The Non-Habitual Residents regime, based on a special IRS, clearly and disproportionately benefited taxpayers with very high incomes, concentrated at the absolute top of the salary distribution in Portugal. The conclusion results from a study by Banco de Portugal that assesses the effective impact of this tax incentive and reveals that the gains were far from being distributed across the board.
In practice, the so-called tax free favor mainly favored a very restricted group of workers with exceptional salaries, not very representative of the national labor market.
According to the website specializing in business and current affairs, Executive Digest, the main beneficiaries of the scheme earned, on average, around 380 thousand euros gross per year. This salary level places them in the top 0.01% of labor income in Portugal, leading the study’s authors to classify the impact of the RNH as heavily concentrated on the so-called super-rich.
A regime created in a context of crisis
The Non-Habitual Residents regime was created in 2009, in a period marked by the international financial crisis and the need to make Portugal more competitive in attracting investment and foreign talent.
The measure provided for a special IRS rate of 20% over a period of ten years for income from work associated with professions considered to have high added value.
Furthermore, the majority of income obtained abroad was exempt from taxation in Portugal, a factor that significantly increased the country’s attractiveness to highly mobile professionals internationally. The regime was, for years, presented as a strategic tool to modernize the economy and attract qualified professionals.
The extension to foreign pensioners
In 2013, legislative changes further strengthened the scope of the regime, extending it to foreign pensioners. These now benefit from tax exemption on pensions received outside Portugal, a change that had a relevant impact on the demand for the scheme by taxpayers with high stable incomes.
This evolution contributed to intensifying the concentration of tax benefits on profiles with greater financial capacity, many of them coming from countries with higher tax burdens than Portugal.
Income outside the national scale
Banco de Portugal’s analysis focuses on data available from 2017, the year for which more detailed information was available. During this period, 547 RNH beneficiaries were identified working in Portugal in sectors classified as high added value. The average annual income of this group was around 380 thousand euros, a value almost 20 times higher than the national GDP per capita that year, which stood at 18,908 euros.
The numbers become even more expressive when compared to the reality of the Portuguese job market. Exploration of the Personnel Tables shows that only 0.003% of workers in Portugal earned income equal to or greater than this amount, highlighting the exceptional nature of these salary profiles.
A limited impact off the top
The study concludes that the scheme had a limited impact on attracting skilled workers on low or medium incomes. On the contrary, it proved to be particularly effective among top executives and other highly mobile professionals internationally, reinforcing the concentration of benefits at the highest levels of the salary distribution.
Despite recognizing that preferential tax regimes can generate net economic gains for the State, the authors warn of the negative effects of tax competition between countries.
According to , as similar solutions become more widespread in Europe, the competition for more qualified workers tends to erode these gains, concentrating benefits on higher incomes and reducing the well-being of less qualified workers, in a context in which the tax expenditure associated with the regime reached around 1.7 billion euros per year, equivalent to 0.6% of GDP.
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