In a bid to bolster economic growth and attract foreign investment, Portugal has recently unveiled a new proposed tax regime that is set to shake up the country’s fiscal landscape. The proposed changes seek to make Portugal a more competitive destination for businesses and individuals looking to establish residency or invest in the country.
The new tax regime is expected to benefit various regions, including the Algarve, known for its tourism and business activities.
Economic Benefit of Investing
One of the key highlights of the proposed tax regime is a reduction in corporate tax rates. Portugal is aiming to lower its corporate tax rate from the current 21% to a more competitive level, making it more attractive for businesses to set up operations in the country. This move is expected to alleviate the hard challenges businesses face, stimulate entrepreneurship, job creation, and overall economic activity.
Understanding Portugal’s Corporate Tax Rate: An Overview
Competitive edge
Portugal’s corporate tax rate of 21% applies to the taxable profits of both resident and non-resident companies conducting business in the country. This rate is in line with the average corporate tax rates in the European Union and falls below the rates seen in some neighboring countries. Eg the UK 24% (although no longer in the EU) but higher than Ireland (12.5% to 15%) which has attracted many global companies to set up their European operations in Ireland, especially Dublin which has become a hub for financial services and global companies such as Amazon, Starbucks & Microsoft.
It is worth noting that the effective tax rate paid by companies in Portugal may vary based on factors such as industry-specific incentives, tax treaties, and the utilization of available tax planning strategies. Companies operating in Portugal are advised to seek professional tax advice to optimize their tax position and ensure compliance with local regulations.
Non Habitual Tax Regime- ended Dec 2023
Last October, then socialist prime minister António Costa announced that the government would close the special Non-Habitual Resident (NHR) special tax status for new entrants in 2024.
The end of the NHR regime is expected to have significant implications for the property market, particularly in terms of real estate investments and accommodation.
Retirees & aging population
Under the NHR tax regime, first introduced in 2009 during the global financial crisis, qualifying entrepreneurs, professionals, retirees and high net worth individuals could benefit from a 20% flat rate of tax on Portuguese-source income for 10 consecutive tax years, while most foreign-source income was exempt.
Ensuring access to essential services and amenities will be crucial for retirees and the aging population under the new tax regime.
Loss of revenue
According to data from the Tax and Customs Authority, over 74,000 people benefited from the NHR tax exemptions in 2022, costing the state budget more than €1.5 billion, an annual increase of 18.5%.
The loss of revenue from the NHR tax exemptions will also impact the city of Lisbon, which has been a popular destination for foreign residents.
New Government Proposals
New prime minister Luís Montenegro, who won an election in March as leader of the centre-right Democratic Alliance (AD), leads a minority government after he rejected entering a formal coalition with a far-right partner.
The new regime is set to take effect in July 2024, marking a significant shift in Portugal’s fiscal policy.
Speaking to the Financial Times, Finance Minister Joaquim Miranda Sarmento said the reintroduced regime would offer the same 20% flat rate of income tax but only cover “salaries and professional income”.
As well as foreign nationals, the special tax breaks would also be available to returning Portuguese citizens who have lived abroad.
“This will attract some people,” said Sarmento. “It’s not sufficient, but it’s something the government can do.” He added that the government would not reverse the previous administration’s decision to end ‘Golden Visa’ real estate investment options.
IFICI regime
In effect, the proposals will expand the list of professions and business activities that are eligible under the Tax Incentive Scheme for Scientific Research and Innovation (IFICI) regime, which came into effect as of 1 January 2024 to replace the NHR regime and applies to:
Professors and scientific researchers.
Research and development activities.
Job positions and members of the board of certified start-ups.
Job positions or other activities carried out by tax residents in the Azores and Madeira.
Tax residency
This means that individuals who reside in Portugal for at least 183 days per year and establish their tax residence in Portugal will be taxed at a 20% flat rate on income from qualifying employment or self-employment in Portugal for a period of ten years, renewable.
Changes
The changes should be implementable through regulations under the IFICI regime and will not therefore require additional approval by the Portuguese parliament.
The 60 measures unveiled by the government included a cut in the standard corporate income tax rate from 21% to 15% by 2027, and a new mandatory minimum tax rate of 15% for all multinationals operating in Portugal and for large Portuguese companies. Other tax proposals introduce incentives for start-ups and research and development, as well as support for tourism and defence.
Portugal will continue to be a place where foreigners can obtain various identification and registration numbers, facilitating their tax residency process.
The new tax regime is expected to make investing in Portugal more attractive, offering potential profitability and enjoyment for investors in various sectors.
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