Portugal faces significant challenges in retaining its young, skilled workforce as its high income tax rate drives many professionals abroad in search of better financial opportunities. With a staggering 40% income tax rate, Portugal ranks as the 8th highest among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD). This has been a major factor for individuals like Duarte Dias, a software engineer who left Portugal in 2020 for a lucrative position in Berlin. Dias's decision underscores the broader issue of tax-induced migration, prompting the Portuguese government to implement new tax strategies to retain young talent.
Duarte Dias's journey highlights the financial struggles faced by many young professionals in Portugal. Earning a yearly income of €35,000 in Portugal, Dias found it challenging to sustain his desired lifestyle.
"Financially it was bad. It would be very hard to save money if I didn't live with my parents," – Duarte Dias
His move to Berlin saw him earning €4,200 monthly for a junior role, with further relocations to Germany and eventually the United States boosting his income to over $160,000 annually, subject to a more favorable 20% income tax rate. Dias's experience illustrates the stark contrast between financial opportunities abroad and those available in Portugal.
The Portuguese government has made efforts to address this issue through the IRS Jovem programme, which offers tax reductions for workers under 30, tiered by education level. Recently expanded to include all workers under 35 regardless of educational background, this initiative aims to make staying in Portugal more financially viable. Despite these efforts, experts remain skeptical about their potential impact.
Sérgio Vasques, a professor of tax law at the Católica Lisbon School of Law, argues that these changes are insufficient to reverse the trend of young people leaving the country.
"It is unlikely that, on its own, the tax regime will make young workers remain in the country, whether because professional opportunities are more abundant in foreign countries, or due to the fact this tax benefit applies only to yearly incomes under €28,000" – Sérgio Vasques
The tax wedge in Portugal stands at 42.3%, highlighting the significant portion of an average worker's salary absorbed by taxes. The government has faced criticism for taking more from workers' salaries compared to many wealthier nations.
"This is a tax regime that is an enemy of qualified work and professional success. This regime will not solve this problem" – Sérgio Vasques
Despite these concerns, Portugal is not alone in facing challenges with youth migration. As Rita de La Feria, chair of tax law at the University of Leeds, notes, the exodus of young people is a broader European issue. To address this, countries including Poland and Croatia have implemented special tax regimes based on taxpayers' ages, similar to Portugal's efforts.
In 2022, official data showed 73,684 taxpayers benefitted from the IRS Jovem programme. The Portuguese Ministry of Finance projects that up to 400,000 workers will benefit from the scheme following its expansion, which was approved by parliament in late November.
Dias remains unconvinced that these changes will influence his decision to return to Portugal.
"Salaries outside Portugal will always be higher, and all those who don't have any personal or familial connections to the country won't have any kind of financial or career incentive to stay there" – Duarte Dias
Another professional considering a return is Antonio Almeida, who cites personal reasons as a motivator rather than financial incentives.
"I think of returning eventually, mainly for family reasons" – Antonio Almeida
Sérgio Vasques humorously suggests that cultural elements might be more compelling than financial strategies.
"Portuguese food works probably better as an incentive to move here than that tax regime" – Sérgio Vasques
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