However this situation is expected to change with the State Budget (OE) proposal for 2024 which provides for the elimination of this special system (NHR) not only for immigrant retirees but also for workers who become non-habitual residents.

According to a report by ECO, the ranking of the worst tax systems analyses not only losses in tax collection but also the level of tax injustice, translated into tax benefits, between groups of taxpayers in 25 special regimes in 17 EU countries. Tied with Portugal in fourth place among the most harmful systems are Cyprus, in terms of tax freebies given to foreign retirees, Denmark and Italy, in relation to special regimes for non-habitual residents.

Worse than Portugal are Greece and Italy, which top the list of most harmful regimes, Switzerland, which is in second place, and Cyprus, in third.

Also in relation to the tax regime for non-habitual residents, which is aimed at workers, Portugal scores poorly, according to the EU Tax Observatory, even though this system is less harmful compared to that for foreign pensioners. At this point, the Portuguese regime is the fifth worst, on the same level as Luxembourg, Sweden, France, Cyprus, Spain, the Netherlands and Ireland.

Negative impact

When evaluating the 25 schemes, the Observatory took into account the duration of the incentive, the minimum income levels, the requirement for professional activity and the size of the tax benefit. Therefore, the longer the regimes last, the greater benefits they provide and the fewer access conditions they require, such as a minimum amount of income or the need to prove professional activity, the greater the degree of harm to the country, explains the Observatory.

In the Portuguese case, a regime that was too long and allowed very high benefits resulted in the most negative impact on the final assessment.

In 2022, tax expenditure on the IRS regime for non-habitual residents grew, in Portugal, by 18.5%, to 1,507.9 million euros. A year earlier, the amount totalled 1,271.8 million, according to the fiscal expenditure report sent to Parliament.

This regime currently allows workers, with activities considered to have high added value, to pay a special IRS rate of 20% on income from categories A (employee work) and B (self-employed work). Retirees pay a 10% IRS tax on their pensions.

Over the past 15 years, many countries have introduced preferential tax regimes to attract specific socioeconomic groups. The Tax Observatory reports that, “since 1995, the number of special personal income tax regimes has increased from five to 28 in the EU and the United Kingdom”.

The organization recognizes that this is “a strategy that can improve tax collection and boost domestic activity”. But, overall, it is a negative policy: “taxpayers, who are attracted to one country, reduce the tax base by the same proportion in another country and global taxation ends up falling”, concludes the EU Tax Observatory.