Taxes hinder FDI in Portugal

Portugal has made substantial strides in its quest to become a magnet for foreign direct investment (FDI), as revealed by the EY Attractiveness Survey Portugal. This survey, gauging the perception of foreign investors regarding the country’s allure as an FDI destination, places Portugal in the sixth position among European nations with the highest number of announced FDI projects. While this ascent on the FDI leaderboard showcases Portugal’s growing appeal, a complex taxation landscape, particularly in the real estate sector, has emerged as a concern, potentially deterring foreign investors.

EY, in a statement, highlights that a significant portion of FDI inflows has been directed towards the software and IT services sector, amounting to 99 projects. Notably, 76 of these projects involve companies establishing their presence in Portugal for the first time, underscoring the nation’s burgeoning attractiveness in the digital economy realm. Furthermore, consistent with past editions of the EY Attractiveness Survey, a remarkable 59% of investors anticipate that Portugal’s appeal will continue to ascend over the next three years.

German Investment Surpasses US

Germany has emerged as a key player in Portugal’s FDI landscape, outpacing the United States with 36 projects and securing its position as the foremost investor in Portuguese territory. Investments from Germany, the United States, and France have predominantly flowed into Software & IT Services, representing 39.4% of total projects within the sector.

The EY study also highlights Portugal’s increasing significance within the broader European FDI landscape. Over the period spanning 2018 to 2022, Portugal’s relative weight in total FDI projects across Europe burgeoned from 1.2% to a substantial 4.2%.

Investor Sentiments and Taxation Challenges

Approximately 29% of surveyed investors perceive Portugal as surpassing the European average in terms of talent availability and workforce quality. Moreover, a noteworthy 73% of these investors express a desire to channel their investments into Portugal, surpassing the European average of 67%.

Nonetheless, as Portugal seeks to solidify its position as an FDI hub, taxation concerns, particularly in the real estate sector, loom large. The imposition of elevated Property Tax (IMI) and Property Transfer Tax (IMT) rates, primarily targeting entities domiciled in countries labeled as “tax havens” by the Ministry of Finance, has raised eyebrows.

Pedro Fugas, a partner at EY, argues that these increased rates, which are applicable to entities indirectly or directly controlled by tax haven-domiciled entities, are acting as a deterrent to potential investors. He contends that such rates should be reconsidered, especially for entities hailing from tax havens with information exchange agreements or double taxation avoidance pacts with Portugal.

In summary, Portugal’s ascent in FDI rankings showcases its growing appeal as an investment destination. However, grappling with taxation intricacies, especially in the real estate sector, remains a challenge that warrants attention. As Portugal navigates this delicate balance between attracting foreign investment and maintaining tax revenue, the nation’s ability to adapt its policies will play a pivotal role in shaping its future as an FDI hotspot.