Portugal will scrap tax breaks for foreigners because of ‘fiscal injustice

Portugal is planning to scrap a controversial foreigner tax break that attracted a large number of wealthy people to the country, but also stoked an housing crisis in Portugal by driving up house prices.

Antonio Costa, Prime Minister of Portugal, described the special tax system, which was introduced to aid Portugal’s recovery after the financial crisis in 2008, as “fiscal unfairness” that “no longer made sense”. The tax is scheduled to be abolished in 2024.

This announcement is the latest sign of Portugal’s decreasing enthusiasm for new residents with high incomes, after a decision was made this year to eliminate a “golden Visa” program for wealthy non Europeans.

These moves are a result of a fear of the impact that foreign money will have on the real estate markets, where the surge in prices of houses has caused many locals to struggle with finding adequate housing, especially in the cities Lisbon, Porto, and the Algarve.

Costa, the head of the Socialist government that faces widespread discontent on the issue, said to CNN Portugal: “To continue this measure would prolong an injustice fiscal which is not justifiable, and would inflate housing in a distorted way.”

Tax breaks are available for people who spend more than 183 calendar days in Portugal and become residents. This includes a 20 percent special rate on income earned from work that has a “high value added”. This applies to professors, doctors, architects, among others.

A flat rate of 10% is also applied to pensions that come from foreign sources. Portugal, which had originally offered a complete exemption of tax on pensions to EU countries such as Sweden and Finland, whose retirees moved to Portugal, introduced the lower rate in order to appease their complaints.

Thirdly, the regime offers a tax-free income from foreign sources, such as rental payments made by tenants, provided that it is taxed within the country of origin.

Benefits are also available to Portuguese nationals who have lived abroad at least five years.

Costa stated that the tax benefits would continue to be available for those who already qualify. By 2020, more than 50,000 individuals had already taken advantage of the tax-free regime. The government stated that in 2022, €1.5bn of income would be untaxed as a result of the regime’s provisions.

Bruno Andrade Alves of PwC’s tax department said that the announcement was “quite shocking” but its full significance will not be known until Costa releases details in his new national budget next Tuesday.

We have to wait until he says it to fully understand. Andrade Alves said that it is unclear if he’s referring to the whole regime or just certain parts.

Portugal has a relatively good fiscal situation. It recorded a budget deficit in the first six months of this year, equal to 1,1% of its gross domestic product.

Some voters have criticized the fiscal success of the government, asking why the surplus is not being used to address the housing crisis or to invest in education and health. Costa will likely try to appease these voters by announcing some new measures when he announces his budget next week.