Portugal’s anti-business culture persists despite NHR tax scheme
Despite the Portuguese government’s Non-Habitual Resident tax regime, the Golden Visa and now the Technology Visa, Portugal still has one of the highest tax regimes in the European Union. Essential columnist David Sampson takes a critical look.
The chairman of the Portuguese Association of Family Companies (Associação das Empresas Familiares) recently complained that “politicians say that they support business, but it is a lie.
“There is a very strong anti-business culture in Portugal. It goes a long way back. Success is looked down on,” said Peter Villax.
The result is that Portugal has one of the most unfriendly tax regimes for foreign investment. In 2018, it was ranked 32nd out of 35 countries, ahead of only Poland, Italy and France, in a survey by the Tax Foundation, an independent US group, which examined how investment-friendly each country is. Although the basic rate of Corporation Tax in Portugal is only 21%, the actual total rate can be as high as 31.5%.
Since the 1974 revolution, the subsequent nationalisations of the country’s largest economic groups in 1975 and their privatisation two decades later, large companies in Portugal have been chronically under-capitalised. Many have been destroyed by a combination of bad management, financial abuse and political interference.
Giants like Portugal Telecom and Banco Espírito Santo have all but disappeared and Cimpor, at one time Portugal’s largest manufacturing company, was recently sold to a Turkish group for €700 million, compared to the price of €5Bn million for which it was sold to the Brazilians in 2012. In 2017 it was worth around €235 million.
The reaction of the government has been to try to attract individuals with proven skills to come to Portugal and invest here. The measures so far introduced have helped boost a recovery in the real estate market, particularly in areas which are popular with tourists, but have brought in few industrial or commercial investments.
Tarnished Golden Visas?
In 2012, the government introduced the ARI (Authorisation for Residency through Investment), a programme authorising residency visas for non-EU foreign investors in exchange for investment. Informally called the Golden Visa, up to January 2018, 5,717 visas have been issued, 5,387 for real estate investments of more than €500,000, 311 for capital transfers of more than €1 million and nine for the creation of at least 10 jobs. So far, the scheme has led to the investment of more than €4 billion in Portugal.
In a report of February 2018, the international pressure group Transparency International (TI) identified three aspects of Golden Visa schemes, such as the Portuguese one, that create high levels of risk. The first is the particular profile of the applicants and the high amount of investment required of them. The second is the lack of operational integrity in the governance of the schemes. The third is the lack of harmonised standards and practices at an EU level.
By their very nature, Golden Visa schemes are attractive to the criminal and the corrupt. Various members of the Angolan ruling class and Brazilian businessmen involved in the Car Wash corruption scandal are known to have acquired Golden Visas through the purchase of properties in Portugal.
TI has stated that money-laundering through real estate is not a new phenomenon, but because of this programme the risk has increased exponentially. The Portuguese government has responded by claiming that its Golden Visa scheme “strictly follows all legally established security procedures”.
The firms offering residence and citizenship planning services describe Portugal’s Golden Visa system as flexible, with a fast process and low physical presence requirements. Applicants are only required to provide a police certificate from their country of origin or the country in which they have resided for more than a year. There appear to be no further checks by the police or immigration authorities and money-laundering checks are left to the banks concerned.
The fact that at least 11 public sector employees, including the former Home Office minister and the head of the Land Registry and Notaries Agency, have been accused of corruption or bribery in connection with the granting of visas (they were cleared in January 2019) has shown that the system is open to abuse. According to the Portuguese member of the European Parliament, Ana Gomes, “it is a corrupt scheme to support the corrupt”.
All clear for non-habitual residents
In 2009, Portugal introduced a beneficial voluntary Personal Income Tax (PIT) regime for non-habitual residents aiming to attract high-value-added activities and ultra-high-net-worth individuals and their families to come to live here. The regime is available to all individuals becoming tax resident in Portugal and the status is granted for a period of 10 years.
Such residents then become subject to a reduced 20% PIT rate both on salaries and business and professional income of a Portuguese source arising from high-added-value activities of a scientific, artistic or technical nature.
Moreover, they are exempt from PIT on salaries from a non-Portuguese source, as well as on rental income, investment income and capital gains from such sources. Pensions paid to such residents are also exempt.
As leading accountancy PwC writes in its Portugal taxation brochure called ‘Europe’s best kept secret’, “non-habitual residents can accrue their wealth in a friendly tax environment, dispose of their assets benefitting from tax exemptions, pass on their wealth without inheritance or gift taxes and/or enjoy their retirement without tax leakage on their pensions”.
No wonder thousands of highly taxed French, Swedish and Finnish citizens have come to spend their retirement in Portugal. It is estimated that about 30,000 people in Portugal are now non-habitual residents. But the Finnish and Swedish governments have reacted and have threatened to revoke their double tax treaties with Portugal so as to ensure that pensions are taxed in one country or the other. The Finnish parliament voted to denounce the current treaty if Portugal did not ratify a new treaty by December 1, 2018.
There have been few objections inside Portugal to the favourable treatment of foreigners. It has welcomed new arrivals such as Madonna and Paddy Cosgrave, the founder of the annual Web Summit event who recently announced that he is moving to live in Lisbon. He is the prime example of the overall success of the government’s desire to attract investment through making Portugal an attractive place to live and invest. It has been estimated that the Web Summit in 2017 generated €30 million in tax receipts and it has helped attract large high-tech investments from companies such as Google and Mercedes.
The UK is a country which has been happy to see all its major infrastructure facilities sold off to international investors. It has relied, not always successfully, on its regulators to protect consumers and to ensure that the investors get good enough returns to invest for the future. Portugal has used EU funds to create an excellent motorway network and it has excellent telecommunications, but it also has a history of under-investing in long-term projects, of an inconsistent tax system and of lack of protection of consumers.
As long as the government keeps the economy on a growth track, the people of Portugal can look forward to a gradual improvement in their standard of living and some small increases in the minimum wage up to €600 per month and beyond. The tax benefits the country is offering are a small price to pay if this can be achieved.
David Sampson
