End of the regime for non-habitual residents worries real estate

The Prime Minister says that this regime once made sense, but now it no longer does, and that this is why it will end. The sector is concerned.

06 Oct 2023 min de leitura

The Prime Minister took the country by surprise this Monday, 2 October, when he announced that in 2024 he intends to end the special tax for new non-habitual residents (RNH). After getting the controversial Mais Habitação enacted, as part of the preparations for the 2024 State Budget and in the wake of the wave of national demonstrations due to the country´s housing crisis last Saturday, António Costa said that the government had decided not to prolong "a measure of fiscal injustice, which is no longer justified and which is a biased way of inflating the housing market, which has reached unsustainable prices". Without giving any further explanation, the leader of the Socialist Executive left several doubts in the air - enough to stir the waters in the sector. From investors to developers: the property market reacted immediately, showing signs of concern about yet another measure from the majority government, which could compromise the health of the sector, without solving the problem of access to housing.

The governor of the Bank of Portugal (BdP) himself has also commented on the Prime Minister´s words, saying that he is not "completely" convinced that programmes such as the one for non-habitual residents are the problem with the housing market.For Mário Centeno, António Costa´s former finance minister and former president of the Eurogroup, the end of the regime is a political issue.
The Non-Habitual Resident Status (NHR) was created in 2009. It is a special regime that offers a reduction in Personal Income Tax (IRS), for 10 years, to new foreign residents (of any nationality) and to Portuguese citizens who have been emigrating for more than 5 years, "with a view to attracting qualified non-resident professionals to Portugal in high value-added activities or intellectual property, industrial or know-how, as well as beneficiaries of pensions obtained abroad".

"It is important to emphasise that the NHR does not confer an exemption on all income. A distinction must be made between income originating in Portugal and income from a foreign source. In the case of Portuguese source income, no exemption applies," emphasises lawyer João Magalhães Ramalho. In an article published in Expresso, the partner of the Tax team at Telles also clarifies that:
- this regime only benefits income from dependent and self-employed work from the application of a 20% IRS rate, but only when it results from the exercise of high value-added activities defined by ordinance;
- in the case of income from abroad, the IRS exemption is applied to some professional income (in some cases the 20% IRS rate), interest, dividends, rents and property capital gains (as long as, in most cases, they don´t originate offshore). But no longer, for the majority of capital gains on securities and income from funds, income that is taxed;
- foreign pensions earned by NHRs registered as of 1 April 2020 are taxed at the IRS rate of 10%.

RNH ends in 2024, but remains for those who already have benefits

"In 2024 the special tax for non-habitual residents will end.Those who have it will keep it," said the Prime Minister in an interview with TVI/CNN Portugal, alluding to foreign residents in Portugal who are already enjoying this tax benefit.According to the leader of the Socialist executive, "the measure for habitual residents has already fulfilled its function and so it makes no sense to keep taxing non-habitual residents".
"There was a time when it was necessary. This measure made sense. In the first ten years, 59 per cent of the people who had benefited remained in Portugal, even though the regime had ended. But right now it no longer makes sense," stressed António Costa.

The Prime Minister said that the scheme is "a skewed way" of contributing to property speculation, but didn´t give any more details about what´s to come. But so far it´s just a political stance, and we still have to wait for the 2024 State Budget (OE2024) to be finalised before we know the contours of the new law, according to an official source in the prime minister´s office who told Negócios.
Although the NHR regime will end from 2024 - no more applications will be accepted - those who have already acquired this status will continue to be taxed at the special IRS rate until the end of the ten-year period, explained António Costa. In practical terms, this means that although Costa wants to promote the measure as an immediate solution to housing problems, the effects of the tax regime will still be felt in the country´s accounts for another nine years, since it won´t end definitively for another ten, in 2033. This is because anyone who joins the scheme this year acquires the right to be taxed as such for 10 consecutive years.
By the end of last year, more than 74,000 people had already benefited from the non-habitual resident regime, according to the figures collected by the Court of Auditors (TdC) in its opinion on the 2022 General State Accounts (CGE). This is an increase of around 50 per cent compared to just over 25,000 in 2018. The associated tax expenditure, according to the aforementioned opinion of the TdC to the CGE of 2022 was around 1,360 million euros that year.

Real estate taken by surprise: the sector is worried

The end of the NHR tax benefit has taken the market by surprise. Bruno Alves, a partner at PwC, told Negócios that "the news broke very quickly" and that they had received enquiries from all over the world about what was happening. According to him, the regime "has a lot of impact, not just for people, but also for companies" and is "very structural". "We have a lot of technology companies in Portugal at the moment, which have a lot of foreigners in the technology sector on their staff and who are here because of the regime." The announcement "created some concern both nationally and internationally and came as a surprise to all of us," the tax expert told the newspaper.

In Spain, according to front-page headlines in the economic press, Costa´s announcement immediately generated a wave of contacts from professionals and large estates to law firms and tax advisers. "The phone didn´t stop ringing all morning," a Madrid-based law firm confirmed to Expansión. The newspaper reports that the transfer of Spaniards waiting to move next year has now been put on ´stand by´, noting that because Portugal can have a partial tax year - and decide by month, not by year as in Spain - last-minute transfers this year to avoid double taxation may be discouraged.

On the other hand, Siro Barro, partner in charge of the Tax Law Department at the Escalona & de Fuentes law firm, told Cinco Días that the high tax payers and large Spanish assets that have been enjoying the advantages in this country for a decade are now looking for new formulas. One of them, which would involve a return to Spain, is the protection of the so-called Beckham law.

In Portugal, after the wave of uncertainty generated by Mais Habitação, the market now fears that changes to this tax regime will drive investment away from the country. In a statement sent to the press, to which idealista/news has had access, Krest argues that the government´s plan to end the NHR regime "raises serious concerns for investors in Portugal". "While we recognise the government´s concerns about the housing crisis in Portugal´s main cities and the challenges of housing affordability, we are deeply concerned that the proposed solutions could worsen the current situation," the Belgian developer argues.

"In the current global economic landscape, where competition for foreign investment is fierce, these signs of uncertainty could have a negative impact," she adds, emphasising that "foreign investors, who have played a vital role in Portugal´s economic development, may want to reconsider the risk factor associated with their future investments in the country."

Other promoters and consultants heard by ECO raise the same concerns, and fear that the future of foreign investment in Portugal is at risk. They therefore want the government to publish data to find out the "real impact" of the regime for non-habitual residents on housing. Hugo Santos Ferreira, president of the Portuguese Association of Property Developers and Investors (APPII), believes that "it would be very pertinent to make a correct assessment of this measure" in order to understand its influence on the property market.

According to José Cardoso Botelho, CEO of Vanguard Properties, who was interviewed by the same publication, "the problem of housing for the middle class has had little or no effect on non-habitual residents or, as has been seen before, on gold visas".

"Investment by non-habitual residents is not at all related to house price inflation. This type of private investor can only rent space, they don´t need to make a purchase. Therefore, this factor does not contribute to the escalation of housing prices in the country," says Miguel Lacerda, Lisbon residential director of the consultancy Savills Portugal, also quoted by ECO.

Even some property investors who agree that the non-habitual resident programme is unfair to locals who bear a heavier tax burden say that the government won´t solve the current housing crisis just by trying to cool external demand.
"In a way, I applaud this idea," said Pedro Coelho, CEO of Square Asset Management, a property investment management company in Lisbon with almost 2 billion euros in property investments, about Costa´s announcement last night. "But the government needs to increase the supply of houses available on the market if it wants to solve the property crisis and not block investment," said the manager in the same statements to Bloomberg.

The Financial Times also echoed Costa´s announcement, writing that "Portugal plans to abandon a controversial tax cut for foreigners that helped attract a wave of wealthy arrivals to the country, but which caused a property crisis with rising property prices".

Source: Idealista