Portugal tightens tax advantages for foreign workers

Portugal has decided to extend the popular tax benefits for non-permanent residents, but also toughened the eligibility criteria in the process. In October, former Prime Minister António Costa announced that the beneficial regime for high-net-worth individuals would end on December 31, 2023. However, during the debate to approve the country’s public budget, Socialist Party legislators introduced an amendment to extend the regime through December 31, 2024.

Maryline Valente, a Portuguese lawyer specializing in international taxation, said, “Looks like the socialists didn’t want to abruptly end the regime and decided to extend it for another year.” However, to avoid attracting more people, they’ve introduced “several criteria that strictly limit access and disqualify many taxpayers.”

Article 143 of the proposed amendment states that people who become residents in Portugal for tax purposes can benefit from the special regime if they meet at least one of the stipulated criteria. For example, a contract or agreement signed before December 31, 2023, for work performed in Portuguese territory. People who have a valid visa or residency permit through the end of 2023 also qualify.

Surprisingly, the regulations also include requirements with retroactive deadlines prior to the approval of the public budget. One such requirement is having a lease or other contract signed before October 10, 2023, granting the use or possession of property in Portugal. Similarly, contracts or binding agreements signed before October 10, 2023, to buy property in Portugal will also be accepted. Enrolling a child in a Portuguese educational institution before October 10 is another way to qualify for the special regime.

“They’ve opened a window and given some oxygen to the regime, but it’s still strange that, with a law starting next year, they’re imposing several new requirements,” said Valente. “In a way, the regulations are restrictive because they limit the time period for qualification.”

Valente says that the explanation for all these requirements can be found right in the text itself. The Socialist proposal offers a transition period to protect the valid expectations of people who have already started the process of changing their tax residence to Portugal. “Moving to a new country can have a big impact on someone’s life, so it’s important to establish a transitional regime.”

According to Valente, the special regime has some attractive benefits, especially for people with passive income. The only issue is that the eligibility criteria are so limited now that it’s practically impossible for anyone who didn’t make the right moves before October to qualify. Valente doesn’t see any connection between Portugal’s move to extend the tax regime and the Spanish Constitutional Court’s ruling in November to uphold taxation of large fortunes.

Lower tax rates

Portugal’s Non-Habitual Resident (NHR) tax regime was created in 2009 to attract foreign investment. The key benefit is that individuals are not taxed on income earned outside the country, for a maximum of 10 years. Additionally, domestic income is taxed at a rate of 20%, and pensions are taxed at 10%. These rates are considerably lower than Portugal’s standard tax regime and the tax systems of most other countries.

In recent years, thousands of high-net-worth individuals have taken advantage of Portugal’s special regime for various reasons, like receiving dividends from companies in different jurisdictions or rental income from properties leased in other regions. It also attracted foreign technology workers and digital nomads. According to the Portuguese Court of Auditors, over 70,000 individuals were registered under this regime in 2022.

Notably, the special regime includes a provision for exempting high-value people in the fields of research and science, and Portugal has established another special regime designed to attract talented individuals.

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