Slash Your Tax Bill By Moving to Europe’s Hottest Destination

Why Digital Nomads Are Flocking to Portugal.

Many people are attracted to the idea of moving abroad because of the potential tax benefits. Unfortunately, those benefits aren’t always as big as advertised.  

But there is one guaranteed—and enormous—tax benefit available if you’re actively working and can do it remotely. It’s one of the reasons “digital nomadism” has become such a buzzword in recent years. 

A “digital nomad” is a slang term for anyone who can do their work remotely via the internet and do so from a foreign country. You could even call me a digital nomad, since I live full time in Cape Town, South Africa.  

Portugal is one of the most attractive digital nomad environments since the country recently launched a visa category aimed squarely at remote workers.  

To qualify, you need to earn at least €2,800 per month (about $3,100), which is four times Portugal’s minimum wage. Your earnings must come from a foreign source, whether that be from a steady employer or through freelancing work.   

For Americans, doing remote work from Portugal means you can qualify for the Foreign Earned Income Exclusion, or FEIE. For 2023, you can exclude up to $120,000 of income from U.S. tax, and double that if you and your spouse file jointly as a couple. Even if your employer or clients are based in the U.S. and you’re paid in U.S. dollars, your income is considered “foreign sourced” because you do the work abroad.  

That’s wonderful, but there’s still the matter of Portuguese tax. Like most countries, Portugal considers you a tax resident once you’ve lived in the country for a certain period. And because Portuguese tax rates can range up to 48%, you’ll want to try to reduce that rate as much as possible.  

That’s where the Non-Habitual Resident Tax Regime (NHR) comes in. It’s available to all new Portuguese tax residents who were not tax residents in any of the five prior years. The NHR is available to people who have jobs and earnings inside Portugal as well as those with income from abroad.   

If your income is sourced in Portugal, you pay a flat tax rate of 20%, no matter how much you earn. But you gain the most benefits if your income is sourced from abroad. For all labor income sourced abroad—as well as dividends, interest, royalties, capital gains and rental income—you’ll pay 0% Portuguese income tax.   

For Americans who qualify for the FEIE, that means you basically pay no income tax at all!  

To qualify, you need to have a long-term residence visa, such as the digital nomad, or D7 or D2 visas. You must have been present in Portugal for more than 183 days out of the previous twelve months. Alternatively, if you spend less time than that in Portugal but have bought a property, you’ll also qualify.   

Either criterion allows you to apply for a tax identification number. Armed with that and your visa, as well as proof of residence, you can apply for NHR status online.  

The only thing excluded from the NHR is pension income. Foreign pension income is taxed at a flat rate of 10%. But for Americans, the U.S. double taxation agreement with Portugal means you only pay taxes on your pension income to the IRS. The NHR also exempts you from all gift or inheritance taxes.  

Of course, there are other taxes besides income. If you buy a property in Portugal, you may pay a municipal tax of up to 7.5%. There are also stamp duties payable on purchase and rental agreements, and an annual property tax payable to the municipality.  

It’s important to understand, however, that the NHR is valid for 10 years, and cannot be renewed. After the NHR expires, you become a regular tax resident and will pay tax like any other Portuguese.  

The knockout combination of NHR status and the FEIE in Portugal—one of the most attractive tax domains in the world, and by far the best in Europe—is a huge reason why the Iberian country is the hottest destination for digital nomads today.