Portugal to reintroduce tax breaks for skilled foreigners

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Portugal’s new centre-right government plans to reintroduce controversial tax breaks that enticed a wave of foreigners to the country, but it will ensure wealthy expatriate pensioners cannot benefit from the perk.

Joaquim Miranda Sarmento, Portugal’s finance minister, told the Financial Times the government would unveil the plan on Thursday to “attract some people” to the country as part of a package of measures aimed at stimulating growth.

The tax breaks were introduced in 2009 to aid Portugal’s recovery from the financial crisis then scrapped last year by the previous Socialist government. It called them a “fiscal injustice” that it blamed for driving up house prices in one of the Eurozone’s lowest-income economies.

Miranda Sarmento, who serves in a fragile government that lacks a parliamentary majority, said the reintroduced regime would include the same 20 per cent flat rate of income tax but only cover “salaries and professional income”.

“It will exclude dividends, capital gains and pensions, which was a problem between Portugal and countries like Finland or Sweden,” he said.

The Nordic nations led complaints that the tax break was luring retirees who stopped paying tax in their home countries. Portugal initially made pensions exempt from tax, but later introduced a 10 per cent flat rate in response to criticism from EU members.

Nuno Cunha Barnabé, a tax partner at Lisbon law firm Abreu Advogados, said the inclusion of retirees in the previous regime had made Portugal an anomaly.

“It was against demographics. It didn’t make sense,” he said. “We already have an old population. Attracting pensioners puts more burden on our health system. We need to attract young people.”

Prime Minister Luis Montenegro’s minority government will need to win approval from hostile lawmakers for the special tax regime. It would need the support of the Socialist party or the far-right Chega party, which both dislike the tax breaks.

Miranda Sarmento said the initiative was crucial to attracting highly skilled foreign workers who would help to boost growth, adding that he was confident opposition parties would support the move or let it pass by abstaining.

Big Portuguese companies are likely to welcome the return of the 20 per cent rate. They say they struggle to attract overseas engineers, researchers and managers willing to pay Portugal’s 48 per cent top marginal tax rate, which is imposed on the portion of incomes above a threshold of €81,199. 

“This will attract some people. It’s not sufficient, but it’s something the government can do,” Miranda Sarmento said

He added that the government would not reverse the previous administration’s decision to end “golden visas” linked to €500,000-plus property purchases.

The special tax breaks would also be available to Portuguese citizens who have lived abroad. To qualify under the previous version of the law, beneficiaries had to become tax residents in Portugal — either by spending more than 183 days a year or having a permanent home in the country — but remain legally domiciled elsewhere.

Miranda Sarmento said the tax plan did not clash with the government’s parallel efforts to tackle the country’s housing crisis, which is stoking a “brain drain” of young people unable to find decent homes.

“We need skilled workers and economic growth. We will have to balance that with more affordable houses,” he said. “Obviously if we have just one side of the policy, there will be more affordable houses, but less economic growth. So we have to balance these two parts.”

The finance ministry noted that the tax regime did not include any requirement to purchase property.

The country’s central bank is concerned that the government’s plans will drive the country from a fiscal surplus back into a budget deficit, potentially putting it in breach of the EU’s new debt rules. It judged government spending was on track to be €2bn above the maximum allowed under the rules.

Banco de Portugal warned in its economic bulletin last month that “there should be no room” under the EU’s new fiscal rules for any extra spending or tax cuts that are not offset by other measures.

“The analysis of developments in expenditure over the projection horizon is hindered by the successive announcement of measures, in some cases unassessed as to their budgetary cost,” the central bank said.

The IMF predicts that Portuguese gross domestic product will grow 1.7 per cent in 2023. An IMF mission to the country last week said Lisbon had delivered “a large fiscal surplus” last year, and reduced public debt by an impressive 36 percentage points of GDP since 2020.