9th July 2024
Portugal plans to make massive tax cuts to boost investment and growth

But it remains to be seen if the Portuguese parliament or even Brussels will approve the sweeping reforms to Portugal’s tax system which aim to accelerate the growth of its companies and the economy as a whole.

 

In what is the most ambitious and far-reaching package in the last 20 years, it aims to simulate Portugal’s economy, attract foreign direct investment, attract talented professionals, and encourage companies to gear their business models to exporting.

 

The package was presented to the Council of Ministers yesterday by Portugal’s Minister of the Economy, Pedro Reis and Minister of Finance, Joaquim Miranda Sarmento.

 

IRC tax will be brought down to 19% by 2025 at a cost in lost tax revenues of €500 million, and 15% by the end of the government’s term in office at a rate of 2% per year, eventually costing the government €1.5Bn according to the news source ECO which consulted a government source, and business daily Negócios.

 

The government will also relaunch its 20% flat tax on IRS for certain professionals. Similar to the Non-Habitual Resident scheme (NHR) to attract overseas talent, this time it will be called the Talent Attraction Regime and will have a much broader scope to include even more highly qualified professionals and the directors of relocated and startup companies.

 

The announcement was made by the ministers at a Council of Ministers briefing held yesterday. (4 July)

 

The government is taking the advice of the IMF and the Francisco Manuel dos Santos Foundation, both of which believe cutting taxes is the only way to attract overseas investment.

 

In the case of Mid Caps and SMEs, these will see a gradual reduction in taxes over three years from 17% to 12.5% on the first €50,000 of taxable income.

 

Moreover, in the coming weeks the government will transpose a European directive that will allow multinational companies to pay an effective IRC of 15%.

 

The measures, part of a wide-ranging package of exactly 60 measures, incentives and tax cuts aimed at simulating growth, has been under intense discussion with the Ministry of Finances. It will be divided into areas and priorities.

 

Among them, a participation exemption exempting companies resident in Portugal from taxation on dividends and any capital gains provided that they hold, for a period exceeding 1 year, an interest equal to or greater than 5% of the share capital or voting rights of the entity that distributes the profits (currently 10%). This was a formula defined in 2014, which the Government is now resuscitating.

 

In addition, the Government intends to change “Cash VAT”, allowing companies that bill up to €2 million (before it was up to €500,000) to be able to pay VAT not when they invoice, but when they receive payment from customers, within a maximum of 12 months.

 

The plan, which has been architected for weeks, was to have been presented for approval on Friday, but was brought forward to Thursday (4 July) because of the football match between Portugal and France today.

 

A reduction of State surcharges, progressive according to profits, and municipal surcharges, has been left out. It is these rates that raise the statutory corporate income tax rate to 31.5%.

 

Another strand of the package is to simplify and reduce bureaucracy by simplifying procedures, slashing processing times, and increasing licencing efficiency in administrative procedures such as public contracts.

 

The package is aimed to be fluid and organic rather than fixed and static, a departure point which will develop throughout the government’s term in office alongside other sector-focused transversal measures.

 

At a conference on Wednesday organised by the Business Round Table, an association which includes some of Portugal’s most important companies, the Prime Minister, Luís Montenegro stressed the importance of cutting taxes, and said he wanted a company friendly tax regime that would simulate the economy and which would be a cornerstone of the government’s economic policy.

 

This meant that tax policy should be used to make Portugal’s economy more competitive which it hadn’t been over the past decade when it had been used solely as an instrument to raise income rather than stimulate the economy.

 

In other words, if the Portuguese economy and its companies are more competitive, they will make more money, and through this logic the government will bring in more taxes on higher profits.

 

For some time business and industry associations like the CIP (Confederação Empresarial de Portugal) have called for a number of fiscal measures like a specific financial instrument to encourage SMEs to become exporting companies, and covering overseas investment costs, attendance costs at international fairs and events, a credit line for active operations and customer financing, and credit insurance mechanisms.

 

It wants automatic tax credit offsets and a tax exemption on profits earmarked for company investments and capitalisation, while the role of public funds in capitalisation processes is deemed as fundamental.

 

Article published in Essential Business