From the Non-Habitual Tax Resident Regime (NHR) to the New Inpatriate Regime (NIR) – how do Unit-Linked Life Insurance Policies (ULLIP) fit in?

Mafalda Cesário , Head of Tax & Legal – Portugal/Brazil at Utmost Wealth Solutions sat down with Ricardo da Palma Borges , Portuguese Tax Lawyer, to ask him some important questions in relation to the change to the NHR.

MMC: The NHR was revoked with effect from 1 January 2024. How did the law safeguard the expectations of individuals who were already registered as NHR before the termination of the regime? Who will still be able to benefit from the NHR regime?

RPB: The Budget Law for 2024 approved a grandfathering regime under which the NHR regime still applies to taxpayers who: i) on 31 December 2023, were already registered as NHR or met the conditions to qualify as residents for tax purposes in Portugal, or ii) become resident for tax purposes herein by 31 December 2024. In the latter case, they will have to meet specific criteria demonstrating an effective link to Portugal in 2023 that proves an intention to move here, through one of the following elements:

• Promise or employment contract, promise or secondment agreement signed by 31 December 2023, whose duties must take place within national territory; or,
• Lease contract or other contract granting the use or possession of property in Portuguese territory concluded until 10 October 2023; or,
• Reservation contract or promissory contract for the acquisition of real rights over property in Portuguese territory concluded by 10 October 2023; or,
• Enrolment or registration for dependents, at an educational establishment domiciled in Portuguese territory, completed by 10 October 2023; or,
• Residence visa or residence permit valid until 31 December 2023; or,
• Procedure, initiated by 31 December 2023, of granting a residence visa or residence permit, with the competent entities, in accordance with the current legislation applicable to immigration matters, namely through the request for an appointment or actual appointment for submission of the request for the granting of a residence visa or residence permit or, also, by submitting the request for the granting of a residence visa or residence permit.

The NHR might still apply to members of the household of the eligible taxpayers (either those that who on 31 December 2023 were already registered as NHR or met the conditions to qualify as residents for tax purposes in Portugal, or become resident for tax purposes herein by 31 December 2024, under the grandfathering conditions).

For those grandfathered taxpayers the rules already in force will remain, namely the exemption on foreign-sourced income.

Nevertheless, most foreign-sourced capital gains from shareholdings and securities will remain taxed at a 28% rate or, in the case of short-term gains, at progressive rates up to 53%. Only gains originating in certain jurisdictions, depending on the tax treaty with Portugal (e.g. Brazil), may be exempted. Foreign capital income or gains from an entity in a blacklisted jurisdiction - a very wide concept that includes more than 80 countries, like Hong Kong, United Arab Emirates or the Isle of Man ? may be subject to an autonomous 35% rate. Gains on Portuguese sourced securities are also taxable in the above terms (28% or progressive rates up to 53%).

Therefore, it might be more tax efficient for investors (i) that wish to regularly trade their portfolios and earn short term gains, (ii) that derive gains on securities registered in jurisdictions blacklisted for Portuguese purposes, or (iii) that wish to hold securities registered in Portugal, to wrap up their financial portfolio in a ULLIP. Redemptions during the lifetime of the policyholder enable low effective taxation and the death benefit towards a beneficiary is not taxed in Portugal.

MMC: The NIR was introduced to replace the NHR regime. What are the NIR’s main characteristics?

RPB: The NIR only applies to individuals who are active professionals performing certain activities, for qualifying entities, considered to be high value-added. The activities below qualify for the regime:?

• Teaching in higher education and scientific research, including scientific employment in entities, structures and networks dedicated to the production, dissemination and transmission of knowledge, integrated into the national science and technology system, as well as jobs and members of governing bodies in entities recognized as technology and innovation centres, within the scope of Decree-Law no. 126-B/2021, of 31 December;
• Qualified jobs and members of Statutory Bodies within the scope of contractual benefits to productive investment, in accordance with chapter III of the Investment Tax Code;
• Highly qualified professions, to be defined by the Ministerial Order issued by the members of the Government responsible for the areas of finance and economy (as per a transitional Ministerial Order the current activity list of the NHR applies):i) developed in industrial and service companies, whose main activity corresponds to one of the CAE codes defined in a Ministerial Order and which export at least 50% of their turnover, in the year in which the corresponding duties started or in any of the two previous years; orii) developed in companies with relevant applications, in the year in which the corresponding duties started or in the five previous ones, which benefit or have benefitted from the ”Regime Fiscal de Apoio ao Investimento” (RFAI), in accordance with chapter III of the Investment Tax Code.The RFAI is a tax benefit that allows companies to deduct from the tax collected a percentage of the investment made in fixed assets (tangible and intangible). However, the percentage allowed to be deducted differs according to the region in which the investment is made (Lisbon and Algarve are less attractive in this regard).
• Other qualified jobs and members of Statutory Bodies in entities that carry out economic activities recognized by the Agency for Investment and Foreign Trade of Portugal, E. P. E. or by IAPMEI - Agency for Competitiveness and Innovation, I.P. as relevant to the national economy, particularly in the context of attracting productive investment, as well as reducing regional asymmetries.
• Research and development of personnel whose costs are eligible for the purposes of the tax incentive system in research and business development, in accordance with subparagraph b) of paragraph 1 of article 37 of the Investment Tax Code;
• 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. It is expected that the Madeira regime, which is currently ruled by a center-right wing party, may be significantly more favourable than the national (mainland) one, something which was already publicly announced by the head of the Madeira Government. Madeira also benefits from a Free Zone with a 5% Corporate Income Tax rate regime, among other tax benefits;
• Jobs and members of statutory bodies in entities certified as start-ups, under the terms of Law no. 21/2023, of 15 May.The above mentioned legal regime defines the concept of startup as any company that; i) has been in operation for less than 10 years, ii) employs under 250 employees, iii) has an annual turnover of less than €50 million, iv) is not the result of a transformation or split from a large company, and no large company holds a direct or indirect majority stake in its capital, v) has its headquarters or permanent representation office in Portugal, or it employs at least 25 employees in Portugal, and vi) meets one of the following conditions: 1) It is an innovative company with high growth potential, innovative business models, products or services, and falls within the scope of Ordinance 195/2018 of July 5, or has been recognized as suitable for research and development (“R&D”) activities by the Portuguese National Innovation Agency or certified through the recognition process for technology sector companies, except for promotional, intermediation, investment, or real estate development companies; or 2) It has successfully completed at least one round of venture capital financing from a legally qualified venture capital investment entity supervised by the Portuguese Securities Market Commission (CMVM) or a similar international authority, or through equity or mezzanine instruments provided by investors who are not founding shareholders of the company; or 3) It has received investment from Banco Português de Fomento, S. A., or from funds managed by it, or from its subsidiaries, or from one of its equity or mezzanine instruments.

Eligible taxpayers, during a period of 10 consecutive years, can be taxed at a special rate of 20% on net professional income earned within the scope of those activities.

Additionally, taxpayers who benefit from the NIR regarding their Portuguese employment or self-employment activities, during the years they receive such type of income, also enjoy a tax exemption on non-Portuguese sourced capital gains and income from employment/self-employment, capital and rentals. As such, ULLIP offered to Portuguese tax resident individuals (qualifying for the NIR) by foreign insurance companies like Utmost, have the additional benefit of tax-exempt policy redemptions.

As an exception, the law states that qualifying taxpayers that derive foreign capital income or gains from a blacklisted jurisdiction are subject to a 35% rate. The Budget Law for 2024 introduced a specific requirement to list assets held in blacklisted jurisdictions in the personal income tax return. Gains on Portuguese sourced securities also remain taxable in the terms explained above (28% or progressive rates up to 53%).

Again, investors who wish to hold securities issued in such jurisdictions or in Portugal can optimize their taxation and reduce their compliance burden by having ULLIP as an umbrella for their portfolios.

MMC: The NHR regime foresaw a reduced flat tax rate of 10% for non-Portuguese sourced pensions. Does the NIR benefit pensioners as well?

RPB: No. As mentioned, the NIR only encompasses individuals who are active professionals. Retired people or High Net Worth Individuals (HNWI) living from their savings / investments do not qualify for the NIR. Even individuals who are eligible for the NIR are never exempt on their foreign sourced pensions, which will be taxed progressively up to a 53% rate.

However, pensions paid under a pre-retirement period, or from 2nd and 3rd pillar private funds, as well as income from life insurance policies and personal saving plans, still have an advantageous tax treatment (being deemed employment income, in certain cases, or capital income, in others).

Regardless of the NIR, Portugal remains attractive for HNWI as there is no gift tax or inheritance tax between descendants and ascendants in direct line or spouses / partners, no wealth tax and no general exit tax. Enveloping financial assets into a ULLIP can be a good tax optimization and succession planning strategy.

Portuguese compliant life assurance policies provide a well-recognised and tax efficient solution for your clients living in Portugal. To find out more about the expatriate solutions available from Utmost Wealth Solutions, please visit: www.utmostinternational.com