I recently had a very interesting conversation with an ex-colleague with whom I had not spoken for almost 20 years. She moved to Madrid and transitioned from technology to real estate, a reminder of a similar change I made 15 years ago. She asked me whether I knew anything about the Spanish Golden Visa and started to describe her experience of convincing one of her friends, who had been thinking of purchasing in Portugal, to invest in Spain.

I then asked her if she had explained to her friend the differences between the Spanish and Portuguese Golden Visas, including the multiple levels in Portugal versus single level in Spain, VAT which is an additional cost in Spain, and whether and how taxes are applied to worldwide income and assets. She hesitated, and then admitted that her friend had just received a very large Spanish tax bill. After another pause, the realization sank in and she said "He only invested in Spain because of me".

I am constantly amazed by investors and buyers who, with a world of choice, fail to complete sufficient or even minimal research and due diligence. And I don't mean that "method" of obtaining free "advice" by flooding Facebook groups with questions and then knitting together a patch-work of answers from the many online trial-and-error "experts". Notwithstanding the arbitrary methods used by so many to make investments, it is evident that Portugal's message as a tax-advantageous investment destination has seeped through. And while I am a big fan of both Iberian neighbours, and our business works in both, it is evident to even those with minimal knowledge, that if tax-efficiency is a major driver of your investment, Portugal is a much better choice than Spain.

This is one of the reasons that Golden Visa investments represent more than €4 billion into the Portuguese economy. This influx of capital has a direct correlation to the massive inflation in house prices in areas such as Lisbon and Porto, where the majority of the GV investment has been concentrated.

The Golden Visa program in Portugal has been a success by any number of measures including total investment, diversification of investor base and origin, and the successful rehabilitation of abandoned urban areas. Dovetailing with the GV program, the Non-Habitual Residence program, much more focused on attracting permanent residents who contribute to the local economy, has reinforced the upward price movement.

As residence under the NHR does not require the purchase of a property, with a rental contract being sufficient, demand for long-term rentals, and subsequently prices, has also increased. Property owners, attracted by the allure of a constantly-improving tourism market and the arrival of wealthier, expatriate tenants, registered rental properties with tax authorities at a faster rate than even that anticipated by the government. Long-term rentals, which attract a higher tax and an up-front stamp duty, are scarce but much in demand by foreign applicants of the NHR program. With the change in rental legislation, the number of lawyers now acting as "cheap rental agencies" by providing a service to their clients, of finding an inland property whose address can be used for legal registration purposes, is on the increase. It is perhaps only a matter of time until inland populations, to whose municipalities these sourcing agents are turning to source inventory, also start to complain about the unavailability of stock and being priced out of the market. Unlike major cities such as Lisbon and Porto, NHR applicants using an inland address often rent a second property in a more desirable location, which they actually occupy. In these situations, they make no contribution to the local economy, precisely the goal of the program.

From a Portuguese government perspective, real estate represents, once again, a major source of growth for the Portuguese economy, with its knock-on effect on sectors such as tourism and construction, both labour-intensive. The country has achieved a rather unique result:

  • it attracted investment, much of which at an average value well above previous transactions, because of the inflationary effect of programs such as the Golden Visa;
  • it legislated for the registration of tax-generating real estate assets whose owners were attracted to the short-term rental market, initially by very low rental taxes; and
  • it attracted expatriate residents eager to benefit from an exemption of personal income tax on foreign-earned income, as a major source of tenants for the newly available inventory as well as buyers of real estate in their own right.

With the rapid growth in all of the above, the government's tax base (pool of taxpayers from whom taxes could be generated) grew significantly in a short period of less than five years. More importantly, the basis of taxation involved assets which could not be easily disposed of (unlike stocks and shares, for example, which carry substantial exemptions on resale). With Portugal suffering for many years post-2008 from a desperate need to generate inward investment to balance its books, these programs achieved two important goals: an immediate injection of foreign investment into the local economy; and the widening of the tax base such that the sources of tax grew while the predictability of future revenues improved.

Faced with an easy source of income, and one which cannot easily (when compared to other asset classes) be sold by its owners, the Portuguese government has for years used real estate as a way of generating additional tax revenue. For those familiar with the system, a number of changes, all of which resulting in higher taxes, have been introduced by the government over the last ten years. Whether compulsory re-evaluation of properties, the greater tax on "added value or comfort" features of properties, the AIMI, capital gains implications of registering a property for short-term lodging or (more importantly) removing it from the AL program, the list is long.

With regards to the Golden Visa and NHR program, the first sign of things to come was the increase in tax on Local Lodging (short-term rentals). With huge pressure from the strong hotel lobby, tax increased from (and admittedly low base of) 4.2% to 9.8% (VAT at 6% also has to be paid by owners with annual gross income of more than €10,000). Now the government has decided to increase tax to 14% (plus VAT, as appropriate). This tripling of the tax rate for short-term rentals in a period of approximately 3 years is an example of the implementation phase of the government's plan to maximize the return from its wide real estate tax base.

Following quickly on the heels of the first increase in the local lodging (AL) tax, came the introduction of a wealth tax, exclusively on real estate. Admittedly, the reasonably high exemption threshold (based on the lower taxable value of the property and not its market value) of €600,000 (€1.2 million for couples) means that most working families are excluded. However, there is a clear move towards taxing wealth, in particular that which has attracted taxes at various levels (income tax paid by the buyer on the money for their purchase, government stamp duty and transfer taxes on purchase, ongoing municipal taxes, and taxes on any rental income), and therefore "demonstrates" the ability of owners of real estate to sustain an ever-increasing tax burden.

For several years, ever since the Finnish government renegotiated the double tax treaty with Portugal because of the discontentment in Finland regarding some high-profile NHR cases who had become tax exiles in Portugal, the writing has been on the wall as regards the 0% status of this program. Sweden followed Finland, and strong signals of resentment emanated from France, which has for two years become Portugal's number one foreign investor market.

Not that a zero-tax program made much sense, in my opinion, because wealthy individuals would have been happy to pay a little tax, and some countries whose double-tax treaties prevent the participation of their citizens paying no tax abroad, could have been included. Like the AL program, the NHR was devised to generate immediate impact (in particular as the Portuguese government could not ethically take the programs on a road show). Much like the program implemented to encourage the consumer to ask for a VAT receipt in stores, agents and social media became the de facto communications arm of the government, as they spread the word about its various tax incentives and programs. It should not be underestimated how intelligently the Portuguese government has lowered its total cost of marketing by introducing aggressive investment incentives which then are gradually eroded over a period of time (a decade in the case of the NHR, coinciding with the loss by the first applicants of their tax-free status), as the number and fidelity of the participants grows.

Rumours about the possible revision to the zero-tax status of the NHR program started in 2018 and the pressure on the government, which did not have a working majority, strengthened in 2019. Despite the expectations that any changes would only be implemented in 2021, the government surprisingly introduced a proposal for a 10% tax, with a minimum of €7,500, in the second reading of the Finance Bill, with a view to implementing the change in 2020. Although not expected to apply retrospectively, it will affect any new NHR applications submitted from the start of the year.

That same pressure on the government, combined with years of complaints about overtourism, lack of access to housing for local residents, and the questionable value of the Golden Visa program beyond profits for real estate developers, has also led to the sudden proposal for the abolishment of the Golden Visa in the greater Lisbon and Porto areas. The proposal appears to have garnered cross-party support and will be subject to a vote by Parliament in February. The message being conveyed is that any legislative changes will not be retrospective but will apply to any applications from January 1, 2020.

These two announcements have generated immense commentary in the international financial press, a flurry of questions and concerns, and in our case, many people asking us to predict what might happen.

The first and most important thing we recommend is to allow time for the process to take its course and to make decisions based on facts. These facts will not be fully known before Parliament has voted.

The second thing is that if you are considering a Golden Visa in Lisbon and Porto, put your application on hold. Even if (unlikely but…) the changes do not happen in the way in which we now expect, the threat of a potential change will always linger over these two large, residential markets. It is pure speculation as to what these decisions will have on property prices, given the diversification of the market in recent years, but it is true to say that the Golden Visa, primarily via the sale to Chinese buyers, had a significant inflationary effect on property prices in these locations.

The third thing we suggest is that those who are seeking a Golden Visa investment without particular affinity for Lisbon or Porto, immediately start to seek alternative options, by classifying themselves into one of two groups: those seeking the cheapest available real estate Golden Visa, would tend to go north and inland; and those seeking an investment return should tend to head south. Anyone who actually intends to spend more than the minimum requite time in the country, should overlay their personal preference of the regions of Portugal, on one of the groupings above.

The fourth thing we suggest, is to act quickly when you have the facts. What has hopefully flowed from this article is that, while Portugal and the Portuguese can be quite dynamic and inventive, the country does not offer fiscal stability. Speak to any accountant, and they will tell you that they spend much of their time dealing with legislative changes, many of which are then not implemented or are changed again without time for consolidation.

The message here is change. Expect it, and do not be surprised when it happens. And more importantly, don't be surprised when the change goes against you. If you are the type of individual seeking absolute certainty as regards how real estate tax might change in Portugal, this market is not for you (but the author is always eager to understand what other markets offer that guarantee of no change or sufficient advance notice, so that comparisons can be drawn). If you are a pragmatist and understand that tax efficiency is the "icing on the cake" then Portugal continues to represent some wonderful opportunities, both in terms of investment and lifestyle.

Disclaimer: a number of statements in this article refer to events which may happen in the future. The results may be exactly as, or completely different to, that which is predicted. One of the objectives of this information is to make people aware of the possible changes, some of the reasons why these changes may happen, and to encourage those interested to seek advice from duly qualified sources (of which Facebook is not one).

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