Top 5 tax trends for 2024 – Our picks

There are no boring years in the tax landscape, and 2023 was no exception.

We had several impactful developments: (i) a new package to foster housing with a multitude of tax changes, (ii) the entry into force of new regimes covering the taxation of stock options and crypto-assets and, of course, (iii) the cancellation of the first interaction of the non-habitual resident regime and its replacement by a new tax incentive for scientific research and innovation.

But while 2023 had plenty of twists and turns under its name, 2024 promises to be similarly challenging for everyone involved in tax affairs.

Our team selected some trends and considerations for individuals and businesses like yours.

1. Implementation of “NHR 2.0” with a special eye on Madeira

As of 1 January 2024, taxpayers who become tax residents under Portuguese domestic law and have not been residents in Portugal in any of the prior five years may benefit from a new tax incentive for scientific research and innovation (“NHR 2.0”).

The scope of beneficiaries is narrow for those relocating to Portuguese Mainland, but for those relocating to Madeira or Azores, the scope is expected to be considerably broader. This broader scope comes from a specific authorisation granted to these regions to attract capital and highly qualified professionals through these tax benefits.

The NHR 2.0 will be valid for a period of 10 consecutive years and provides a special tax rate of 20% on employment or self-employment income on certain activities. Similar to NHR 1.0, eligible taxpayers in Portugal will also be exempt on foreign income from several categories, namely employment income performed abroad, self-employment income performed abroad, foreign rental income, foreign dividends, or capital gains on foreign-based assets.

The new NHR 2.0 regime, however, does not apply to tainted income obtained in blacklisted jurisdictions and does not entail any benefit for pension income.

All of this still requires further regulation that is currently in the works. The regulation will determine, among other things:

1. The exact administrative procedures for registering as NHR 2.0;
2. The meaning of some unclear wording inserted in the regime and its correlation with the eligible activities;
3. The final format of the benefit for those relocating to Madeira or Azores, as each region is entitled to create its own regime, adapted to their needs.

The bottom line is that, although this is still in the early days, we expect Madeira to quickly position itself as the main hub for highly qualified professionals and high-net-worth individuals looking into the NHR 2.0 benefits.

2. Grandfathering of NHR 1.0

Existing NHRs will continue to benefit from the regime until the end of their 10-year period.

The NHR 1.0 is no longer available for new residents as of 1 January 2024 unless the applicant has a:

• Promissory employment agreement or promissory secondment agreement (or employment or secondment agreement) signed by 31 December 2023 to perform activities in Portugal; or
• Lease agreement or other agreement granting the use or possession of property located in Portugal and concluded before 10 October 2023 (the day when the NHR withdrawal was officially announced); or
• Reservation or promissory contract for the acquisition of property located in Portugal concluded before 10 October 2023; or
• Enrolment or registration for dependents at Portuguese educational establishment by 10 October 2023; or
• Residence visa or residence permit valid by 31 December 2023; or
• Procedure, initiated by 31 December 2023, for granting a residence visa or residence permit with the competent entities, in accordance with the current immigration legislation.

These special grandfathering rules also apply to a person who is a member of the household of taxpayers covered by one of the conditions above.

Considering the number of grandfathered NHR beneficiaries, the regime will keep a strong presence for several years, with the need to ensure its correct application for years to come.

For this reason, it will be key to retain proper Portuguese tax advice in 2024 and beyond, until the end of the regime for each of the beneficiaries.

3. No (huge) news is good news: Madeira consolidates its position as an investment hub for companies and individuals

The Madeira International Business Centre special tax regime remains open to new companies throughout 2024 and its effects have been extended until 31 December 2028. This regime provides a 5% corporate income tax rate on income derived from transactions with non-residents and a full withholding tax exemption on the upstream of income to corporate or individual non-resident shareholders).

Madeira will also continue boasting a standard corporate income tax rate of 14.7% (significantly lower than the 21% rate applicable in Mainland Portugal). In comparison, most municipalities of Madeira have again opted against applying the 1.5% municipal surcharge, which in the Portuguese Mainland applies to most companies.

Moreover, in Madeira, a reduced corporate income tax rate of 11.9% will continue applying on the first EUR 50,000 of taxable income of small and medium-sized enterprises and small-medium capitalisation companies (resident entities and PEs in Portugal of non-resident entities). In case these companies carry out their activity in the inland territories of Madeira, a rate of 8.75% will apply on the first EUR 50,000 of the taxable amount.

For 2024, Madeira’s regional government is also expanding the 30% reduction (compared with the rates applicable in Portugal Mainland) of the standard personal income tax rates. This reduction applies to any individual that qualifies as a tax resident of Madeira.

4. Implementation of Pillar 2 in Portugal

Portugal should have transposed, until 31 December 2023, the EU Directive 2022/2523 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups (OECD BEPS Pillar Two rules).

This directive seeks to impose a global minimum tax of 15% on certain profits of multinational groups with annual revenue of € 750 million or more via a set of interlocking rules that impose a top-up tax where the effective tax rate is below the agreed 15% minimum rate.

Member States that are home to not more than 12 ultimate parent entities of groups may opt to delay the application of the directive for a maximum period of six consecutive years. It is unclear whether Portugal is exercising this option, and little has been known about any works on the transposition, which is intriguing considering the relevance of the directive and the fact that we are already beyond the deadline for its transposition. Let’s hope 2024 sheds some light on this mystery.

5. Unshell Directive, BEFIT, HOT initiative and the TP Directive

The EU Unshell Directive had its first draft published back in December 2021, and it was originally scheduled for adoption in July 2023 and implementation in January 2024. Both deadlines have yet to be met, and there is growing scepticism about its future because of fierce criticism from several countries. 2024 is looking like a “make or break” year, with ECOFIN trying to broker an agreement.

The other clear highlights are provided by an EU Commission package that consists of three legislative proposals: the framework for income taxation (“BEFIT”) Directive, a proposal establishing a head office tax system for small and medium enterprises (“HOT”) and a transfer pricing Directive (“TPD”):

• Under BEFIT, companies that are members of the same group will calculate their tax base in accordance with a common set of rules. The tax bases of all members of the group will then be aggregated into one single tax base, and each member of that ‘BEFIT group’ will have a percentage of the aggregated tax base calculated on the basis of the average of the taxable results in the previous three fiscal years;
• The HOT proposal would give small and medium enterprises operating cross-border through permanent establishments the option to interact with only one tax administration – that of the head office – instead of having to comply with multiple tax systems. Small and medium enterprises would calculate their taxes based only on the tax rules of the member state of their Head Office and would file one single tax return with the tax administration of their head office, which would then share this return with the other member states where the small and medium enterprise is operating. The member state of the head office would subsequently transfer any resulting tax revenues to the countries where the permanent establishments are located;
• The TPD aims to harmonise transfer pricing rules within the EU and ensure a common approach to transfer pricing problems. It incorporates the arm’s length principle and key transfer pricing rules into EU law, clarifies the role and status of the OECD Transfer Pricing Guidelines and creates the possibility of establishing common binding rules on specific aspects of the rules within the EU.

While they bring different challenges, and their adoption is still unclear (both timing-wise and in its final format), all these proposals will be on the agenda of 2024 and should be monitored closely.