Portugal’s Socialist government has backtracked on two of its most controversial measures included in the 2024 State Budget proposal, having axed the increase of the IUC vehicle circulation tax on pre-2007 vehicles and postponed the end of the NHR (Non-Habitual Resident) tax regime, which will be extended into 2024 with a “transitory regime” for those who were already planning their move to Portugal in 2023.
While many seem to agree with the government’s decision to backtrack on these two contentious measures, it is the way that PS changed its mind that is drawing criticism.
The ruling party is being accused of “electioneering” – in other words, it is said to be scrapping or changing its most controversial proposals included in the 2024 State Budget in order to gain the favour of the Portuguese people ahead of March’s early election.
What’s certain is that the government, which despite the ongoing political crisis still holds a majority in parliament, depends solely on itself to move forward with these amendments to its State Budget proposals.
When it comes to the NHR tax regime, the new temporary scheme will allow individuals of any nationality to still benefit from the NHR regime (which was to be scrapped starting in 2024) until December 31, 2024, so long as they are able to prove they were already planning their move to Portugal in 2023 (i.e., documents proving that a property has been purchased, that a residence visa has been requested or that children have been enrolled in a Portuguese school).
This ‘transitory regime’ has been created following an amendment to the State Budget (OE) proposal for 2024 presented on Tuesday in Parliament by the Socialist Party (PS).
According to the government’s statement presented to Parliament, there are six ways to benefit from the transitory regime:
- Promise of employment or work contract, or promise or secondment agreement celebrated until December 31, 2023, with work duties having to be performed in national territory;
- Lease contract or another contract granting the use or possession of property in Portuguese territory concluded until October 10, 2023;
- Reservation contract or promissory purchase contract with rights over property (contrato-promessa de aquisição de direito real sobre imóvel) in Portuguese territory concluded until October 10, 2023;
- Enrolment or registration of dependants in an educational establishment located in Portuguese territory, completed until October 10, 2023;
- Residence visa or residence permit valid until December 31, 2023;
- Procedure initiated with the competent authorities for the granting of a residence visa or residence permit, until December 31, 2023.
Justifying the scrapping of the scheme earlier this year, prime minister António Costa said the NHR regime was “a measure of fiscal injustice that is no longer justified and is a biased form of inflating the housing market, which has reached unsustainable prices”.
However, months later, now the PS government believes that a ‘transitory period’ is required.
“It is important to create a transitory regime that safeguards the legitimate expectations of individuals who have already made the decision to immigrate or return to Portugal,” the party says. It adds that failing to create this transitory scheme could “harm the confidence” of those who chose Portugal to live.
Essentially, what this new transitory NHR regime does is extend it for another year, leaving the door open for the next government to either move forward with its abolishment, maintain it or alter it.
Elections are ‘reason’ for government’s change of heart
Representatives from the property sector have applauded the creation of the “transitory” NHR regime but criticised the government for deciding to end it in the first place.
“When prime minister António Costa announced the end (of the NHR), he said two things: that its goals had been achieved, but I don’t know what they were. I think nobody knows what the objectives were. The second aspect was that he said the regime was behind rising property prices. But nobody knows on what basis he said that,” Paulo Caiado, president of the Association of Real Estate Mediation Professionals and Companies of Portugal (APEMIP), told Jornal Económico (JE).
Samuel Fernandes de Almeida, Managing Partner of MFA Legal, added that ending the regime after 2024 will remain a mistake “for several reasons”.
“Ending the tax regime as announced, without any prior study or analysis of its advantages, constitutes a blow to the country’s image as a centre for attracting talent and foreign investment. And the uncertainty – even if this measure is eventually repealed – is a critical deterrent factor for any investment decision,” he told JE.
The government’s sudden change of heart was even more surprising when it came to the IUC vehicle circulation tax hike, which was scrapped after being so adamantly defended on several occasions by finance minister Fernando Medina.
In a statement justifying its decision, PS said: “Light vehicles are still in many cases the main means of transportation to the workplace or the nearest public transportation stop, especially outside of the country’s main cities and in low and medium-density areas, where public transport alternatives are reduced and inadequate for daily mobility needs.
“In these cases, in which cars are an absolute necessity, there is also the fact that many citizens do not have the financial means to replace their vehicle with a newer one. Thus, we consider it important, as a matter of social justice and protection of citizens with more economic vulnerability, to rectify the State Budget proposal,” the socialists added.
Political scientist Bruno Costa has given his take on the government’s reasons for cancelling the tax hike proposal.
“The main goal (of PS) is the electoral campaign for March 2024, and aware of the (negative) reaction this measure caused, the PS clearly realised that it would be harmful and affect the support of the lower middle-class,” he said on SIC Notícias.
The Portuguese Automobile Club (ACP) has also highlighted the “fear” that it believes prompted the government’s decision to axe the tax hike.
“As expected, with elections looming, (PS) got scared and took a step back,” ACP president Carlos Barbosa told Lusa news agency.
Speaking to journalists at Parliament, PSD MP Hugo Carneiro stressed that all opposition parties dubbed the proposal “an injustice against the middle and most disadvantaged classes”, recalling that the government justified it on environmental grounds.
“In the end, this argument by the PS and the government was false. There was no environmental concern; there was just the desire to increase taxes for the Portuguese (…) What is the real reason for this U-turn? The elections!” he said.
For PSD, this “has never been an electoral issue, but one of social justice” for all the citizens who own older cars “because they can’t afford” newer ones.
The president of Iniciativa Liberal (IL), Rui Rocha, also described the PS change of heart as “absolutely opportunistic”.
“It’s a shame they waited for an election campaign to make this change. It’s pure hypocrisy, pure opportunism, pure and hard electioneering,” he said.
Nonetheless, both parties hailed this change as “a victory for citizens” after several movements have been protesting in the streets against the IUC increase, including a petition that amassed the most signatures in the nation’s history (over 403,000).
By Michael Bruxo