Portugal Plans to Reintroduce Tax Breaks for Foreign Residents

LISBON – The Portuguese government plans to reintroduce tax breaks for foreign residents to attract skilled workers, despite previous criticism that the scheme contributed to rising housing prices, announced the economy minister on Thursday.

The “Non-Habitual Resident” scheme, initially launched in 2009 during a financial crisis, provided foreign residents who spent over 183 days a year in Portugal a special 20% tax rate on income from “high value-added activities,” such as medicine or university teaching. It also included tax exemptions on almost all foreign income if taxed in the country of origin and a 10% flat tax rate on foreign pensions.

Despite being scrapped last year for being deemed a “fiscal injustice,” parliament extended the scheme until the end of 2024 for those who could prove they had planned their move to Portugal during 2023.

Finance Minister Joaquim Miranda Sarmento told the Financial Times that the revised plan would still cover salaries and professional income but exclude pensions, dividends, and capital gains.

“We are revisiting this scheme because we want to attract talent and qualifications that are highly strategic for the country and add value to our economy,” said Economy Minister Pedro Reis after Thursday’s cabinet meeting that officially approved the plan.

Prime Minister Luis Montenegro’s government, however, may face challenges passing the plan through parliament as it lacks an outright majority. Data showed that over 74,000 people benefited from the tax exemptions in 2022, costing the state budget more than 1.5 billion euros ($1.62 billion), an 18.5% annual increase.

Additionally, the government approved a cut in the normal corporate income tax rate to 15% by 2027 from the current 21% and introduced a mandatory minimum tax rate of 15% for all multinationals operating in Portugal and large Portuguese companies.

Reis mentioned new incentives for private investment and the merging of companies to help them “better compete with their European peers.”

Analysts indicate that low productivity continues to undermine the competitiveness of Portuguese companies. Eurostat data showed that labour productivity in Portugal was 28% lower in 2022 than the average of the 19 euro zone countries.