What can Portugal Teach Croatia about Tax Incentives and Immigration?

Lauren Simmonds

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What can Croatia learn from Portugal’s dramatic turnaround? Quite a bit, as it happens.

As Novac/Nikola Mijatovic writes on the 9th of June, 2019, most European countries have faced a demographic crisis over the past decade or so, with the exceptions of rich EU nations like the UK and Germany, who have seen an influx of immigrants from other EU states. The number of deaths significantly exceeds the number of births in Croatia, which is also what happened in Portugal, affecting the proportion of the working-active population (employed) and even just state service users negatively.

This is negatively reflected in Portugal’s public finance system, and in particular on the financial sustainability of the social security system. It can be said that the demographic aging of the population in the EU is a crucial challenge that currently doesn’t have an adequate response offered to it. This was aided by the 2008 economic and financial crisis, which pushed Portugal even further back, seeing it drop to the very bottom of the European economy, taking the general levels of optimism of the Portuguese population down with it.

Portugal currently has 10.3 million inhabitants. Forecasts suggest that by the year 2080, if there are no positive demographic fluctuations, there will be 7.7 million inhabitants. Such a negative demographic breakdown was also influenced by Portugal’s entry into the EU back in 1986, when a significant number of citizens, using the benefits of EU’s fundamental freedoms, went to live and work in richer European countries such as the UK and Germany.

This should also include about 500,000 people who left Portugal in the wake of the awful 2011-2015 crisis. The poor economic situation in Portugal (additionally supported by the global crisis) affected a large number of unemployed people – in 2015 the unemployment rate in Portugal was 12.4 percent according to Eurostat, by 2018, it was 6.7 percent – especially affecting young people, of whom almost 50 percent were unable to find any sort of job (today the share of unemployed youth in Portugal stands at 20 percent).

All of this led to the figure of 2.3 million Portuguese citizens who went to live overseas. With the extremely negative rate of demographic growth – the lowest rate of demographic growth in the EU for the past few years (fertility rate of 1.4 percent) – Portugal’s still lingers at the demographic bottom of the EU.

Significant economic revolutions and better financial parameters from the state are thanks to the formation of a new, left-leaning government which took over at the end of 2015. The growth of the Portuguese economy in recent years has led to the lowest budget deficit since 1974 (when a new government system was established).

Immediately after the takeover of power, in 2016, the new Portuguese government achieved a budget deficit of 2.1 percent, which is within the limits of budget constraints imposed by the EU (the budget deficit cannot be higher than 3 percent of GDP), and in 2018, it recorded a record budget deficit of 0.7 percent of GDP.

Though it has the largest public debt with the EU (with 128.8 percent of GDP in 2007), it has continued to decline over the last three years, to 201.4 percent of GDP (according to Wirtschaftskammer Austria), and the IMF forecasts from February 2019 predict a continued fall in public debt, and it’s expected to amount to 107.4 percent of GDP by 2022).

Positive economic developments and the stabilisation of public finances also led to the early repayment of an IMF loan, which Portugal, forced by the economic crisis, took out in 2011 in order to service its financial needs. There is also a rise in its credit rating, which has affected the decline in interest rates on Portuguese bonds.

All of this contributed to stronger foreign investment and strong global business activity in ​​Portugal (Google employs more than 500 people there, Mercedes opened up new office IT offices, and more and more Spanish companies moved their headquarters to Portugal.)

All of the above has led to growth in private consumption, attracting more foreign investment and strengthening exports, and the Portuguese economy has been growing steadily in recent years (2017’s GDP growth was 2.8 percent, and in 2018 it was 2.1 percent), leading to a fall in the unemployment rate (forecasts by the IMF indicate that in 2022, unemployment in Portugal will amount to a mere 6 percent).

In addition to a strong growth in tourism, the growth of the economy was affected by the lowering of oil prices on the world market, the increase in the sale of metal products and the increase in exports for the needs of motor vehicles, as well as the textiles and paper industries in EU countries (especially Spain, France and Germany as main trading partners).

The main export products from Portugal in 2018, at least according to Wirtschaftskammer Austria, were car parts (6.8 percent), electric machines (4.1 percent), mineral raw materials (3.5 percent), machinery and mechanical appliances (3.1 percent), and artificial materials/goods (2.6 percent).

The (economic) optimism that is now felt in Portugal is particularly evident in the field of tourism, which has experienced a real boom in recent years; it has received a variety of tourist awards, which attracts numerous (foreign) tourists and leads to an overall rise in tourism revenue.

According to WKO Austria, Portugal was visited by 15.8 million foreign tourists in 2015, then 21.1 million in 2017. It has strongly boosted (overseas) tourist revenues, which in 2011 amounted to 7.9 percent of GDP, and in 2017, they accounted for 9.6 percent of GDP. The strengthening of Portuguese tourism was also influenced by a tax-oriented tourism policy.

While the previous government, due to the crisis and the need for increased tax revenues, decided to increase the VAT rate to an unhelpful 23 percent, the current government has made a tax reduction – it has introduced a 13 percent lower VAT rate on tourism and hospitality, which paved the  way for the attractiveness of the country as a desirable tourist destination.

Positive budgetary and economic developments, among other things, were influenced by the good tax measures introduced by the new left-leaning government. Unlike the previous government, which, in response to the crisis, advocated a savings policy (reducing salaries and pensions) and introduced new taxes, the current government is pursuing expansive economic and fiscal policies by abolishing the reductions and taxes introduced during the crisis.

While it was decided to reduce VAT on tourism and hospitality, taxes on inheritance, gifts and property were raised. Tax exemptions seek to attract foreign pensioners to come and live in Portugal.

In this regard, wanting to take advantage of the mild climate, more than 300 sunny days a year and lower living costs, the Portuguese Government has already stipulated that foreign pensioners applying for a resident status – in the case of multiple residences – must stay at least 183 days oer year Portugal, and can then take advantage of the exemption from paying income tax.

With such tax planning, individuals can save up to 30,000 euros a year, depending on the country they come from and the pension that they have. Politico wrote about this “unusual resident scheme” a few months ago, stating that the well-off baby boomers moving to Portugal are attracted by the warm climate and tax benefits, where it isn’t necessary to buy properly (it’s possible just to rent). By applying for such a “resident scheme” pensions from abroad can be exempt from needing to be taxed for an entire decade.

2009’s tax exemptions for new tax residents in Portugal were imposed. Physical persons who become Portuguese taxpayers (residents) next year, provided that they weren’t taxpayers for the previous five years there, may seek the use of a special tax incentive for so-called “unusual” taxpayers.

For them, a proportional tax rate of 20 percent is foreseen regardless of the amount of income earned. There is also a limitation that such tax incentives, which are aimed at attracting highly educated professionals, remain valid only for professional activities in highly valuable positions.

For example, architects, engineers and similar technical professionals, artists, actors and musicians, auditors and tax consultants, doctors and dentists, professors, psychologists, investors, directors, and managers are included in this category. The aforementioned residents are entitled to tax incentives for the next ten years. In addition, under certain conditions, the possibility of a tax exemption for income made outside of Portugal (under the double taxation avoidance agreement, tax is payable only in the source country) is foreseen.

For entrepreneurs from third countries (outside the EU/EEA), in order to accelerate the acquisition of resident status in Portugal and the achievement of related tax incentives, the Golden Residence Permit was launched in 2012. If the investor wants to meet the conditions for obtaining this status, he must invest at least one million euros (share investments are allowed), open at least ten jobs within the investment project, and acquire real estate costing at least 500,000 euros.

By acquiring this status, entrepreneurs from third countries can move around and use the benefits offered within the EU more easily. This program proved to be beneficial to the Portuguese economy because such permits have been obtained thousands of foreign entrepreneurs who have invested more than four billion euros into the Portuguese economy so far, according to public figures. The program itself was supported by almost all political parties.

This also includes tax measures for emigrants, foreseen in the budget for 2019. It is intended to be realised within Portugal’s ”Return Program” (Program Regressar), where those who have emigrated from Portugal, as well as their offspring, are offered incentives if they return to their homeland.

Namely, as has been stated, in the period from 2011 to 2015, in the wake of the economic crisis, about 500,000 Portuguese people left their country. Although some of them returned, the Portuguese Government wants to boost the return of other Portuguese emigrants. That is why the Program Regressar was thought up and eventually passed, in order to, among other things, deal with the task of “meeting the current needs of workers within certain sectors of the Portuguese economy”.

As part of this program, the intention is for emigrants who decide to return to receive assistance, help with the costs of relocating and transferring private property, as well as finding a job in Portugal. There are also specific credit facilities intended for returnees who want to start a private business.

Portugal has not only properly addressed their burning issues, but taken the necessary steps to overcome them. Croatia is continuing to lag, with an absolutely dire demographic trend continuing to strip the nation of its much needed labour force, resulting in the Croatian Government increasing the quota for foreign workers from outside the EEA, such as those from Serbia, Bosnia, and even people from as far away as Asia. 

The situation in Croatia is likely to get dramatically worse before it shows any signs of improving, or will the state wake up and follow in Portugal’s footsteps? Only time will tell, but by then it might be much too late.

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