If the replacement of RNH taxation with a more limited fiscal incentive happens - what now?

Problems have arisen again in the real estate market after António Costa announced the discontinuation of the Non-Habitual Residents (NHR) program for new applications starting in2024. His intention was confirmed in the draft state budget for2024, which repeals this status and creates a new one to replace it. This new tax incentive for scientific research and innovation, which some market experts consider to be more "limited" compared to the previous one, may mean that it will be inaccessible to many foreign talents needed in the country. And the consequences of these changes are not limited to this: discontinuing the program creates legal instability, putting new foreign investments in real estate and the country's economic development at risk.

The termination of the RNH program has caused concern. Last Monday, October2nd, the prime minister announced the government's intention to terminate the RNH program, which has been offering income tax reductions for new foreign residents and Portuguese nationals living abroad for more than five years since2009. The idea is to end the RNH program for new applications from2024 onwards, but to maintain tax benefits for those who already have this status in Portugal.

** Antonio Costa provided arguments for ending the RNH program. "Tax inequality," which is a "distorted way of raising house prices," he explained. Immediately after Costa's announcement, economists, tax lawyers, and real estate market experts reacted to this statement, expressing clear concern about the future.

"We've received many inquiries from French clients worried about the discontinuation of the program," comments César de Brito, managing director of De Brito Properties. "For French pensioners, the announcement already had the same effect in 2020 [when pensions started to be subject to a 10% personal income tax rather than 0%], but for young active people it was news that made them very anxious," he adds.

Also Diogo Capela, solicitor and partner at Lamares, Capela & Associados, says that "the reaction has primarily come from clients who have pending applications and were concerned that these changes might affect them in some way". On the other hand, there has not yet been a "significant increase in demand" for new RNH applications. The Belzuz law firm has also seen "an exponential increase in demand for tax consulting services in the area of change of residence and status, both from clients who were already interested but had not yet made a decision, and from new clients who now see an opportunity to make the move to Portugal," shares attorney and director of the tax department, Rafaela Beire Cardoso.

And the same is happening at PwC: "We have noticed that our clients who have already planned a move to Portugal are very concerned about whether they will be able to ensure that the move is completed correctly before the end of the year. On the other hand, we have noticed an increase in questions from other people (...) who want to know the conditions under which they can potentially continue to benefit", explains Luiz Filipe Sousa, Tax Director at PwC Portugal.

"The main concern of foreign investors is related to stability", emphasizes Francisco Castro Guedes, coordinator in the SRS tax department. And the head of residential real estate at JLL has even felt an "outflow" of investors. "Once again Portugal makes a decision that repels foreign investment in the country and sends a negative message" in the international arena, argues Patricia Baran. Investors due to the termination of the RNH program were "absolutely stunned" as it came "completely out of the blue", shares Roman Karel, founding partner of Athena Advisers.

The new tax incentive for research and innovation is "limited"

The day after Costa's announcement, the 2024 state budget was presented, confirming the end of the RNH program, "universal and comprehensive" from 2024, as explained by Finance Minister Fernando Medina. But it brought a novelty: another program was created, a new fiscal incentive for research and innovation, aimed at "scientists and highly skilled workers," which has similar requirements and benefits as the RNH. This requires recipients to live in Portugal for at least 183 days a year to benefit from a special tax rate of 20% for 10 years. And this is only valid for those who have not had tax residency in our country for the last five years.

Will this measure attract talent, wealth and investment to Portugal? Experts interviewed by idealista/news believe that this new incentive to retain talent in research and entrepreneurship is much more "limited" compared to the RNH, excluding many talents. "This program is becoming much more limited than before. While it is not uninteresting - because any measure to retain talent in our companies and educational institutions is positive - it has a much more limited application than the RNH", comments Gonzalo Nascimento Rodriguez, coordinator of ISCTE Executive Education's Real Estate Investment Training Program.

And attorney Diogo Capela goes even further, arguing that the "very limited" nature of this program is likely to make it inaccessible or ineffective for most people. In Cesar de Brito's experience, however, there have been no cases so far of professionals who have made a request for RNH status by engaging in this activity. "We don't think it will be an interesting market share and that it will attract many scientific researchers to Portugal", predicts the manager of De Brito Properties. Luis Leon, a tax specialist at consultancy firm Ilya, says the same: "The regime [created in the budget proposal] is completely ineffective in attracting anyone." And if it is not changed during discussions on the details of the 2024 budget, it will become "useless" as it is "very limited", Lusa Lusa tells agency Lusa.

And Patrick Deverbe, of CMS Law's tax practice division, recognizes that the RNH repeal is a "grave mistake," believing that the new regime is "not of interest" given the types of occupations and jobs it covers. "The impact of the RNH program's repeal so far has meant huge losses," says Patricia Baran, head of residential real estate at JLL.

On the other hand, "the creation of a tax incentive for research and innovation, announced as a replacement for the RNH, reduces the impact of the abolition of this benefit, preserving it for some more specific professions". "However, the fact that legislation in Portugal is constantly changing still causes some uncertainty for those looking to invest in our country," says Lisbon Residential Director at Savills. Although she admits that it is "a good incentive", Patricia Baran, of JLL, says that this new tax incentive "does not replace at all what they want to remove, as the spectrum is very narrow and focused on profiles working in the science and technology sector." On the other hand, Roman Karel, of Athena Advisers, says that all research and innovation incentives are "welcome in the country." But he argues that they can be created in addition to the RNH, so there is no need to "discontinue a program that has had a very positive and significant contribution to the national economy and has also attracted to Portugal highly qualified professionals in high-value activities."

Micaela Monteiro Lopes, a visiting assistant at the Institute of Higher Accountancy and Administration of Lisbon (ISCAL) and a PhD student in law, says that “the creation of incentives for research and innovation signals a shift from policies focused on individuals to corporate policies focused on innovation. It is a bet on the future that will bring long-term results and establish Portugal as a leader in technological industries”, she says.

On the other hand, there are those who do not agree with the measures aimed at providing tax incentives and reducing personal income taxation for foreigners. Economist Vera Gouveia Barros supports the termination of the RNH program, provided it is applied only to new applications and without retroactive effect, because “those who have already moved to Portugal in this hope should not be deceived.” And her opinion on the new tax