But there are several common myths about the scheme that keep popping up over and over. In this article, I’m going to bust those myths once and for all, so you can clearly understand what the NHR Portugal scheme is, what it does, and who can get it.
Myth 1: The NHR Portugal scheme is a type of visa
Much of the confusion around NHR is related to its name, which stands for ‘non-habitual residency’. This immediately makes you think that NHR is related to immigration. It also makes it sound as if NHR is for people who are not habitually resident in Portugal.
In fact, the opposite is true. Contrary to its name, holding NHR status requires the holder to be a tax resident of Portugal. NHR is purely a tax status; it has nothing to do with immigration.
To become tax resident, you have to spend more than 183 days per year physically in Portugal, and have Portugal as your primary place of residence. That requires having legal immigration status.
Depending on whether you’re an EU citizen or third country national, there are different immigration pathways for Portugal. EU citizens can simply move to the country and immediately claim the right to live there. This privilege is part of the EU’s freedom of movement rules, which grant this right to all member state nationals.
In contrast, those from outside the EU, have to apply for a visa to enter Portugal with intention to reside (this is different from the regular Schengen tourist visa). This visa then gets converted to a residency permit, which has to be renewed every so often. Once you have your residency permit, you can then apply for NHR tax status.
So in a nutshell, you move to Portugal first, using either EU freedom of movement or an immigration visa, then apply for NHR tax status once you’re officially resident.
Myth 2: NHR makes all income tax free
The NHR Portugal scheme has developed a reputation as a way to avoid tax. That’s not entirely true. Portugal certainly isn’t a tax haven. For starters, the EU wouldn’t allow any of its member states to act as such. Portugal’s regular taxation scheme has some pretty high rates, going up to 48%, and with very low allowances at the bottom end.
Having NHR allows the holder to benefit from some tax exemptions, mainly on income originating abroad. For example, if you draw your income as dividends from a foreign limited company, these will be tax-free under NHR. That’s only the case if the dividends are theoretically taxable in the country of origin.
This works well for the UK, because the UK tax authorities levy a tax on dividends. But the UK won’t tax your dividends if you’re not resident there. The end result is: no tax on your dividends with the NHR Portugal scheme.
In contrast, dividends from a company incorporated in a country with no dividend tax at all, such as Dubai, wouldn’t work with the NHR scheme. Portugal would tax those dividends at the normal rate of 28%. The basic tenet is that any income should be taxable somewhere, either in its country of origin or in Portugal.
Other forms of income won’t be free of tax under NHR, but will instead be taxed at a flat rate that’s lower than Portugal’s regular scale. One common example is income generated from Portuguese sources when working as a freelancer. If your area of work is classed as a high-added value activity, then you’ll pay a flat rate of 20% tax on all your Portugal-sourced income.
Myth 3: NHR is only for programmers
The NHR Portugal scheme was originally designed to attract high value individuals to the country, with the aim to rejuvenate Portugal’s economy.
As such, a wide range of individuals can be eligible for NHR status.
The first is retirees. Those with a foreign pension form their own NHR category. They will be subject to 10% tax from Portugal on any foreign pension income. This used to be 0%, but Portugal raised it to 10% in 2020.
For everyone else, the NHR Portugal scheme revolves around the below list of high value-added activities, which is actually very broad.
For example, if you’re the director of a limited company based outside of Portugal, then you fit into the list as “General director of a company”. This makes you eligible for NHR status.
Previously, NHR Portugal applicants had to submit proof of their high value-added activity at the moment of application. This proof could include employment or service contracts, proof of being part of a professional association, or other official documents to prove the applicant actually conducts the high value-added activity in question.
But this process was time-consuming, so the Portuguese authorities introduced a new approach. Now, the NHR application is typically approved without prior recognition of a high value-added activity.
NHR holders simply have to refer to the high value-added activity framework when they file their annual income declaration. The tax authorities still have the right to ask the NHR holder to provide proof of their activity at any point, if they decide to perform a random check.
List of high value-added professional activities
- General director and executive manager of a company;
- The directors of administrative and commercial services;
- Directors of production and specialized services;
- Directors of hotel, restaurant, commercial and other services;
- Specialists working in physical sciences, mathematics, engineering and similar technical fields;
- Dentists and stomatologists;
- Teachers at universities and higher learning establishments;
- Specialists in information and communication technologies (ICT);
- Authors, journalists and linguists;
- Creative artists and performing artists;
- Intermediate level science and engineering technicians and professionals;
- Information and communication technologies technicians;
- Market oriented farmers and qualified agricultural and livestock workers;
- Market oriented qualified forestry, fisheries and hunting workers;
- Qualified industrial, construction workers and craftsmen, including qualified workers in the fields of metallurgy, metalworking, food processing, wood manufacturing, clothing production, handicrafts, printing, manufacture of precision instruments, jewellers, artisans, electricity and electronics workers;
- Operators of installations and machines and assembly workers, namely fixed installations and machine operators.
Myth 4: NHR Portugal is difficult to get
When the NHR scheme began, the application process was a lot more involved than it is now, requiring the applicant to submit a range of documents including proof of high-added value activity. But, as already outlined in the previous point, the NHR application process has become more streamlined. This doesn’t rule out the possibility that you’ll have to prove your high-added value activity later down the line, but it makes it easier for people to get into the scheme.
Myth 5: You can get NHR anytime after moving to Portugal
The NHR Portugal scheme is valid for 10 years from the date you apply.
But the process of applying has a strict deadline. If you miss this deadline, you’ll miss out on the NHR scheme altogether. In that situation, the only way to reset your status would be to leave Portugal for five years, then return and start afresh as a new resident. As you can see, this is a high-stakes deadline.
Here’s the lowdown so you don’t miss out on NHR.
You must apply for the NHR status by March 31 of the year after you become a tax resident of Portugal. So if you become resident in September 2021, you have until March 31, 2022 to submit your application. If you become resident in January 2022, you have a longer timeframe, until March 31, 2023.
The thing to watch out for is the shorter timeframes, such as if you become resident in December. In that case, you’d have only a few months to submit your NHR, again until the end of March in the following year.
I advise making NHR a priority, and submitting your application immediately after you get your Portuguese address. You’re typically considered a Portugal tax resident from the day you communicate a Portuguese address to the tax authorities. This can be done on the Finanças portal, by uploading a copy of your rental contract or house deeds, along with a request to change the address on your NIF.