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

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Portugal plans to ditch a controversial tax break for foreigners that helped attract a wave of wealthy arrivals to the country but stoked a housing crisis by driving up property prices.

Prime minister António Costa described the special tax regime, introduced to help Portugal’s recovery from the 2008 financial crisis, as a “fiscal injustice” that no longer “made sense”. It is set to be eliminated in 2024.

His announcement is the latest example of Portugal’s diminishing enthusiasm for high-income new residents, following a decision this year to abolish a “golden visa” programme for wealthy non-Europeans.

The moves have been driven by angst over the impact of foreign money in the real estate market, where a surge in house prices has left many local residents struggling to find adequate accommodation, particularly in the cities of Lisbon and Porto and in the Algarve.

Costa, head of a Socialist government facing widespread public discontent over the issue, told CNN Portugal: “To maintain this measure in the future would prolong a fiscal injustice that is not justified, and would continue to inflate the housing market in a skewed way.”

The tax breaks, available to people who become resident in Portugal by spending more than 183 days a year there, include a special tax rate of 20 per cent for work income from “high-value added” activities, which covers professors, doctors and architects among other professional roles.

Another element is a flat tax rate of 10 per cent on pensions from a foreign source. Originally a full exemption from tax on pensions, Portugal introduced the low rate to quell complaints from EU countries, including Sweden and Finland whose retirees were moving to the country.

A third benefit under the special regime is a tax exemption on foreign-source income, including rental payments from tenants, if it is taxed in the country of origin.

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

Costa said the tax breaks would remain in place for those who have already qualified for it. More than 50,000 people had already benefited from the regime by 2020. The government said that the amount of income that went untaxed due to its provisions in 2022 was €1.5bn.

Bruno Andrade Alves, a tax partner at accounting firm PwC, said the announcement was “quite surprising” but that its full significance would not be clear until Costa unveils details in a new national budget on Tuesday next week.

“We have to wait to understand what he’s actually saying. It is not clear if he is referring to all or only parts of the regime,” said Andrade Alves.

Portugal is in a relatively strong fiscal position and recorded a budget surplus in the first half of this year equal to 1.1 per cent of gross domestic product.

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