By Raquel de Matos Esteves & Inês Marques Dias
Portugal’s recent announcement that it was ending its non-habitual resident (NHR) tax regime in Portugal, after the approval of the State Budget Law for 2024, marked a significant change to the system for foreigners who are tax residents in the European country that has been in effect for 14 years.
It is also a significant development in the European Union (EU)'s evolving tax landscape and evidence of the challenge of harmonizing tax policies within the bloc.
POTENTIAL CHANGES TO PORTUGAL’S TAX REGIME FOR FOREIGN RESIDENTS
In simple terms, Portugal’s NHR regime allows taxation of foreign residents at a fixed rate of 20% on income from high-value-added activities and a fixed rate of 10% for pensioners. It exempted passive incomes, as opposed to a taxation rate that can go up to 53% for regular residents.
Until now, Portugal’s tax regime is one of the best special tax regimes for individuals in the EU, not requiring any local contract or local source of income to benefit from the special tax rules. It is also relevant to consider that no foreign assets report is needed, and Portugal does not have an inheritance or wealth tax.
In the final draft, the Portuguese government foresaw a transitional period to safeguard the legitimate expectations of applicants who had already initiated their relocation process to Portugal. Therefore, applying for the NHR tax regime in 2024 will still be possible, contingent upon the fulfillment of specific conditions.
In addition, Portugal has introduced a fiscal incentive for scientific research and innovation targeted at taxpayers who have not been residents in Portugal in the last five years and engaged in activities such as teaching in higher education and scientific research. They are considered qualified jobs within the scope of contractual benefits for productive investment or recognized by the Agency for Investment and Foreign Trade of Portugal (AICEP) or the Agency for Competitiveness and Innovation (IAPMEI). They are regulated by governmental ordinance, employment in certified entities as startups, and jobs or other activities carried out by tax residents in the autonomous regions of the Azores and Madeira, under terms to be defined by regional legislative decree.
The beneficiaries will be subject to a special tax rate of 20% on the net income of categories A and B earned within the scope of these activities for ten years and exempted on all foreign-sourced income, starting from the year of registration as a resident in Portugal, provided they maintain fiscal residency in the country and annually undertake qualified activities.
HOW DOES PORTUGAL’S TAX FOR FOREIGNERS COMPARE WITH OTHER EUROPEAN COUNTRIES?
Given the legislative gap at the EU level regarding the taxation of European citizens living and/or working outside their home countries, several countries have established special tax regimes to attract individual taxpayers.
In Spain, residents are taxed on income from dependent work at progressive rates ranging from 19% to 47%, with the highest bracket applying to incomes exceeding 300,000 euros. Under the Special Regime for Posted Workers, commonly known as the Beckham Law, taxable income is subject to a 24% rate up to a limit of 600,000 euros, and beyond this amount, the rate applied is 47%. As for income from dividends, capital gains, or other income, they are not subject to taxation in Spain if they originate from foreign sources but will be taxed if obtained in Spain.
This regime is applicable for six years; the first year of residence plus five more years. The individual must not have been a tax resident in the last five years (previously 10 years) to benefit from this regime. It also covers the relocation to Spain due to the conclusion of an employment contract, secondment, or appointment as a director of an entity. Starting in 2023, freelancers, remote workers, and entrepreneurs also have tax benefits if they relocate to Spain.
Meanwhile, in Italy, income from dependent work is subject to progressive tax rates ranging from 23% to 43%, with the 43% rate applying to incomes starting at 50,001 euros. Additionally, there is a regional tax ranging from 1.23% to 3.33% and a municipal tax between 0% and 0.9%, depending on the municipality of residence. The impatriates’ regime provides an exclusion from the taxation of 70% of income from Italian sources, which can go up to 90% in specific circumstances. This regime is valid for five years and, under certain conditions, the new resident can benefit from the regime for an additional five years, with a 50% exclusion (90% in the case of impatriates with at least three dependent minor children, among other cases). However, the proposed 2024 State Budget Law could change the current exclusions to 50% and restrict the subjective scope.
Italy’s tax regime for new foreign residents, introduced by the 2017 State Budget Law, allows paying a fixed amount of 100,000 euros in taxes on foreign-source income, regardless of the actual amount received and its transfer to Italy. This alternative can also be extended to family members for an additional 25,000 euros per member.
For impatriates, Italian law requires that the individual has not been a tax resident in the country for the last two years and that they work at least 183 days in Italian territory during each fiscal year. In the case of new residents, the individual cannot have resided in Italy for at least nine of the last 10 years.
The 2019 Budget Law introduced a new tax regime for individuals receiving pension income. It allows individuals who receive pension income from foreign entities, and who change their residence to Italy in certain small municipalities to opt for a tax regime with an alternative 7% tax on foreign income for each of the nine fiscal periods during the validity of the option. To benefit from the foreign pensioner tax regime, the individual cannot have been an Italian resident in the five fiscal periods before the regime came into effect.
In the Netherlands, income from dependent work is categorized under "Box 1" and subject to progressive tax rates ranging from 9.28% to 49.5%, with the 49.5% rate applying to incomes exceeding 73,031 euros. Expatriate workers posted to the country or foreign workers hired by a Dutch employer may qualify for the "30% facility" if they have resided at least 16 out of the last 24 months more than 150 kilometers away from the country's border before concluding their employment contract. The specific taxable salary thresholds depend on the position to determine if the worker has specific expertise or qualifications.
Under this regime, 30% of taxable income from dependent work in the Netherlands can be paid as a tax-free allowance to cover the cost of living. Starting in 2024 (with exceptions), a maximum limit of 223,000 euros of income subject to the "30% facility" will be applied. This limit is adjusted annually. The 30% reimbursement is intended to cover all extra-territorial costs, and if the actual extra-territorial costs exceed the 30% reimbursement, the higher costs can be reimbursed tax-free.
In Greece, under the non-resident tax regime, individuals who change their tax residence to the country can benefit from an alternative tax on foreign income amounting to 100,000 euros to be paid for each fiscal period during which the regime applies (it also applies to family members, with a tax of 20,000 euros for each). To be eligible for this regime, the individual must not have been a tax resident in Greece for at least seven out of the eight years preceding their move to Greece and must invest at least 500,000 euros in real estate, bonds, or shares of companies established in the country, either directly or through family members or a company. The request for changing tax residence and obtaining non-domiciled status must be submitted by Mar. 31 of each fiscal year.
As for pensioners, individuals receiving pension income from foreign entities that constitute at least 75% of their taxable income can be taxed at a reduced rate of 7% for 15 years. In this case, the individual must not have resided in Greece for five years in the six years leading up to the year in which the tax regime takes effect.
Finally, a tax regime is available for employment income and business activities for individuals who transfer their tax residence to Greece. Under this regime, 50% of income from employment or business activities obtained in Greece during the fiscal year is exempt from income tax and the special solidarity contribution, subject to certain conditions.
In Malta, the Global Residence Program provides individuals from third countries who opt to relocate to Malta to work with income originating abroad, the benefit of a flat 15% tax rate on such income, subject to a minimum annual tax of 15,000 euros. To be eligible for this program, individuals must either possess real estate in Malta valued at a minimum of 275,000 euros (with lower thresholds applicable to properties in specific areas) or enter property leases with an annual rent of no less than 9,600 euros.
Individuals who receive pensions from foreign sources, constituting at least 75% of their taxable income, can benefit from a 15% tax rate, accompanied by a minimum annual tax of 7,500 euros, with an additional 500 euros per year for each dependent.
On the other hand, returning migrants, subject to specific conditions, can choose a taxation method based on the source and remittance of income instead of their worldwide income. In this scenario, foreign-source income received in Malta that exceeds tax-exempt amounts of 4,200 euros for single taxpayers and 5,900 euros for married taxpayers must be subject to a fixed 15% income tax, with a minimum annual tax of 2,325 euros.
In addition, highly qualified individuals who maintain their residence in Malta but are not domiciled in the country and derive income through a 'qualified employment contract' for activities conducted in Malta can also take advantage of the appealing fixed 15% tax rate.
FOREIGN INVESTORS MUST UNDERSTAND THE EU’S TAX LANDSCAPE IS EVOLVING
The end of the Portuguese NHR regime as we know it is a significant development in the EU's evolving tax landscape. While it raises concerns about the potential impact on Portugal's attractiveness to foreign residents and investors, it also highlights the broader challenge of harmonizing tax policies within the EU.
In this context, EU member states will continue offering unique tax regimes to attract foreign individuals and investors. The push for greater tax cooperation and regulation at the bloc’s level remains ongoing, but achieving consensus among member states with varying interests is complex.
As individuals and investors weigh their options, understanding the available tax schemes in different EU member states will be crucial in making informed decisions. The EU's ever-evolving tax landscape will continue to be a topic of interest and debate as countries strive to balance their fiscal goals with the need for tax fairness and competition.
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