Portugal’s 2020 State Budget passes and brings good news for companies and bad news for overseas NHR pensioners and new Golden Visa applicants.
After a month of criticism from the European Union and weeks of arguments and debates in the Portuguese parliament, the country’s State Budget for 2020 was finally passed last week.
Portugal’s Secretary of State for Fiscal Matters, António Mendonça Mendes, who created the expectation in a parliamentary debate that the government would initiate a round of “big tax cuts” was shot down in flames by Minister of Finance Mário Centeno who announced tax cuts would be in the order of only €200 million.
This year’s budget partly revolves around the government’s pledge to slash the amount of VAT paid on electricity for which some of the highest tariffs are charged in the eurozone.
But hopes, too, that VAT would be slashed were dashed when it was announced that electricity charges would, for the time being, remain unaltered.
Indifferent to internal arguments of how Portugal will keep within the budgetary spending parameters set by the European Commission, the European Council is currently debating, at a technical level, the proposal for the Portuguese State Budget 2020 which has been sent to Brussels by the government led by António Costa. But a source in Brussels has already warned that the final verdict from the European Commission will only arrive in Lisbon after this year’s budget comes into force.
This year’s state budget has had a painful passage through parliament which culminated in four days of votes and a Great General Debate last week but has been approved after much horse trading between parties.
In a nutshell, there will be considerable changes for families, companies, pensioners, the public administration, the real estate sector and for investment.
The cap on reinvested profits that may be deducted against IRC tax has been raised from €10 million to €12 million, as well as an increase in the limit of taxable profit from €15 million to €25 million which will allow SMEs to have access to a reduced IRC rate of 17%.
Companies linked to the paper-making and cellulose industries will pay a special forest conservation tax.
The government will maintain exemptions on IMI property rates covering buildings that are classified as national monuments or of public interest (listed buildings).
However, transfer taxes on properties valued at over €1 million, the so called municipal tax on onerous property transfers (IMT), will now go from 6% to 7.5%.
Local accommodation (B&B/Air B&B)
Incomes derived from establishments in central city areas designated as over-represented by bed & breakfast establishments will now be taxed on 50% of the profits instead of 35% as has been the case up until now.
However, properties that are transferred from local accommodation to affordable renting will enjoy tax breaks.
The government has spelled the end of the concession of authorisations of residency through investment (ARI), commonly known as Golden Visas, for investments in property in Lisbon, Porto and coastal regions of the mainland. However, those who already have Golden Visas through the scheme will not be penalised when the time comes to renew their permits for applicants and their family members. Changes will only come into force next year.
This budget affects deductions on IRS for families with more than one child. The ‘bonus’, which is added to the set deduction per dependent (€600) from the birth of the second child, now goes from €126 to €300. This deduction applies regardless of the first child’s age providing this second child is below the age of three.
According to the government’s calculations, this measure should help 135,000 families.
Moreover, children under three from families in need (Scale 1) will have free access to crèches which will cover around 40,000 children.
New schoolbooks will be distributed in primary school years from the next school year, while university students will see a reduction of 20% in the cost of their maximum university charges, from €871 to €697.
Young people who are studying and may be working on the side will be exempt from IRS tax up to a limit of five-times the current Social Support Index which is €2,194.05. They will also get partial exemptions in their first three years working. In the first year, they will pay taxes on 70% of their income, in the second 80% and the third 90%.
The government has also spelled out the end of fees for primary health care. In the case of fees for complementary diagnostic and therapeutic exams that were prescribed through primary care, fees will be phased out in September and in January.
There will be a new extraordinary increase in pensions which means that pensions up to 1.5 times the value of the Social Support Index (€658.2 a month) will see an increase of €10 per month from one month after the budget comes into force.
Overseas resident pensions
In a controversial move, the government has spelled the end of 100% exemptions or ‘El Dorado’ tax benefits for overseas pensioners. Foreign residents registered under the non-habitual residents scheme will lose their double tax exemption and will now have to pay a 10% IRS charge on their income in Portugal. Those previously registered under the scheme prior to the coming into force of the State Budget 2020 will continue to enjoy their exemptions.
Taxes on sugared drinks
Taxes will be increased on sugared drinks and heated tobacco as well as on bullfighting shows in terms of VAT charges (from 6% to 23%).
Independent workers will enjoy a VAT exemption ceiling of €12,500 per annum (up €2,500 on the last budget).
Public Admin workers
Salary increases linked to career progression will go back to normal after being scrapped during the austerity and budgetary containment years from 2011.
Finance Minister Mário Centeno, who is head of the European Commission’s Eurogroup, had faced a barrage of criticism over Portugal’s budget plan from his EU colleagues who said it demonstrated insufficient progress in reducing Portugal’s structural deficit.
According to Reuters news agency, the Commission’s economics commissioner Paolo Gentiloni said that Brussels had to take a “hard line” even though Portugal’s debt is falling and it expects to run a budget surplus this year.
The Commission’s attitude is that unless Portugal continues to make more progress reducing its structural deficit, it could end up being in non-compliance with European measures.
By CHRIS GRAEME