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Portugal has debated how to minimize the impact of wealthy foreigners relocating to the nation for its natural beauty and lower living costs. Portuguese themselves have struggled with inflation and continue to be amongst the poorest citizens of a western European nation. There is a concern about how Portugal can benefit from an increase in new wealthy residents yet protecting the cultural integrity of Portuguese urban areas. This is reasonable considering wealthier citizens from Europe and North America who come from nations with higher salaries than those typical in Portugal threaten to continue to push out Portuguese residents from their own cities.
Currently there is a debate whether there should simply be additional costs for foreigners to buy homes in Portugal or if Portugal needs to look to directly aim new taxes at the capital gains of new residents. An argument favoring taxing capital gains is that Portugal can benefit more rather than earning a small sum each time a house is bought or sold, which is uncertain how often that would be. Taxing capital gains could be a more steady source of revenue for Portugal which it would ideally be able to use to better conditions for Portuguese citizens.
Unaffordability Of Homes In Portugal
As discussed previously in this column, Portugal has the issue of empty homes. The nation also has a large number of homes rented out by landlords to tourists rather than workers. While tourism is beneficial for the tourist industry and helps increase the GDP of Portugal, it also negatively impacts the nation when landlords would rather rent out their apartments short-term to tourists rather than to workers long-term. This creates a shortage of homes available for rent for workers, causing rental prices to skyrocket in Portugal. As inflation has caused prices in the supermarket along with energy cost significantly more along with higher interest rates to buy homes and cars, being able to live a middle class life in Portugal on a Portuguese salary is becoming a distant dream.
The Portuguese government has proposed to increase minimum wage annually through 2026, when the minimum wage would reach 900 euros. This measure does little however for allowing people to support a family, which has become an issue throughout the entire EU. All 27 member states currently have a fertility rate below replacement. In Portugal, this is understandable considering that on minimum wage a person on average is able to rent out a room much less a two bedroom apartment. A two-bedroom 70 square meter apartment costs 770 euros on average in the cheapest neighborhoods in 2023 meanwhile a room costs 500 euros in Lisbon. On average a one bedroom apartment costs 2,005 euros, essentially making it impossible for a minimum wage worker to live alone, considering that in 2023 the monthly minimum wage is 760 euros.
Portugal Not Only Destination For Expats
One problem with this proposal is that Portugal is not the only nation attracting foreigners interested in at least living abroad temporarily. This means that if Portugal will go ahead with directly taxing foreigners as a means to increase government revenue, the nation must find an equilibrium. The increase in revenue must be significant enough to justify the government spending time on the measure yet the tax rate cannot be so high that it causes a large drop in foreigners, rendering the measure useless as well. Currently Portugal has a favorable tax for expats of 25 percent, meanwhile the tax rate for Portuguese citizens varies between 14.5 percent and 48 percent.
Another member state which has similar tax incentives for foreigners to relocate is Italy. For foreigners willing to move to southern Italy which struggles more economically than the north, foreigners pay income tax on only 30 percent of their income. For millionaires, there is also a flat tax option. For foreign income, the ultra wealthy could choose to pay only 100,000 euros a year, rather than pay a certain percent annually. The flat tax is valid for 15 years and family members can take advantage of this incentive by paying an additional 25,000 euros annually. While 549 people took advantage of the flat tax in 2020, this rose to 1,339 individuals in 2021. As both nations enjoy similar weather and both are European Union member states, this shows that Portugal cannot choose a tax hike that would incentivize too many people to move elsewhere.
While Portugal is smart to brain storm how it can fully benefit from expats living in Portugal, it is walking a narrow path. While Portugal is an attractive nation with several aspects that attract people to move there, it still needs to remain competitive. Other nations in Europe with warm weather and beaches such as Italy are also looking to cash in on wealthy foreigners. As Italy is offering tax incentives to attract the wealthy, Portugal cannot be too aggressive with taxes otherwise foreigners may leave. At the same time, the tax needs to raise enough money to justify politicians spending a significant amount of time on the measure instead of working on other strategies to help increase government revenue and support Portuguese citizens. In order to make housing more affordable, the government would be better off incentivizing the rehabilitation of empty homes and cracking down on the number of homes that can be rented out as short term rentals to tourists instead of long term leases to workers.
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