Portugal to scrap ‘fiscal injustice’ of tax breaks for foreign residents

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Portugal plans to abandon a controversial tax break for foreigners that helped attract a wave of wealthy people to the country but sparked a housing crisis by driving up house prices.

Portuguese Prime Minister António Costa has described the special tax system introduced to help Portugal recover from the 2008 financial crisis as a “fiscal injustice” that no longer “makes sense”. It is expected to be phased out in 2024.

His announcement is the latest example of Portugal’s waning enthusiasm for high-income new residents, following the country’s decision to scrap its “golden visa” program for wealthy non-Europeans.

The moves were prompted by concerns about the impact of foreign money on the property market, with soaring house prices leaving many local residents struggling to find adequate accommodation, particularly in cities such as Lisbon, Porto and the Algarve.

Costa, the leader of the Socialist government, facing widespread public dissatisfaction over the issue, told CNN Portugal: “Maintaining this measure in the future will prolong unjustified fiscal injustices and will continue to push prices higher in a distorted way. real estate market.” “

Tax relief is available to those who become Portuguese residents by staying in Portugal for more than 183 days per year, including a special tax rate of 20% on income from employment in “high value-added” activities, which include professors, doctors and architects, among other professional roles .

Another factor is the introduction of a flat rate of 10% on pensions from foreign sources. Portugal initially exempted pensions from tax entirely and later introduced lower rates to quell complaints from EU countries, including Sweden and Finland, where retirees have moved to the country.

A third benefit under the special regime is the tax exemption on foreign income, including rent from tenants, if taxed in the country of origin.

These benefits are also available to Portuguese citizens who have lived abroad for at least five years.

Costa said the tax breaks will continue to be available for those who already qualify. By 2020, more than 50,000 people had benefited from the system. The government said the amount of income exempted from tax under its provisions in 2022 was 1.5 billion euros.

Bruno Andrade Alves, tax partner at PricewaterhouseCoopers, said the announcement was “quite surprising” but its full significance would not yet be known until Costa unveils details of the new national budget next Tuesday. clear.

“We have to wait to understand what exactly he is talking about. It is not clear whether he is referring to all or part of the regime,” Andrade Alves said.

Portugal’s fiscal position is relatively strong, with a budget surplus equivalent to 1.1% of gross domestic product in the first half of this year.

But its fiscal success has drawn criticism from some voters, who ask why it doesn’t use the surplus to do more to address the housing crisis, invest in health and education or lower taxes. Costa is expected to announce new measures to appease them in next week’s budget announcement.

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