Last Chance for Tax-Advantaged Living in Portugal

If you’ve been considering a move to Portugal for its tax advantages, don’t wait.

The country is shuttering the so-called Non-Habitual Resident (NHR) program, which offers expats reduced tax rates on income earned domestically (20%) and overseas (0–10%) for a non-renewable 10 years.

The government hasn’t announced an official end date yet, and messaging is mixed.

In a television interview, Prime Minister Antonio Costa was vague, stating only that the program will close to new entrants in 2024. Some in the government whisper that the NHR program could end as early as Jan. 1, 2024. But the plan is part of the Draft State Budget Law, which is yet to be ratified.

More likely, the program will be phased out gradually, with an end date of mid- to late 2024. So potentially, there’s time to take advantage of it.

The one thing officials unequivocally agree: Those who join the program prior to its end date will be grandfathered in.

Portuguese residence applications typically take three to four months to complete. Once you file to change your tax residence to Portugal, that begins the NHR process, which would grandfather you into the program… even if you don’t officially have NHR status when the program terminates.

In other words, those who qualify for NHR status in 2024—assuming it’s still available—will be eligible for tax-advantaged living until 2034.

If you don’t make the cutoff, Portugal will be less attractive from a tax-reduction standpoint, but there are still compelling reasons to relocate here… and I’ll touch on those in a moment.

Retire in Portugal Now and Pay Fewer Taxes

The NHR program is best-suited for those looking to retire to Portugal or digital nomads who want to live and work in Portugal permanently.

The program imposes a flat 10% tax on pension income derived from offshore sources (e.g., Social Security, as well as IRA and 401k distributions).

American retirees in Portugal are not taxed on capital gains or rental income, nor on dividend and interest income from non-Portuguese investments.

And there are no taxes on foreign earned income… if income is taxed in the source country.

In other words, if you as a retiree still do some online consulting back in the U.S., you will pay self-employment taxes in America… and no personal taxes on that income in Portugal.

Digital Nomads Benefit From the NHR, Too

In my opinion, the NHR program is even better for those of us still working.

Under the existing rules, offshore income is taxed at a flat 20% rate.

If, however, that income is structured as dividend pay from a corporate entity, such as an LLC… then the rate drops to 0%.

And because the income is earned (rather than derived from passive sources, like investments), Uncle Sam allows you to write off the first $120,000 as part of the Foreign Earned Income Exclusion.

You’ll owe $0 in personal income taxes on that $120,000.

Anything above $120,000 is taxed at your marginal rate. Because the IRS considers a single-person LLC a “disregarded entity,” your LLC income is seen as personal income by the IRS.

You’ll still pay a 15.3% self-employment tax to the US, though that can be reduced by writing off expenses such as business travel, supplies, home-office deduction, etc.

In sum: Digital nomads eligible for the NHR program, and who run their income through an LLC, have an effective global tax rate of less than 15%. It’s one of the best tax opportunities for nomadic workers right now.

Why Is Portugal Ending the NHR Program?

In the past years, Portugal has touted itself as a top destination for foreign nationals wanting a cheaper, higher standard of living.

Indeed, I recently relocated from Prague to Cascais, a beach community roughly 45 minutes west of Lisbon. My cost of living here is easily half of what it was in Los Angeles, where I lived before decamping to Europe.

In fact, there are very few beachy communities anywhere in the US where I could afford to live a five-minute walk from the beach. (And Cascais is one of the most expensive communities in Portugal.)

Little wonder that Portugal exploded in popularity. When I was in the Algarve region, a property manager told me that some locals have started calling the area “New California” because of all the West Coasters drawn to the affordable, beachfront lifestyle of southern Portugal.

Though official numbers haven’t been published, anecdotal evidence suggests that over 10,000 foreigners are part of the NHR program, which began in 2009… and that number’s increasing rapidly.

While the NHR program has a host of benefits for expats, Portugal is losing out on scads of potential tax revenue.

Portugal’s Tax and Customs Authority (the local version of the IRS) recently reported that the NHR exemption reduced annual tax revenue by €1.21 billion in 2021.

That’s the first time the number crossed €1 billion. As of 2019, exempted tax revenue was closer to €770 million.

As for local residents… well, Portugal has been hit by a number of protests as residents rail against the rapid escalation in home prices and rent.

Indeed, Portugal Business News recently reported that home prices in the country are up nearly 100% between 2010 and 2023.

In neighboring Spain, the increase of the last 13 years was just… 0.9%.

Looking to Portugal’s Future

Portugal offers many advantages for expat retirees and digital nomads… namely, a cost of living much cheaper than the States… a well-regarded healthcare system… and an enviable lifestyle, whether you seek sun and sand, wine country, urban living, or a quiet lifestyle along trout- and salmon-packed rivers in the north of the country.

And the NHR program sweetens the deal.

The NHR program is one of two reasons Portugal stands above neighboring Spain in terms of residency attractiveness. The other reason: Portuguese citizenship—and therefore an EU passport—are attainable in just five years rather than the 10 Spain requires.

Post-NHR program, Portugal will still offer lower housing costs than the US and a potential fast track to one of the most desirable second passports (EU) in the world. But it won’t boast superior taxadvantaged living.

Instead, it will be closer to Spain, with progressive tax rates of as much as 48% on income over $83,000. That will make Portugal far less attractive to digital nomads and retirees.

Property prices could retreat, tempering local anger. But Portugal will also lose one of its biggest draws… and could lose a host of residency applications, which would have a negative economic impact.

Indeed, Portugal recently ended its so-called Golden Visa program, which gave immediate residency rights to those who spent €350,000 on property. That program alone brought in €7.3 billion in the decade before its demise.

Killing the NHR program could see a similar impact, as would-be Portuguese residents opt for Spain, France, Italy, or Greece instead, all of which have digital nomad and retiree visa programs.

For now, the NHR program remains open… though its days are clearly drawing to a close.

So if you’re interested in trying to get in under the wire, now is the time to act.