Portugal’s New Innovation Tax Incentive and What It Means for Expats and Investors

Portugal’s newly introduced Tax Incentive for Scientific Research and Innovation (IFICI) is set to reshape the country’s tax landscape in 2025. The IFICI tax regime offers significant benefits for highly skilled professionals, entrepreneurs, researchers and innovation-driven businesses.

With the application of a 20% flat tax rate over income derived from the listed activities within the regime (employment and self-employment) and a tax exemption applicable to non-Portuguese income (excluding pensions), the regime aims to attract global talent while boosting Portugal’s economic competitiveness.

However, experts warn that the criteria for qualifying individuals and businesses will require clarifications, which could limit the regime’s impact unless the scope is more fully defined and although the Ministerial Order providing the corresponding regulatory framework was already published, from a practical standpoint, the regime will entail several difficulties until its application has matured and all the corresponding adjustments (namely to the informatic system) have been made

“This is a significant step in Portugal’s strategy to remain competitive on the global stage,” says Rogério Fernandes Ferreira, the Managing Partner at RFF Lawyers. “The regime targets skilled professionals who can contribute to the country’s scientific and economic advancement while benefiting from favourable tax conditions.”

One of the key attractions of the IFICI tax regime, which was brought in to replace the NHR tax regime incentives, is its capital gains exemption on non-Portuguese assets, making it particularly appealing to international investors.

The fact that the exemption over non-Portuguese income is applicable to almost all kinds of income (excluding pensions and some blacklisted sourced income) makes the attractiveness of the regime very considerable despite its strict application regarding the people who can benefit from it by carrying out one of the listed activities.  

“The capital gains exemptions make this regime highly attractive for those holding global investments, particularly those relocating from higher-tax jurisdictions,” says Rogério. “This aligns with Portugal’s tradition of offering favourable tax conditions to expats and investors.”

The IFICI tax regime allows taxpayers to choose between the flat 20% rate or Portugal’s progressive tax rates.

While the IFICI tax regime benefits individuals, encouraging investment in registered start-ups and export-driven businesses, the criteria for qualifying companies remain narrow and restrictive.

“There is currently a lack of complete clarity on what constitutes a registered start-up under this regime,” says Paul Stannard, Chairman of Portugal Pathways and the Portugal Investment Owners Club. “The focus on tech and innovation is essential, but this excludes many viable businesses that are critical to Portugal’s economy, particularly in real estate, hospitality, and professional services.”

Stannard also highlights the need for corporate tax reform to make Portugal more attractive to global businesses. “There’s an opportunity here for the government to introduce lower rates for qualifying companies, particularly those that invest in local economies and job creation. This would create a more business-friendly environment and encourage long-term investment.”

The export-driven criteria may also pose a challenge for some industries. Under the IFICI tax regime, qualifying businesses must export at least 50% of their turnover and operate within certain Portuguese Classification of Economic Activities (CAE) codes defined in the Ministerial Order. Besides, this criterion may lead some businesses that, in theory, could be encompassed under the corresponding activity (CAE code) to have some reservations about confirming the eligibility of the IFICI applicant due to not being sure if the 50% export condition will be met.

“This is a restrictive approach,” Stannard notes. “We need a broader view that reflects Portugal’s diverse economy, allowing more sectors to benefit from these incentives.”

The IFICI tax regime provides international investors with a unique opportunity to optimise their tax positions while contributing to Portugal’s innovation economy.

However, legal and business experts caution that careful planning is required to maximise the benefits and navigate the complexities of the new rules.

“There are significant practical challenges in registering for the regime, particularly around the documentation required and the validation of qualifying businesses,” explains Rogério Fernandes Ferreira. “Investors need to ensure they meet the specific criteria from the outset to avoid complications.”

An interesting feature of the IFICI tax status is that regional governments in Madeira and the Azores may introduce additional criteria for businesses and residents in those areas. This could provide greater flexibility and a wider scope to benefit from the tax regime. However, the corresponding regional legislative decrees are still pending.

“This is where the regime could become more attractive,” says Nuno Santos, Tax Partner at CMS Law. “The regional legislative decrees from Madeira and the Azores could expand the scope of qualifying businesses, potentially including service sectors, tourism, and real estate, which are key drivers of their economies.”

Nuno adds that regional flexibility could be a game changer for attracting both individuals and businesses to the islands, particularly given their lower corporate tax rates.

“Regional governments are well-positioned to address gaps in the national framework, especially in sectors that may be excluded from the mainland criteria,” he says. “This could result in a more inclusive regime reflecting Portugal’s economic diversity.”

The introduction of the IFICI tax regime comes at a critical time as Portugal seeks to maintain its appeal to high-net-worth individuals and international professionals, particularly following the phase-out of the Non-Habitual Residency (NHR) tax regime.

With 10 years of tax benefits, including a flat 20% rate on qualified income and an exemption over non-Portuguese income (excluding pensions and some blacklisted sourced income), the regime is expected to attract global talent, boost innovation, and reduce regional disparities.

However, experts agree that more flexibility is needed to ensure that Portugal remains a top destination for both investors and entrepreneurs.

“This could be a missed opportunity if the government doesn’t take a more flexible approach to defining qualifying businesses,” Paul Stannard warns. “We need to broaden the scope to include a wider variety of industries, particularly real estate development, hospitality, and professional services, which are critical to Portugal’s success.”

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Contact Portugal Pathways' team of experts today to learn more about the new IFICI tax regime and how you could benefit.

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