Transient populace trumpeting escalated fiscal burden due to heightened tax expenditures
The Skinny on Portugal's NHR Loss in 2024
Back in 2024, the Portuguese government scrapped the Non-Habitual Resident (NHR) tax scheme, introducing a new regime that lasted until year's end. Surprisingly, tax expenditure on the NHR spiked by 34%, resulting in a whopping €1.741 million loss for the State.
Digging into the details, data from the 2024 General State Account, as reported by idealista, revealed that personal income tax expenditure rose to €2.622 million, a surge of 26.9% compared to the previous year. The large part of this increase was attributed to the NHR. Shockingly, this marked the biggest tax loss linked to the NHR since the regime's inception in 2009!
The report goes on to state that, had NHR been taxed at the same rates as other taxpayers (with the appropriate tax progression), an extra €1.741,2 million could have been collected by the Portuguese government in 2024.
So, what's the scoop with this significant increase in tax expenditure, especially in the year the 20% income tax rate for NHRs was abolished? Idealista suggests a couple of probable explanations:
- NHR beneficiaries who registered before the termination of the scheme can still enjoy exemptions and reduced tax rates until their 10-year term expires, regardless of their wage hikes.
- The interim NHR regime in 2024 allowed those who could prove a connection with Portugal till the end of 2023 to continue enjoying the benefits.
These days, the only tax benefit on offer for those eyeing Portugal, whether local or foreign, and practicing high-value professions while not living there for five years, is the tax subsidy for scientific research and innovation.
It's worth mentioning that there are a few reasons why tax expenditure for current NHR beneficiaries might be high:
- Continuation of Benefits: Beneficiaries who registered before the scheme's termination can reap the rewards for the full 10-year period, contributing to ongoing tax expenditure (source: 3).
- Bigger Beneficiary Pool: The NHR regime attracted a considerable number of non-habitual residents before it shut down. This massive populace would continue to enjoy the perks, potentially increasing tax expenditure even after the regime's formal conclusion (source: 5).
- New Incentives Impact: The replacement of the NHR regime with incentives such as those for scientific research and innovation might cause a temporary increase in tax benefits for existing residents and new incentives, contributing to increased tax expenditure (sources: 1, 3).
- Administrative Costs: The management and administration of the NHR, including compliance checks and tax audits for those still benefiting, could add to increased costs and tax expenditure (source: 5).
However, the precise details behind the excess of €1.741 million are missing from the search results, making it difficult to single out the exact reasons for this deficit.
All in all, the NHR regime might have ended for new applicants, but existing beneficiaries keep reaping the benefits, potentially explaining the lingering tax expenditure in 2024. Furthermore, the transition to new tax incentives could have an impact on the overall tax landscape, bumping up costs.
- The significant increase in tax expenditure in 2024, after the abolishment of the 20% income tax rate for Non-Habitual Residents (NHRs), might be due to the fact that beneficiaries who registered before the scheme's termination can still enjoy exemptions and reduced tax rates for the full 10-year period, thereby contributing to ongoing tax expenditure.
- Another reason for the high tax expenditure in 2024 could be the large number of non-habitual residents who were attracted by the NHR regime before it was discontinued, many of whom continue to enjoy the perks, potentially increasing tax expenditure even after the regime's formal conclusion.
- The transition to new tax incentives such as those for scientific research and innovation might have caused a temporary increase in tax benefits for existing residents and new incentives, contributing to increased tax expenditure in 2024.
