Tax expenditure from Portugal’s NHR scheme increases to €1.7Bn – but revenues by far offset tax losses
Portugal’s revamped Non-Habitual Residents (NHR) regime has posted a record in tax expenditure, representing more than 66% of IRS tax benefits.
The transitional regime led to a rush of applications, triggering benefits of almost €500 million.
Nevertheless, tax experts have estimated that revenues received by the State from the NHR are likely to be higher than total costs from tax sweeteners. And in terms of overall investments from overseas citizens in terms of VAT, Social Security, spending in the Portuguese economy, the fact that they have to buy a house in which to live or rent an office from which to run a business, not to mention the fact that they are usually HNWIs or high earners, means that the statistic from the State General Account (CGE) is largely irrelevant as benefits far outweigh any tax losses to the Portuguese State in attracting capital and investment in the first place.
Last year, Portugal’s hugely successful NHR regime was replaced with NHR2 which was much more restrictive in terms of the tax benefits overseas citizens relocating to Portugal could receive.
Yet it was that same year that tax expenditure from the regime registered the largest increase since it was created in 2009 as people rushed to apply before the cut off deadline for the transitional period, with the cost of the NHR to the Portuguese State in tax benefits soaring by almost €500 million euros to €1.741Bn euros last year.
According to the 2024 State General Account (CGE), released this week, this regime was the one that represented the highest tax expenditure in IRS (about 66.4% of the total).
Tax experts admit that the transitional regime led to a rush of applications to benefit from tax deductions but have calculated that this is a virtual “expense”, as it points to revenues coming in that would never have existed without the regime in the first place.
The outgoing regime provided an IRS rate of 10% for foreign pensioners living in Portugal (except for those who met the requirements to December 31, 2023 and have submitted the application for registration as NHR in 2024).
However, it maintained the special rate of 20%, for 10 years, for highly qualified professionals in the areas of innovation, science and research, provided that they were residents of another country in the five years prior to the year in which they became tax residents in Portugal.
Anabela Silva, partner at EY told Jornal Económico: “Although many different reasons can explain this more significant increase (since there had always been an increase every year as the regime became well known internationally), the news that the previous regime was ending may have contributed to speeding up relocaters’ moving plans to Portugal as early as 2023, contributing to a greater concentration in the number of registrations”.
