Washington, May 7, 2026 (Lusa) – The International Monetary Fund (IMF) has recommended that Portugal’s government abolish the ‘IRS Jovem’ (youth income tax return), saying that it causes distortions and lacks clear evidence of effectiveness in curbing emigration.
“Tax returns specifically for young people increase fiscal costs and distort reality, with no clear evidence of effectiveness in curbing youth emigration. It is advisable to reverse them,” reads the conclusion of the IMF’s post-adjustment programme mission report, drawn up following a technical visit to Portugal in recent weeks.
Similarly, the IMF considers that measures to support young people in buying their first home, such as public guarantees and tax exemptions, are not subject to income criteria, thereby boosting demand and worsening imbalances.
Advocating a simplification of the Portuguese tax system and a reduction in exemptions to increase revenue and improve efficiency, the IMF considers that “the numerous exemptions, reduced rates and special schemes narrow the tax bases and increase compliance costs, especially for small and medium-sized enterprises”.
The IMF also said that “reduced VAT rates and exemptions are not well targeted and often benefit higher-income households”, citing the reduced VAT rate for hotels and restaurants as an example, adding that it should be abolished.
Furthermore, it said that harmonising corporate income tax rates by company size would remove a disincentive to business growth.
As for the response to the energy shock, the IMF warned that it must be carefully designed, and that “while temporary and targeted support may be justified, higher energy prices should continue to be passed on to end-users to preserve price signals and reduce demand”, it said.
Therefore, the fund rejects a broad-based tax cut (for example, a VAT cut), arguing that well-targeted support for lower-income households and struggling but viable firms in energy-intensive sectors should replace a reduction in fuel taxes.
Regarding housing, the IMF believes that reducing imbalances in the property market requires supply-side measures, identifying facilitating new construction and encouraging owners of vacant properties or short-term rentals to sell or let their properties on a long-term basis as key priorities.
Support for low- to middle-income households should be based on targeted housing subsidies and increased social housing availability.
"Rebalancing property taxation, shifting from transaction taxes to recurrent taxes, would encourage mobility, while taxation of underused housing must be strictly enforced," the fund said, emphasising the need to facilitate the enforcement of contracts to improve the rental market.
In the labour market, the IMF highlighted the importance of reforms that boost productivity growth, saying this was the key to bringing Portugal's living standards into line with those of its eurozone peers.
Attributing the weak productivity growth in Portugal to insufficient investment in human and physical capital, exacerbated by a restrictive business environment, it also recommends greater labour market flexibility: “Making permanent contracts more flexible will encourage their wider use, reduce labour market duality and help improve the allocation of resources to the most productive sectors or firms,” it said.
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