5 key fiscal topics set to shape the end of the year

As summer comes to an end, we approach the moment of critical decision-making: several long-awaited proposals/laws and regulations are imminent, and the public debate will once again revolve around long-term decision-making on how Portugal wants to position itself in an era where tax benefits are still key to attracting investors, but fairness and a level playing field in international taxation cannot be downplayed.

Let’s delve into some of them:

1. Portuguese State Budget for 2025

The Portuguese State Budget is a crucial document that reflects the government's economic and social priorities and sets the framework for fiscal policy, public spending, and taxation. The proposal is submitted to the Parliament by October 15th of each year and is followed by a debate under which changes are possible (and even expected). Once (and if) approved, the provisions are applicable as of 1 January 2025.

Throughout the years, the State Budget has become the main source of back-to-back tax amendments (a debatable option), with Governments saving their key proposals for this moment when public opinion is heavily dominated by intense discussions lasting more than one month.

The 2025 Budget has an additional point of interest: it will be the first from the new right-wing minority government elected in the March 2024 snap election. Considering the need for a majority to get the document approved (meaning that agreements/concessions will be needed), there are considerable challenges ahead. We will follow this process closely and keep you posted.

2. NHR 2.0 regulations

This is becoming a classic of our newsletters, but it is indeed surprising that almost 9 months into the regime, we still do not have regulations that will be essential for the long-term prospects of the NHR 2.0 regime.

However, the delay has some good news attached: as we mentioned before, the new national Government announced plans to broaden the reduced scope of eligibility that was put in place by the former Government. Hence, we expect news in late September or October, with a key point being that the regulations will be set up directly by the Government and do not require a lengthy parliamentary approval process.

A separate process is the regulation of NHR 2.0 in Madeira. This is a prerogative of Madeira’s Regional Government and is likely to be used during the approval of the 2025 Regional Budget – a completely separate document from the national Budget.

3. Reduction of the standard CIT rates

The new national Government announced the intention of progressively reducing the standard CIT rate until 2027.

The first amendment would be introduced in 2025 (potentially on the State Budget, but it can also be on a separate initiative), with the standard rate being reduced to 19%. Simultaneously, a new 12.5% rate would apply to the first 50,000 EUR of taxable income.

In case these amendments are confirmed, Madeira and Azores would be constitutionally allowed to reduce the standard CIT rate to 13.3% and to 8.75% for the first 50,000 EUR of taxable income. All of this is wishful thinking for now, but still a good prospect.

4. Amendments to the participation exemption regime

Portugal's participation exemption regime provides tax relief on certain types of income, particularly dividends and capital gains, received from qualifying shareholdings in other companies. Under the current regime, qualifying dividends and capital gains are exempt from CIT, subject to meeting specific criteria such as a minimum holding period (1-year) and ownership percentage (10%).

The Government announced plans to reduce the minimum ownership percentage to 5%. This amendment would certainly be welcomed and a return to the regime initially introduced in the 2014 CIT reform.

5. Transposition of Pilar 2 Directive into the Portuguese legislation

Member States had until 31 December 2023 to transpose the Pillar 2 Directive (formally known as the Council Directive (EU) 2022/2523) into national law. Most Member States managed to do so with the new rules coming into effect on 1 January 2024.

However, Portugal missed the deadline and only in mid-2024 did the Secretary of State for Fiscal Affairs launch a public consultation on a draft bill for the implementation of the Pillar 2. At the beginning of September, the government submitted a draft law to Parliament, with the intention of finalising the approval process as quickly as possible and avoiding further complications with the European Commission. Once transposed, the law is expected to produce effects already in 2024.

In parallel, a mention should be made to the fact that Portugal’s adoption of the Pillar 2 Directive is of course aligned with the tax policies of the EU and global standards, establishing a global minimum tax rate of 15% on large multinational enterprises with annual revenues exceeding €750 million.

According to official data provided by the Portuguese Government, there are around 3,000 companies within the scope of the Pillar 2 Directive operating in Portugal.

Final take

We are in an era where taxation significantly influences the public perception and trust in governments. In a country where the debate over tax overload and public expenditure is always present, the political parties (including the one supporting the ruling government) are particularly active and need to make their views/tax options stand out.

This is obviously conflicting with the current scenario of the Portuguese parliament, requiring negotiations between all the parties to get Laws approved. Most measures should then be seen, for now, with a pinch of salt, while others that are simple regulations (such as the one of NHR 2.0) can be considered closer than ever.

Se tiver alguma questão relacionada com o acima exposto ou com qualquer outra parte do processo legislativo português e com as iniciativas em curso/prospetivas, não hesite em contactar um dos nossos especialistas.