As it does every year, the government presents its draft Finance Bill for the coming year to the Assembly. In Portugal, the debate and vote take place around October 30 and 31. Once this date has passed and the budget has been approved, it is submitted to Brussels for validation. In this article, I’ll outline the main points that will be debated at the end of the month. Of course, I’ll provide an update once the state budget has been approved and published.

You'll see that as you read the project In OE2024, the government of Mr. Antonio Costa plans to replace the current “non-habitual resident” status.

OE2024 Tax Proposals: Analysis

1.THE IMPACT OF THE OE ON THE NON-HABITUAL RESIDENT REGIME AND THE "INGRESSAR" REGIME

1.1. THE FORMER RESIDENTS PROGRAM (REGRESSAR PROGRAM) OR THE NEW «INGRESSAR» PROGRAM»

The so-called «Regressar Program» is expected to be extended to all individuals who meet the tax residency requirements in Portugal between 2024 and 2026, provided they have not been considered tax residents during the preceding five years (as you can see, this condition is similar to what follows the current Non-Habitual Resident (RNH) regime), and instead of the three years currently required.

It is therefore no longer necessary for the taxpayers in question to have had tax residency in Portugal during a prior period, which reflects an alignment with the current RNH special regime.

At the same time, an annual quantitative cap on tax exclusions is proposed at 50 % of income from employment or self-employment [Categories A and B of the Individual Income Tax Code (IRS)], corresponding to €250,000, which was previously tax-exempt.].

This proposed change applies only to taxpayers who are considered tax residents of Portugal, effective in 2024.

1.2. THE REGIME FOR NON-USUAL RESIDENTS

It is proposed to end the special RNH program, effective January 1, 2024, while maintaining:

• taxpayers already registered as RNHs in Portugal as of the effective date of this proposal;
• Taxpayers who are eligible for this special program in 2023, or who obtain a residence visa valid through the end of this year, but who do not apply for enrollment in the RNH program until 2024, before the deadline of March 31, 2024. .

In both cases, the program will remain in effect until the end of its 10-year consecutive period, in accordance with the terms and conditions currently in effect.

2. THE NEW TAX INCENTIVE PROGRAM FOR SCIENTIFIC RESEARCH AND INNOVATION

The creation, in the Tax Benefits Statute (EBF), of a new special regime applicable to taxpayers who (i) become tax residents in Portugal, (ii) have not been residents during the preceding five years, and (iii) earn income that falls under:

1. career paths for teachers in higher education and scientific research, integrated into the national science and technology system; ;
2. skilled jobs as part of contractual incentives for productive investment in accordance with the Investment Tax Code; ;
3. research and development positions for employees holding a Ph.D., the costs of which are eligible for the Corporate Research and Development Tax Incentive System (SIFIDE).

For taxpayers who meet these conditions, it is proposed to apply a special rate of 20% to net income from categories A and B earned through the activities listed above, as well as the option to claim an exemption on income earned abroad. (with the exception of pensions).

However, this exemption means that this income must be taken into account when determining the progressive tax rate, if applicable.

In addition, a higher rate of 35% should be applied to income received by taxpayers covered by this special tax regime when such income is paid by entities based in territories with significantly more favorable tax regimes, commonly referred to as «tax havens.».

Thus, for a period of 10 consecutive years, beginning in the year they are registered as residents in Portugal, taxpayers may benefit from this special regime, provided that in each of those years, and at all times, they are considered taxpayers. residents in Portugal, or resume earning income from the activities listed above.

In addition, eligible taxpayers must register with the Foundation for Science and Technology, IP (FCT), with the Portuguese Agency for Investment and Foreign Trade EPE (AICEP), or with the National Innovation Agency, S.A. (ANI), depending on the activity. These procedures must be followed and will be communicated to the tax authorities; they will be regulated by an ordinance to be published.

Finally, it is specified that taxpayers who are currently eligible for or have previously been eligible for the RNH regime, or who have opted for taxation under the Ex-Resident regime, are excluded from this regime.

3. THE IMPACT OF OE2024 ON FAMILIES

3.1. UPDATE TO CONTRIBUTION SCALES

It is proposed that all IRS levels be updated at a rate of 3 %, which, if confirmed, will be lower than the estimated inflation rate for this year—4.6 %—and the projection for 2024—3.6 %.

At the same time, it is proposed to adjust the applicable rate up to the fifth bracket, which has an impact—albeit a gradual one—on all subsequent brackets.

3.2. EXPANSION OF THE IRS YOUTH PROGRAM

The percentages applicable to taxpayers covered by the IRS Jovem program are expected to be increased:

• 100 % (up to 40 times the IAS value) in the first year
• at 75 % (up to 30 times the IAS value) in the second year
• 50 % (up to 20 times the IAS value) in the third and fourth years
• at 25% (up to 10 times the IAS value) in the fifth and final year of application of the IRS special tax regime

The eligibility criteria and respective requirements have not changed.

3.3. CLARIFICATION OF DEDUCTIONS FROM TRAINING AND EDUCATION CONTRIBUTIONS

The draft state budget specifies that the deduction from IRS withholding tax for training and education expenses—currently limited to a maximum of 30 % of the amount of expenses incurred and an absolute maximum of 800 € per taxpayer— also includes expenses related to vocational training for the taxpayer or any member of their household.

3.4. SUBSISTENCE LEVEL

In accordance with what was previously determined by the OE for 2023, the new proposal suggests modifying the formula for calculating the subsistence minimum to ensure that, despite the increase in the guaranteed monthly minimum wage—which is expected to be set at €820 starting in 2024— taxpayers with low gross monthly incomes will no longer be subject to IRS tax.

It is therefore planned that the reference value for the minimum subsistence level will be the higher of €11,480 and 1.5 × 14 × IAS.

3.5. REDUCTION OF PENALTIES FOR FAILURE TO COMPLY WITH REPORTING REQUIREMENTS

The OE2024 proposal reduces the penalties resulting from failure to comply with the requirement to file the annual IRS return, by stipulating that the tax and customs authority must take into account the taxpayer’s minimum liability and deductions from the tax collected.

4. THE IMPACT OF THE OE ON BUSINESSES AND INVESTMENT

4.1. REDUCTION OF THE GOODWILL AMORTIZATION PERIOD

It is expected that the period during which the tax expense will be recognized for the goodwill acquired as part of a business combination should be reduced from 20 (under the current rules) to 15 tax periods after its initial recognition.

It is important to note that this change will apply only when the initial recognition occurs in tax periods beginning on January 1, 2024.

4.2. REDUCTION OF THE CIT RATE APPLICABLE TO STARTUPS

The 2024 Budget Bill proposes reducing the corporate income tax (IRC) rate to 12.5% on the first €50,000 of taxable income for small and medium-sized enterprises or small- and mid-cap companies (Small Mid Cap). , when the entities in question are legally classified as startups and cumulatively meet the following legal requirements:

• are innovative companies with high growth potential, featuring an innovative business model, products, or services that meet the criteria defined by Ordinance No. 195/2018 of July 5, or that have been recognized as eligible by the ANI – the National Innovation Agency (ANI), SA, in the conduct of research and development activities or in certifying the recognition process for companies in the technology sector; ;
• have completed at least one round of venture capital financing from an entity legally qualified to invest in venture capital and subject to the oversight of the Portuguese Securities Market Commission (CMVM) or an international authority similar to the CMVM, or through a capital contribution or quasi-equity instruments from investors who are not founding shareholders of the company, namely business angels , certified by IAPMEI – Agency for Competitiveness and Innovation, IP (IAPMEI, IP); ;
• have received an investment from Banco Português de Fomento, S.A., or from funds managed by it, or from its affiliates, or from any of its equity or quasi-equity instruments.

Given the context described above, it is strange that the proposal requires a cumulative assessment of the aforementioned requirements, since the legal classification of entities as startups—as provided for in regional legislation—is less stringent, and a cumulative assessment of the requirements is just as difficult.

Finally, it is also anticipated that this benefit will be subject to the applicable European rules on state aid minimis .

4.3. AUTONOMOUS TAX RATES

It is proposed to reduce the autonomous tax rates on charges collected from or borne by taxpayers who do not benefit from subjective exemptions and who primarily engage in commercial, industrial, or agricultural activities related to light passenger vehicles and light goods. vehicles, motorcycles, or mopeds, under the following conditions:

• from 10% to 8.5%, for vehicles with a purchase price of less than 27,500 €
• from 27.5% to 22.55%, for vehicles with a purchase price of 27,500 euros or more but less than 35,000 euros
• from 35% to 32.5%, for vehicles with a purchase price of €35,000 or more

With regard to fees for vehicles powered exclusively by electricity, it is proposed to maintain the separate tax rate of 10 %, but only if their purchase price exceeds €62,500; however, the proposal now provides for the possibility of exempting vehicles from this tax in certain cases, namely when they are used to operate a public transportation service, when their use is classified as income from salaried employment, or when they are intended to be rented out as part of the taxpayer’s normal business activities.

4.4. INCREASE IN EXPENSES FOR ELECTRICITY AND GAS

It is proposed to maintain the special support program for electricity and natural gas costs, during the 2023 and 2024 tax years, which provides for a 20 % increase in additional expenses or losses related to electricity and natural gas consumption for tax purposes. profit.

The proposal also provides that the consumption-related increase for 2022, which cannot be claimed during the 2022 and 2023 tax periods, since it exceeds the limit set for the impact of tax benefits on tax liability, may be carried forward up to the tenth second following the tax period. .

4.5. TAX INCENTIVES TO INCREASE WAGES

Changes are expected to be made to this system, established by the 2023 OE Act, highlighting its expanded scope of application, as it would eliminate the requirement to determine wage increases through a dynamic collective bargaining mechanism; in addition, it is also proposed to cover the costs of wage increases for employees of corporations.

It is proposed that the minimum increase to be considered be 5% (currently 5.1%), with the additional aim of clarifying the definition of «wage range» to reflect the ratio of the annual fixed compensation of the 10 % highest-paid workers to the total, and the share of the annual fixed compensation of the 10 % of the lowest-paid workers relative to the total.

Under the current system, it is also provided that the concept of a dynamic instrument of collective labor regulation includes the extension order and the order on working conditions.

4.6. TAX POLICY TO ENCOURAGE BUSINESS CAPITALIZATION

Under the tax regime designed to encourage corporate capitalization (which replaced the so-called “conventional” share capital remuneration regime), it is provided that the annual deduction from the tax base be calculated at a variable rate, corresponding to the average 12-month Euribor rate, plus a spread of 1.5%.

In the case of a small or medium-sized business or a Small- and Mid-Cap , the spread rate provided for in the bill is 2 %.

To determine the tax benefit, it is proposed that eligible net increases in equity include the current year and the six preceding years (currently, the program covers the current year and the nine preceding years).

It is also proposed to temporarily strengthen this system, with the deduction under the above system to be increased by 50 % in 2024, by 30 % in 2025, and by 20 % in 2026.

4.7. TAX POLICY TO SUPPORT INVESTMENT AND CONTRACTUAL TAX INCENTIVES FOR PRODUCTIVE INVESTMENT

It is proposed that costs associated with creating jobs for skilled workers—who hold at least a master’s degree—be accepted as eligible expenses, provided that the jobs are maintained for at least five years, or three years in the case of micro, small or medium-sized enterprises, or small- and mid-cap companies.

Relevant labor costs include gross pre-tax wages, mandatory social security contributions, workers’ compensation insurance, costs for childcare and care of dependents, as well as other expenses required by law or arising from collective bargaining agreements.

A mitigation measure is proposed for the purposes of the investment support tax program (RFAI), provided that this «relevant application,» as well as the amount of the investment in intangible assets, does not exceed 50 % of the relevant requests, unless the entity is considered a micro, small, or medium-sized enterprise, as defined in Commission Recommendation No. 2003/361/EC of May 6, 2003.

5. THE IMPACT OF OE2024 ON CONSUMPTION

5.1. VALUE-ADDED TAX

The OE bill does not provide for the continuation of the zero value-added tax (VAT) rate—a VAT exemption, with the right to deduct, for the basic food basket. It is proposed to exempt certain cultural services from VAT, provided free of charge to individuals who accompany others with a permanent disability rating of 60 % or higher, duly attested by a medical certificate, and on whom they depend to perform their duties. visit.

It is proposed to maintain the VAT exemption, through December 31, 2024, applicable to the supply of fertilizers, fertilizers and soil conditioners, as well as flour, grains, seeds, and any other product intended for feeding livestock, poultry, and other animals, when normally used in the course of agricultural production activities.

It provides for the application of the intermediate tax rate to food service, excluding alcoholic beverages and soft drinks, thereby allowing juices, nectars, and carbonated waters—or waters containing carbon dioxide or other substances—to also benefit from the aforementioned tax rate.

There are plans to extend the application of the reduced tax rate through December 31, 2024, which applies to the supply of electricity for consumption—excluding fixed charges—for a contracted capacity not exceeding 6.90 kVA, for the portion not exceeding 6.90 kVA. Not to exceed:

• 100 kWh per 30-day period; ;
• 150 kWh per 30-day period, when purchased for consumption by large families, defined as households consisting of five or more people.