portuguese flag and IRS desk

The Tax Authority is rejecting applications for the more favorable transitional regime for non-habitual residents and is only then asking interested parties to provide proof of eligibility.

The tax authorities are automatically rejecting all applications from foreign workers and pensioners who want to come to Portugal this year to benefit from the more favorable regime for non-habitual residents, which applies only a 20% IRS rate on income from work, including green receipts, instead of the progressive IRS rates of up to 48%, and does not require the exercise of an activity.

Only then, “when notifying applicants, does the Tax Authority (AT) ask them to provide proof, documents showing that, until the end of 2023, they were eligible to take advantage of the scheme, such as employment contracts, enrollment of their children in Portuguese schools or contracts promising to buy a house,” Luis Leon, tax expert and co-founder of the consultancy Ilya, told ECO. ECO has questioned the Ministry of Finance and is awaiting a response.

In terms of information technology, the Tax Authority does not have the means to automatically apply the amendment that the PS introduced in the State Budget (OE) for 2024, which provided for the end of the non-habitual resident regime and the creation of a new program aimed at certain activities linked to innovation and science.

The current model does not require the exercise of an activity or limit it to a range of sectors and grants the IRS tax benefit indiscriminately for 10 years to all foreigners who have not lived in Portugal in the last five years. Faced with the opposition that the end of this regime provoked, the Socialists decided to approve a transitional regime, allowing foreigners who move to the country this year to still benefit from the old regime, as long as they provide proof that they already had plans to live in Portugal by the end of 2023.

Not having the means to apply this transitional regime, the AT decided to reject all the applications outright, and then ask the foreigners concerned to prove, through documents, that they already had plans to live in Portugal by the end of 2023.

This “bureaucratic” process, as Leon puts it, could lead to considerable delays in the approval of applications. “A few months ago, the AT was still evaluating applications for 2022,” warns the tax expert.

Luís Leon also warns that there are two deadlines to take into account when submitting proof: “In the case of employment contracts and visas, the documents must be signed by December 31st at the latest. Enrollment of children in schools or promissory contracts for the purchase of real estate must have been signed by October.”

To benefit from the transitional regime for non-habitual residents, foreign or Portuguese workers and pensioners who have been emigrating for more than five years must meet one of the following conditions:

  • Promise or employment contract until the end of 2023;
  • Rental contract or contract relating to the possession of property in Portuguese territory until October 2023;
  • Reservation contract or promissory contract for the acquisition of a right in rem over real estate in Portuguese territory signed until October 10, 2023;
  • Enrollment or registration for dependents in an educational establishment domiciled in Portuguese territory until October;
  • Residence visa or residence permit valid until December 31, 2023 or procedure, initiated until December 31, 2023, for granting a residence visa or residence permit, with the competent authorities;
  • Member of the household of the taxable persons referred to in the previous paragraphs.

Under this special regime, foreign workers who choose to live in Portugal or Portuguese people who have been emigrating for more than five years benefit from a reduction in personal income tax for 10 years, and are subject to a tax rate of 20% on category A and B income. Pensioners pay 10% IRS, whereas until 2020 they were exempt.

In order to access this regime, non-habitual residents must be tax resident in Portugal and stay in the country for more than 183 days, consecutive or interpolated, within a year, have their own home or rented home, with the intention of occupying it as their habitual abode.

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