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The IBSA Podcasts
IBSA podcasts contain information from a global community of entrepreneurs and professional advisors dealing with international business structuring and regulatory compliance.
Hosted by Roy Saunders, who has over 50 years’ experience within the financial sector, these podcasts delve into enlightening conversations with a wide range of leading professionals aiming to demystify the complex world of business and provide invaluable insights to help listeners deal with various complex technical matters to best support their business and clients.
Disclaimer: We believe the information in this podcast to be correct at the time of recording. The information given is relevant at the time in line with governmental legislations. Competent counsel in the jurisdiction(s) whose laws are involved should be consulted. The podcast is made available by the IBSA for educational purposes only and to provide general information. The information should not be used or relied upon as a substitute for competent legal advice from a licensed professional in your jurisdiction.
The IBSA Podcasts
The Sequel after the Abolition of Portugal's Non-Habitual Residence Regime
What happens when a tax regime designed for attracting top talent instead becomes a haven for retirees with foreign pensions? Together with Roy Saunders, Ana Castro Gonçalves, an International Tax Lawyer from Caiado Guerreiro in Lisbon, unravels the reasons why Portugal has abolished its non-habitual residence regime and explains how this initiative, which offered significant tax breaks, evolved and why it ultimately led to the need to impose a 10% flat tax on foreign pensions. They also discuss the chaos caused by its confusion with the golden visa program, contributing to skyrocketing property prices, and how these factors led to the regime's termination by the left-wing government.
In this rich discussion, we delve into how the non-habitual residence regime will be phased out for current beneficiaries and those who become resident in 2024. We clarify how this regime differs from the golden visa, and examine the economic impacts, including the effect on spending and VAT.
This series of podcasts explores the beneficial tax regimes in Italy, Spain, Portugal, Malta, Cyprus, Switzerland, Singapore, Israel and Dubai in respect of where UK residents may wish to emigrate in light of the non-dom changes introduced by the Conservatives, and the likely tightening of these rules under the new Labour government.
Hello and welcome to the IBSA series of podcasts on considering countries to where UK residents may wish to emigrate, in light of the non-dom changes introduced by the Conservatives and the more frightening tightening of these rules under the new Labour government, including bringing foreign trust assets within inheritance tax and increasing capital gains tax rates to income tax levels which may happen, particularly aiming at fund managers.
Speaker 1:Now my name is Roy Saunders, founder and chairman of the IBSA, the International Business Structuring Association, which is a multidisciplinary global association of entrepreneurs and their professional advisors, dedicated to sharing their expertise with each other within a great networking platform. Our current series of 15-minute podcasts will review beneficial tax regimes in Italy, spain, portugal, malta, cyprus, switzerland, singapore, dubai, israel and Hong Kong, and perhaps some other places as well. Today, I'm joined by Anna Castro Gonçalves, an international tax lawyer with Caído Guerrero of Lisbon. Anna, I know that the Portuguese non-habitual residence regime has now ended, but could you tell us a bit more about what that means for those who are still currently benefiting from that regime and, in fact, whether anyone coming to Portugal can get similar advantages? But so perhaps you can start off by saying what that regime did for incoming residents and then go on from there.
Speaker 2:Well, thank you, roy, for having me. It's a pleasure to be here speaking to you about these matters. Well, the non-habitual residency regime, which is the, I would say, the jewel of the crown of the Portuguese tax, benefits for individuals for quite a number of years, and its main traits or at least it was heralded as such was that the majority, if not the entirety, of the foreign-sourced income of someone who came to Portugal and set up his or her residency here would be exempt in Portugal. So, essentially, what happened is that this regime started by attracting well, the idea was to attract highly professional, qualified professionals, if you will, in order to develop our economy, which was struggling, as it always is, but at the end of the day, what had happened was that it attracted mostly people with passive income, people that were in retirement or nearing retirement, that most of their assets were abroad, most of their income was, of course, received, generated abroad, and therefore they could come to Portugal and pay virtually no taxes. This was then coupled with the fact that in Portugal, we still don't have inheritance tax in a direct line, and so it made it quite attractive for those people.
Speaker 2:As for the highly qualified professionals, they also came, and the tax treatment there would be for someone who is carrying out this activity in Portugal, let's say, for instance, a professor in a university, or a doctor or not a tax advisor, unfortunately, but someone with that type of qualifications that would exercise their activity here in Portugal. They would be taxed at 20% flat on their Portuguese sourced income and the foreign sourced income would be exempt generally, with the notable exception of capital gains, not real estate but movable assets, capital gains. Those would still be subject to tax. Most of you know, interest dividends would all be tax exempt in Portugal.
Speaker 1:So foreign capital gains were taxed, which was, I think, a big difference to the Spanish regime as well. I know that it was quite unpopular, or became quite unpopular amongst the populace. Was it because house prices were being pushed up or people were saying it's not fair that they're not paying tax and we are paying tax?
Speaker 2:Yes, well, the house's prices were a big driver, especially because in parallel with the non-habitual residency, almost simultaneously the golden visa was introduced, and so people sort of confused the regimes whereby they thought, and in that case, for the golden visa, it clearly had a huge impact in the rise of the prices of properties, because people could get the golden visa via acquisition of real estate so, and it had to be a minimum 500 000 euros.
Speaker 2:So, you know, it just really made it a very deep impact in the market. But then, since the both regimes were aimed at foreign people essentially and they were more or less simultaneous in time, there was quite a bit of confusion. It was very ill-perceived in such a sense that halfway through the government introduced a significant change, which was to start taxing foreign-sourced pensions at a flat rate of 10%. Not only from internal voices that were challenging the regime, but also other countries with whom Portugal had double taxation agreements, that were criticizing and threatening and even in some cases in the case of Sweden, for instance, it actually went through threatening to terminate the double taxation agreements because of this regime.
Speaker 1:Okay. So I know it was unpopular, and did you have a left or right wing government at that stage? Left Okay when it was introduced.
Speaker 2:it was introduced by a right wing government, but then the left stepped in and they kept it. So they were the ones that introduced the 10% on the pensions, but they, for the remaining of the of the regime, they kept it. And they kept it, in my opinion, because it was really bringing wealth into the country, not directly in personal income tax collection, but in terms of you know, development spending.
Speaker 2:you know the the VAT was through the roof in terms of income for the Portuguese state, so it was really quite favourable in the sense that it was wealth that was being brought in.
Speaker 1:Yeah, that's why I think it would be strange if the Labour government drive out very wealthy people here, because VAT is an essential element. But wealthy people spend money and it's on that money that's spent. So that's interesting. But now you, the regime is going. When does it go? Actually, the regime is it completely out of now or is it still in place until a certain date?
Speaker 2:out of it now, or is it still in place until a certain date? We are this year, we are in the transition period, so it was officially, uh, terminated by the socialists. So the left wing government, uh, at the end of last year. Most people believe that it was in an attempt to still hold on to power and to see if they could convince people to still vote for them. But you know, there was, it wasn't enough and they fell. The government fell nonetheless, but the regime was over, and the transition period means that those who have manifested an intention of relocating to Portugal within 2023 and carry it out in 2024 until the end of this year, may still benefit from the regime as we all knew it, because that is another thing. The old regime was terminated, but a new one was introduced. It's completely different, but it was something that they still wanted to advocate as an interesting regime for.
Speaker 1:Is the existing regime, then, or the old regime, let's call it? Is that still applicable for people who are in Portugal, who have come under that regime, and for how many years will that continue?
Speaker 2:It will continue for the 10 years. So this was a 10-year regime, non-renewable. So if someone started benefiting in 23 23, they can still benefit for the full 10 years, even though the regime no longer exists okay, I don't not quite sure whether, uh, that's well understood in the outside world.
Speaker 1:So that's that's. And now tell us what the new regime is then, as from, presumably as from the beginning of this year, is it?
Speaker 2:yes, uh, so in this year, what we've been doing is that we've been closing, uh, we've been finalizing the settlement of people that were interested in coming to portugal and have, uh, some sort of evidence of that and when I say some sort, it's really some sort of evidence. People that have started have signed promissory agreements for purchase of real estate, people that had enrolled children in schools in 2023, people that had a promise of employment dated of 2023.
Speaker 2:So there are a number of instruments that the tax authorities accept that evidence that that person, before the regime was known to be ended, were going to set up in Portugal and we are now registering those people now, in 2024, and they will still be able to benefit for 10 years of the old regime. This ends at 31st December 2024.
Speaker 1:Right. So the new regime. How is that going to attract people?
Speaker 2:Yeah, so the new regime. It's interesting because this was to be the non-habitual residency regime, so the old one was framed as a type of residency. So people are tax residents in Portugal and they are under this special regime, which is a mix of taxation plus residency for tax purposes. Now they've completely detached from that model and they've considered that it makes sense to consider this, to frame this as a tax benefit. So it's not even in the same legislation, it's in a different code which is specific for tax benefits, and it's a tax benefit that is aimed at innovation. They call it tax incentive to scientific research and innovation.
Speaker 2:So what they are trying to do here is they have a list of professions which are linked, of course, to this, to innovation, to scientific research. Um, education, education also, yes, uh, it's very well, um, well, not I don't know if well is the word, but it's. It's very connected with the concept of startups and entrepreneurship. But where it clearly differs from the previous regime is that these are now regulated professions. So I cannot just simply state that I am making some research and development and have someone my technical director benefit from the regime. Technical director benefit from the gene. I need to be registered with the competent organism in Portugal, which is usually the science and technology ministry, or something. I need to go through there first in order to be certified that my activity, that what I am doing, is really relevant for those purposes.
Speaker 1:That's really interesting, Anna, because we're planning on holding a workshop on R&D effectively later this year or the beginning of next year, but probably later this year, and that sounds very much like an R&D tax benefit that we have here as well. So that's quite specific, isn't it?
Speaker 2:It's not targeting the wealthy individuals anymore, really no it's clearly targeting and this is a very political statement the economical development of the country statement the economical development of the country. So the idea here is for you to see, one of the professions is to be, you know, a corporate in a directorship position in a company that exports at least 50% of its activity, be it services, trade, industry, whatever but it needs to be export-focused in more than 50%. So this is a different outlook entirely as to what the tax benefit is not for the company.
Speaker 1:The tax benefit is for the individual. I understand, yes, correct. And what is that tax benefit is not for the company, the tax benefit is for the individual. I understand yes and and what is that tax benefit then? Is it a?
Speaker 2:so exemption or what yeah, so it's a 20 flat income tax rate for the individual. Uh, on the income from this profession. Okay, that is um raised in portugal. And then, something which is excellent, and it's even better than before it's a complete exemption from all foreign source income including capital gains including capital gains that's very interesting.
Speaker 1:Okay, so that's, that's quite good. Well, I mean, I think there's there seems to be quite a shift in tax legislation everywhere. What's your expectation now as regards the new government? It's a light wind government, not only on tax, but what are other things that you know? Things like immigration, for example? What's their view on all of these things?
Speaker 2:Well, you know, right and left in Portugal. They are the ones that get to the government, which are essentially the two main parties in Portugal, although we are seeing, like in all of Europe, more smaller, more radicalized parties also now getting elected, but the ones that really are in government. Although we call them left and right, they are very similar, ok, so the left having a more social and environmental concerns environmental concerns, whereas what we call right, which is what is happening now, is economically focused on the economical development of the country and not so much in the social aspects of it, although it's not very different, but it is like that. So the main and and this, this government has now publicized a number of measures that they intend to put in practice within the their government. I think it was something similar that your labor government did.
Speaker 2:I saw on the news yesterday or something like that. I saw you know the king reading it, and they did like 60 pages and I would say 50 of them are targeted towards the development of the economy and many are towards tax. They are trying to reduce our corporate income tax, which is the 21%. They want to reduce it to 15%, which would be, you know, very. I think it's quite ambitious, to be honest.
Speaker 1:Certainly competitive, that 15%.
Speaker 2:That's their. They want to increase the competitiveness of Portugal. We already have that with our cost of labour, which we still have a pretty low cost other places, but our taxation is too, too high. It really is Social Security. They are also intending to reduce the burden for the employers in terms of Social Security, because we also have a very significant burden there.
Speaker 2:So they've announced all this, but the thing is they're a minority in parliament. All of this has to go through parliament, their state budget has to be passed, so they're going to have to negotiate a lot of these measures. So clearly they are aiming higher and they know they won't be able to to get there, uh, as far as this, the non-abitual residency or the new uh this innovation tax regime, what they have said is that they intend to uh increase the, the number of professions that can benefit from this. So they are clearly stepping away from the passive income and the pensioners and so on. They've seen that that is a model that's not well perceived, even though, like we said before, it brings wealth to the country, but it's not well perceived. They want to attract more active population and highly skilled.
Speaker 1:What I think will happen is that they will just allow advisors to frame a lot more people than you know initially, but I mean, ultimately, all of these tax cuts and all of the social welfare costs and everything else can only come from growth, which is what the Labour government have said, and, of course, that's the same thing as you're saying there. So well, I mean, it's fascinating. Thank you very much. You've really explained a lot and it's been very interesting. It's lovely talking to you, anna, and thank you, listeners, for listening to this interesting podcast. As I say, it's a series of podcasts, so please do listen to the ones from other countries as well. Thank you, anna. Thank you, roy.