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Why has Portugal u-turned on tax breaks for foreign residents?

A sign at a demonstration demanding better housing policies in Lisbon. Sept. 30, 2023.
A sign at a demonstration demanding better housing policies in Lisbon. Sept. 30, 2023. Copyright Armando Franca/AP.
Copyright Armando Franca/AP.
By Eleanor ButlerEuronews with Reuters
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Portugal's parliament has extended tax breaks for foreign residents until the end of next year despite concerns about rising house prices for Portuguese residents. Euronews Business takes a look at why.

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To benefit from the policy, applicants must show they planned their move to Portugal during 2023, either through an employment or a housing contract signed by the end of December.

Launched in 2009, the scheme allows people who have become residents by spending more than 183 days a year in the country to benefit from a 20% tax rate on Portuguese-sourced income during a 10-year period, granted that it’s derived from "high value-added activities".

Doctors and university lecturers are some of those considered to be in “high valued-added” professions.

Other perks of the scheme include tax exemptions on almost all foreign income if taxed in the country of origin and a 10% flat tax rate on pensions from a foreign source.

Portuguese citizens who have lived abroad for five years or more can also apply, but those who don't benefit from the scheme can be taxed up to 48%.

The tax-break scheme was originally introduced during the financial downturn in Portugal with the aim of attracting foreign talent, but it is becoming increasingly controversial as Portuguese citizens struggle with rising house prices.

Earlier this year, Prime Minister António Costa claimed he would end the tax relief, branding it a “fiscal injustice”.

House prices in Portugal recorded the fourth highest increase (8.7%) in the European Union in the second quarter of 2023, according to the latest numbers from Eurostat.

“It is no longer justified and is a biased way of inflating the housing market, which has reached unsustainable prices," Costa said in an interview with CNN Portugal.

Why was the tax rule changed again?

However, following Costa's resignation earlier this month, his Socialist Party has retreated on this front, deciding that the tax break should be extended.

The decision was approved on Wednesday in the final vote on Portugal’s draft budget bill for 2024.

The Socialists said in a statement that they wish to "safeguard the legitimate expectations of people who have already made the decision to immigrate or return to Portugal".

Official data showed that over 74,000 people had benefited from the scheme by the end of 2022.

Last year the tax exemptions cost the state budget more than 1.5 billion euros, an annual increase of 18.5%.

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