João Sousa Magalhães analyses the implications of the new NHR 2.0 tax regime for pensioners

João Sousa Magalhães, associate at Morais Leitão, authored the article “Portugal's NHR 2.0: could the new regime still be attractive to pensioners?”, published in the International Tax Review (ITR), in which he reflects on the impact of the new Tax Incentive for Scientific Research and Innovation (NHR 2.0) and its potential attractiveness to foreign pensioners.

The NHR 2.0 was created following the end of the Non-Habitual Residents (NHR) regime and is aimed at attracting qualified professionals to Portugal. For a period of 10 years, the regime provides for a fixed 20% tax rate on employment and self-employment income derived from scientific research and innovation activities, as well as exemptions on certain foreign-sourced income. However, pension income continues to be taxed progressively up to 53%.

In the article, João Sousa Magalhães highlights that the main difference between the former NHR and the new regime lies in the mechanism for applying exemptions. While the traditional NHR required the verification of additional conditions — such as effective taxation in the source country or the existence of a double tax treaty — the NHR 2.0 only requires that exempt income be foreign-sourced.

He further notes that the Portuguese Tax Authorities’ interpretation of pension plans — namely early redemptions and lump-sum payments — may allow such income to be reclassified as employment or investment income. This reclassification, which under the former NHR was disadvantageous to taxpayers, may under the new regime result in full or partial exemptions.

Although the NHR 2.0 was not designed with pensioners in mind, the current position of the Tax Authorities may end up benefiting them in certain circumstances. However, João Sousa Magalhães warns that this interpretation partly subverts the spirit of the regimes, since the former NHR was expressly intended to make Portugal attractive to foreign retirees, while the new regime is focused on professionals in the fields of science and innovation.

According to the Morais Leitão associate, there is, for now, no clear incentive for the Tax Authorities to change their position on pension plan income. Thus, the potential beneficiaries of this interpretation may paradoxically be NHR 2.0 taxpayers who receive income arising from early redemptions or lump-sum payments from foreign pension plans.

Read the full article here.