Portugal proposes decade of tax breaks for the young to stem brain drain

Portugal is proposing a novel way of stemming the country’s brain drain: a decade of progressive tax breaks for young people including paying nothing at all in their first year of work.

The centre-right minority government of Luís Montenegro is ditching a proposed 15% cap on income tax for 18- to 35-year-olds and replacing it with a progressive scheme similar to one supported by the opposition Socialists.

Under the plans, which form part of the country’s 2025 budget, those aged up to 35 and earning up to €28,000 (£23,416) a year would have a 100% tax exemption in the first year of work, dropping to 75% from the second to the fifth year, 50% between the sixth and ninth and 25% thereafter.

The average annual salary in Portugal is about €20,000 and income tax rates range from 13-48%. The government estimates the scheme would cost €645m in 2025, while the cap would have cost €1bn.

The incentives aim to tackle a devastating youth brain drain in Portugal. According to the Emigration Observatory, about 850,000 young people – 30% of those aged 15- to 39 – have left at some point, and are living abroad because of low wages and poor working conditions at home. The country has a population of 10.4 million people.

Although overall unemployment in Portugal fell to 6.1% in the second quarter of 2024, among young people it was almost four times higher at 22%.

The prime minister has said Portugal needs to ensure its young people “can find an opportunity here” so they do not have to abandon their families and friends to seek economic opportunities abroad. “It’s worth believing in Portugal,” he said in August. “We are capable of doing in Portugal what we are often capable of doing abroad.”

Montenegro said his government was working to make it easier for young people to buy their first homes by exempting them from some municipal taxes, stamp duty and fees. It intended to make reducing personal income tax “a touchstone” of government policy, he added.

The lack of affordable housing, which has been exacerbated by Portugal’s efforts to recover from the 2008 financial crisis by embracing deregulation and seeking to attract foreign investment, has led to a series of large protests in recent years.

Critics point to the liberalisation of the rental market, the proliferation of short-term rental properties, the issuing of “golden visas” that confer residence permits in exchange for buying properties worth €500,000 or more, the introduction of tax-saving “non-habitual residency scheme” for foreigners and the creation of a digital nomad visa to allow well-off foreigners to work remotely and pay a tax rate of just 20%.

At the end of September, thousands of people protested in Lisbon and other cities across Portugal against soaring rents and house prices. The government has promised to address the issue with a €2bn spending package and a pledge to build about 33,000 homes by 2030.

The budget plan also proposes cutting corporate tax by one percentage point to 20% in 2025, not by two points as previously planned, and giving tax incentives to companies that increase wages and their capital. These measures are calculated to cost €330m, less than the €500m that a previous plan would have cost.

If Montenegro’s government, which took over from the Socialists in April, cannot get its budget approved in parliament in the coming weeks, Portugal could face its third snap election in as many years.

His centre-right Democratic Alliance took 80 seats in March’s general election – well short of a majority in the 230-seat legislature – followed by the Socialists with 78 seats and the far-right Chega party, which was founded just five years ago, with 50.

Speaking shortly before he took office, Montenegro said his government had “the confidence of the voters”, adding: “It also has what is required of all political players, including those now in opposition – that is a sense of responsibility.”

Reuters contributed to this report