Desperate for growth, Portugal backtracks on hostility to digital nomads as its tax breaks for skilled foreigners return

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Portugal’s will-they-won’t-they relationship with foreign workers has just taken another twist, as the country plans to bring back contentious tax breaks that its old Prime Minister called a “fiscal injustice.”

The country’s Prime Minister Joaquim Miranda Sarmento told the Financial Times that his center-right government would bring legislation on Thursday to reintroduce tax breaks to lure foreigners to Portugal.

Sarmento said the switch is part of a body of legislation aimed at stimulating Portugal’s economy and “attracting some people to the country.” 

The country scrapped the 20% flat tax rate charged to those in “high value-added” jobs like doctors, tech workers, and journalists in October. Instead, skilled foreign workers would fall under the same progressive tax rate as Portuguese citizens, ranging from 14.5% to 48%.

The decision was expected to deter high-skilled foreigners from migrating to Portugal, who would face higher charges on income earned there. 

Portugal’s U-turn means foreign workers will receive the 20% flat rate on “salaries and professional income” rather than all income like before. That means things like dividends, capital gains, and pensions will not benefit from a tax break. 

The move marks the latest twist in the country’s complicated relationship with foreign workers. 

Portugal’s migrant mixup

The country has sought to attract young, skilled foreigners since its economy was devastated by the global financial crisis in 2009. As the COVID-19 pandemic shifted working patterns, Portugal’s capital of Lisbon became the homeland of newly coined “Digital Nomads.”

Opponents of these inflows regard them as devastating to the cost of living of Portuguese residents, among the EU’s lowest-income workers. They also blame the knock-on effect of that higher income on spiraling house prices in the country, adding to unaffordability. 

When the tax breaks were scrapped in October last year, then-Prime Minister António Costa described them as a “fiscal injustice” and a “biased way” of inflating the housing market.

Migration advisors told Fortune last October that the decision to axe these tax breaks may have inadvertently created a brief swell of new applicants rushing to immigrate to Portugal before the law was changed. 

Portugal also made sweeping changes to its “Golden Visa” program last year, which previously allowed foreigners to gain residency by buying property worth at least €500,000 ($540,000). The country scrapped that avenue, meaning only higher investment options were available for prospective residents. 

While Portugal is again liberalizing its approach to skilled foreigners, it is standing firm on its taxes against older immigrants. The exemption of pensions from tax breaks is expected to stop older people migrating to the country for sun and higher income. 

Population crisis

Thanks to a continent-wide aging population crisis, Portugal is locked in a demographic battle with the rest of Europe’s economies. 

However, long described as the most migrant-friendly nation in the EU, Portugal is getting more selective with who it lets in under its right-leaning government.

In June, the country said it would scrap its “manifestation of interest” immigration clause, which allowed non-EU citizens to come to the country without a guaranteed job and apply for residency after a year of making social security payments. 

Scrapping the clause appeared to be directed at lower-income migrants from countries like India, Nepal, and Bangladesh, who took advantage of it most.

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