Portugal plans to reintroduce tax breaks for foreign residents

By Catarina Demony and Sergio Goncalves

LISBON (Reuters) - The Portuguese government is planning to reintroduce tax breaks for foreign residents in an effort to attract skilled workers despite criticism in the past that the scheme stoked housing prices, the economy minister said on Thursday.

The scheme, launched in 2009 to attract investors and professionals at a time of financial crisis, gave people who became residents by spending more than 183 days a year in Portugal a special 20% tax rate on Portuguese-sourced income derived from "high value-added activities", such as practising medicine or teaching in universities.

The "Non-Habitual Resident" scheme also included 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.

The previous government decided last year to ditch the scheme, calling it a "fiscal injustice", but parliament then extended it till the end of 2024 for applicants who could prove they had readied their move to Portugal during 2023.

Finance Minister Joaquim Miranda Sarmento told the Financial Times, which first reported the new plan, that salaries and professional income would now still be covered by the tax breaks but not pensions, dividends or capital gains.

"We are revisiting this scheme (because) we want to attract talent... qualifications that are highly strategic for the country and that add value to our economy," Economy Minister Pedro Reis told a news conference after Thursday's cabinet meeting that officially approved the plan.

Prime Minister Luis Montenegro's government may still struggle to get the plan through parliament as it lacks an outright majority.

Data showed that over 74,000 people benefited from the tax exemptions scheme in 2022, costing the state budget more than 1.5 billion euros ($1.62 billion), an annual increase of 18.5%.

The government also approved on Thursday a cut in the normal corporate income tax rate to 15% by 2027 from 21% currently and a new mandatory minimum tax rate of 15% for all multinationals operating in Portugal and for large Portuguese companies.

Reis said new incentives for private investment and the merging of companies were also planned for them to "better compete with their European peers".

Analysts say low productivity continues to undermine the competitiveness of Portuguese companies. Labour productivity was 28% lower in Portugal in 2022 than the average of the 19 euro zone countries, Eurostat data showed.

($1 = 0.9260 euros)

(Reporting by Catarina Demony and Sergio Goncalves; Editing by Frances Kerry and Gareth Jones)