for Expats

2. The US has tax treaties with many foreign countries (including Portugal). While both countries take far too many pages to explain this, essentially, you are not taxed on the same dollar twice. — IRS

3. In 2009, Portugal instituted NHR which grants a 20% tax rate or a total exemption on the taxation of income of expatriates who choose to live in Portugal, for up to 10 years. — Lisbob

Working…Retired?

If you are a non-Portuguese citizen living and working in Portugal (i.e. a “working” Resident), under the NHR program you are taxed at 20%. If you are a retiree, you may not pay any taxes during the ten-year NHR period. Compare this to the typical tax schedule under which residents in Portugal are taxed on their worldwide income at progressive rates varying from 14.5% to 48% for 2021.

Chart from PWC

Why?

Those in favor of creating and maintaining the NHR program argue that Portugal needs immigrants. That Portugal needs workers and benefits from retirees who typically have access to larger nest eggs to spend in Portugal. Those that oppose the law argue that these tax benefits don’t actually help the Portuguese economy and are unfair to the Portuguese people.

As of 2020, some changes have been made to the law. Specifically, the Portuguese government has decided to tax certain foreign pension income at 10%. This only applies to new NHR beneficiaries (like us). People who arrived before 31 March 2020 can still benefit from 0% taxes. But even with this change, it makes sense for us to apply. (Keep in mind we are paying taxes in the U.S. on this income…because of the tax treaties we won’t pay anything more.) Of course, the first step is the all-important NIF. The next step was gaining residency, which we completed a few weeks ago. Finally, prior to March of 2022 (when taxes must be filed after our first tax year of residency), we needed to apply online for the program. A much simpler (online) process than I expected. So it just made sense to take care of it now while it was top of mind. We still will have to file taxes in the U.S. and Portugal over the next 10 years…but the amount owed will be a whole lot less.

Editor’s Note: Permit me again to remind you that I am not a lawyer or an accountant. I am not offering advice as your situation may be different than ours. Just sharing our experiences…tha-tha-tha-that’s all folks!