Scrapping Tax Breaks for Foreigners in Portugal: Impact on the Housing Market
Introduction
Portugal has been a popular destination for wealthy foreigners, attracting a wave of high-income residents with its tax breaks. However, the country is now considering scrapping this controversial tax regime due to concerns over its impact on the housing market. Prime Minister António Costa has described it as a “fiscal injustice” that no longer makes sense and plans to remove it by 2024.
The Special Tax Regime and its Effects
The special tax regime, introduced after the 2008 financial crisis to aid Portugal’s recovery, provided attractive tax reliefs to foreigners who became residents and spent more than 183 days a year in the country. These benefits included a special tax rate of 20 percent for labor income from “high value-added” activities, a flat tax rate of 10 percent on foreign-source pensions, and a tax exemption on foreign-source income.
While these tax breaks were intended to stimulate economic growth and attract investments, they have also fueled a housing crisis by driving up property prices. The influx of wealthy arrivals has led to soaring property prices, particularly in cities like Lisbon, Porto, and the Algarve, making it difficult for local residents to find suitable housing.
Government Response and Concerns
Concerned about the impact of foreign money on the property market, the Portuguese government has taken steps to address the issue. Earlier this year, they decided to remove the “golden visa” program aimed at wealthy non-Europeans. Now, with the plan to scrap the tax breaks, the government aims to address the fiscal injustice and prevent further inflation of the real estate market.
Prime Minister Costa, leading a socialist government facing public discontent on the matter, acknowledges the need for change. He told CNN Portugal, “Maintaining this measure in the future would prolong a fiscal injustice that is not justified and would continue to inflate the real estate market in a biased way.”
Expert Insights
Bruno Andrade Alves, a tax partner at accounting firm PwC, has commented on the announcement, considering it “quite surprising.” However, the true impact of the decision is yet to be fully understood until Prime Minister Costa reveals further details in the upcoming national budget announcement.
Portugal, with a relatively strong fiscal position and a budget surplus in the first half of this year, faces criticism from some voters who question why the surplus isn’t being utilized to address the housing crisis, invest in healthcare and education, or reduce taxes. The government is expected to introduce new measures to address these concerns in the budget announcement.
Conclusion
The decision to scrap tax breaks for foreigners in Portugal marks a significant shift in the country’s approach to attracting wealthy residents. While the special tax regime was initially introduced to aid recovery from the financial crisis, its unintended consequences on the housing market have prompted the government to reevaluate its effectiveness.
By removing these tax breaks, the Portuguese government aims to address the housing crisis and prevent further inflation of property prices. The impact of this decision on the housing market and the overall economy will become clearer as more details are disclosed.
Summary
Portugal is considering scrapping tax breaks for foreigners that have driven up property prices and contributed to a housing crisis. Prime Minister António Costa described the special tax regime as a “fiscal injustice” and plans to remove it by 2024. The regime, introduced after the 2008 financial crisis, offered attractive tax reliefs to foreigners who become residents in Portugal. These tax breaks, although aimed at stimulating economic growth, have led to soaring property prices, particularly in Lisbon, Porto, and the Algarve. Concerned about the impact on the housing market, the government has decided to remove the “golden visa” program as well, further signaling a shift in their approach to attracting wealthy residents. The decision to scrap the tax breaks aims to address the housing crisis and prevent further inflation of property prices. However, the true impact of this decision will become clearer when Prime Minister Costa reveals more details in the upcoming national budget announcement.
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Portugal is considering scrapping a controversial tax break for foreigners that has helped attract a wave of wealthy arrivals to the country but has fueled a housing crisis by driving up property prices.
Prime Minister António Costa described the special tax regime, introduced to help Portugal recover from the 2008 financial crisis, as a “fiscal injustice” that no longer made “sense”. It should be removed in 2024.
The announcement is the latest example of Portugal’s waning enthusiasm for new high-income residents, following this year’s decision to remove the “golden visa” program aimed at wealthy non-Europeans.
These measures were prompted by concern over the impact of foreign money on the property market, where soaring property prices have left many local residents struggling to find suitable housing, 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: “Maintaining this measure in the future would prolong a fiscal injustice that is not justified and would continue to inflate the real estate market in a biased way. »
Tax reliefs, granted to people who become residents Portugal spending more than 183 days a year there, include a special tax rate of 20 percent for labor income from “high value-added” activities, which covers teachers, doctors and architects, among others.
Another element is a flat tax rate of 10 percent on foreign-source pensions. Initially completely exempt from pension tax, Portugal introduced the low rate to appease complaints from EU countries, notably Sweden and Finland, whose retirees were moving to the country.
A third advantage of the special regime is a tax exemption on foreign-source income, including tenant rents, 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 would remain in place for those who already qualify for them. More than 50,000 people had already benefited from the scheme in 2020. The government said the amount of income not taxed due to its provisions in 2022 was €1.5 billion.
Bruno Andrade Alves, tax partner at accounting firm PwC, said the announcement was “quite surprising” but its true meaning would not be clear until Costa reveals details in a new national budget on Tuesday next week .
“We have to wait to understand what he is really saying. It is not clear whether he refers to the entire regime or only certain 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 percent of gross domestic product.
But his fiscal success has drawn criticism from some voters who question why he isn’t using the surplus to do more to solve the housing crisis, invest in health care and education or cut taxes. Costa is expected to try to appease them by announcing new measures during next week’s budget announcement.
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