Taxes for Expats in Portugal

    Your complete guide to expat tax in Portugal:

    Tax Rates

    2017 income tax rates

    There are six categories of income that are subject to personal income tax:

      • employment income,
      • business and professional income,
      • investment income,
      • real estate income,
      • increases in net worth and
      • pensions.

    Investment income, real estate income and capital gains on securities are taxed at a flat rate of 28%.

    The remaining income is taxed at these progressive rates:

    Taxable Income Band EUR National Income Tax Rates
    0 - 7,091 14.5%
    7,091 - 20,261 28.5%
    20,261 - 40,522 37%
    40,522 - 80,640 45%
    80,640 + 48%

     

    Married individuals are taxed separately, but may choose to file a joint tax return unless one spouse is nonresident, in which case the resident spouse files a separate tax return.

    Special rates apply to capital gains and investment income.

    Extraordinary surtax

    For 2017, an extraordinary rate will be applied according to the following table:

    Taxable Income EUR Rate
    over 20,261 but not over 40,522 0.88%
    over 40,522 but not over 80,640 2.75%
    over 80,640 37%

     

    Also in 2017, an additional solidarity rate, which varies between 2.5% and 5%, applies to taxpayers with a taxable income exceeding EUR 80,000.

    Social security

    Employees contributes 11% of their gross salary, and the employer contributes 23.75%.

    Tax year

    The calendar year.

    Filing and payment

    From 2017, filing dates for a personal tax return will be the same for all types of income (i.e. from 1 April to 31 May following the year end).

    Final payment of tax is due by 31 August in the year following the year to which the income relates.

    There is an optional filing extension to 31 December if the taxpayer requests foreign tax credits.

    Penalties apply for failure to comply with tax payment and filing obligations.

    Who pays

    Who pays tax in Portugal?

    Expat residents in Portugal are subject to expat tax rules on their worldwide income. Non-residents are subject to personal income tax on income arising in Portugal.

    An expat is considered resident in Portugal if, among other conditions, he or she meets either of the following conditions:

    • He or she stays in Portugal for more than 183 days in any 12-month period, beginning or ending in the fiscal year concerned.
    • He or she has a dwelling in Portugal, in any day of the above mentioned period, which may imply his or her intention to use it as his or her habitual residence.

    As a rule, individuals that meet the above conditions become tax residents in Portugal from the first day of permanence in Portugal as expats. As a result of the above two conditions, it is possible to split the year for tax purposes.

    Splitting the years for expat tax purposes requires special attention with regards to expat tax exclusions and expat tax residency is complicated. Seek professional expat tax advice to fulfil the requirements of expatriate tax preparation.

    Any change in expat tax status (resident versus non-resident) should be updated within 60 days.

    Individuals who were not Portuguese resident in any of the five tax years before moving to Portugal may request a special non-habitual tax residency status for 10 years.

    Non-habitual residents are taxable on worldwide income, but exempt from tax on certain foreign-source income.

    Portugal also has the concept of part-year residency.

    How it works

    How is income taxed in Portugal?

    Expat employment income - Personal income tax (IRS) is imposed on the earned income of employed individuals.

    Expat business and professional income - Taxable income includes all earned income of a professional individual, including commissions and profits from a trade. Business and professional income is taxed at the personal income tax rates and may be subject to one of the following two regimes:

    • Simplified regime
    • Organised bookkeeping regime

    Income may be taxed under the simplified regime if the taxpayer does not choose to use, and is not required to use, organized bookkeeping and if the annual gross business and professional income of the taxpayer does not exceed EUR200,000.

    Directors’ fees - Directors’ fees are taxed in the same manner as employment income.

    Investment income for expats - A withholding tax of 28% is imposed on interest income derived from public company bonds and state bonds and on bank interest. Dividends paid by resident companies are subject to a 28% final withholding tax. Expat tax rules regarding withholding taxes are final with respect to the following:

    • Dividends
    • Bank interest
    • Interest on shareholders’ loans
    • Interest from public company bonds, bills or other paper
    • Interest on public debt

    The expat taxpayer may elect to include these items in taxable income in the tax return unless they are obtained within the scope of a business or trade activity. If the taxpayer makes the election, the income is taxed at expat tax rates with a credit given for the tax withheld (a 50% relief applies to dividends received from resident companies subject to corporate tax or from European Union (EU) companies that fulfil the requirements of the EU Parent-Subsidiary Directive).

    In general, other expatriate investment income is subject to a final withholding tax of 28%.

    Rental income and royalties are subject to withholding tax at rates of 25% and 16.5%, respectively with particulars making seeking expat tax help a must when it comes to expatriate tax returns.

    One key point to note for expats regarding expat tax rules in Portugal is that rental income is subject to a 28% flat tax rate. However, the taxpayer may elect to include rental income in the taxable income in the tax return.

    Deductions

    Personal deductions and allowances relating to expat taxes

    Deductions (up to specified limits) are available, including deductions for health and education expenses.

    Personal tax credits in varying amounts also are available, depending on the number of family members.

    However, expatriate tax returns are complex for business and professional deduction cases, and professional expat tax advice should be sought.

    IHT

    Do I have to pay inheritance, gift and capital duty taxes?

    Inheritance and gift taxes were eliminated, effective from 1 January 2004. However, stamp duty at a rate of 10% applies if the beneficiary is an individual (except for the spouse, ascendants and descendants who benefit from an exemption).

    For a beneficiary that is a collective person, a corporate tax applies at a maximum rate of 21%, plus surcharges.

    There is no capital duty.

    Finally on this point, do not assume that just because you've expatriated to live in Portugal that your estate will not be liable to inheritance tax (IHT) in your old home nation, or any nation where you hold assets.  For example, those domiciled in Britain remain liable for IHT on their worldwide estate.

    If you are concerned about mitigating your IHT liability, we'd like to offer you a free initial consultation to determine whether we can help you.

    DTAs

    Taxes for expats in Portugal: Double tax relief and tax treaties

    Expat residents who receive foreign-source income are entitled to a tax credit equal to the lower of the foreign tax paid or the Portuguese tax payable on such income. The credit applies to income derived from treaty and non-treaty countries; however, for treaty countries, the credit is limited to the amount of tax payable in the country of source.

    For purposes of expatriate tax returns, compulsory social security contributions and other deductible expenses incurred overseas may be deducted if properly documented.

    Portugal has entered or is entering into 73 double tax treaties with jurisdictions.

    CGT

    Do I have to pay capital gains tax?

    Capital gains on the sale of an individual’s main residence are exempt if the proceeds are used to purchase another permanent residence in Portugal, or in another EU/EEA member state, provided that, in the latter case, arrangements are in place for an exchange of information in tax matters.

    Only 50% of gains from the sale of immovable property is subject to tax as income at the progressive rates. Capital gains on shares are subject to tax at 28%.

    A 50% exemption applies to capital gains on the disposal of participations in unlisted small and micro companies.

    Taxable capital gains for expats that are not specifically exempt or taxed separately are taxed at the ordinary rates. No withholding tax applies. In general, gains derived from sales of the following assets are taxed at the personal income tax rates.

    • Real estate and associated rights
    • A taxpayer’s property transferred to the taxpayer’s business (however, this gain may be deferred, see below)

    Capital gains derived from sales of the following assets are exempt from resident expat taxes:

    • Securities acquired before 1 January 1989
    • Real estate, except land for construction, owned prior to 1 January 1989
    • A personal residence if, among other conditions, the proceeds are reinvested in another personal residence in Portugal (or in other EU member states or European Economic Area (EEA) countries that have entered into an exchange-of-information agreement with Portugal concerning tax matters) within 36 months after the sale or 24 months before the sale
    • A personal residence if the proceeds are used to repay loans under certain circumstances (temporary measure for loans granted on or before 31 December 2014 and sales of property between 2015 and 2020)

    The following capital gains benefit from special tax treatment for resident expats:

    • Gains derived from the sale of real estate or associated rights, excluding real estate used in a trade or business, are taxed only to the extent of 50% of the gain.
    • Gains derived from disposals of securities (including disposals of autonomous warrants, redemptions of bonds and other debt securities, redemptions of participation units of investment funds, receipts of liquidation proceeds, assignments of credits and assignments of supplementary capital contributions or ancillary contributions) and derivative financial products are subject to tax at a rate of 28% (a 50% exclusion from tax applies to gains from shares in unlisted micro and small companies) if an exemption does not apply. An exemption may apply to non-residents under domestic rules or an applicable double tax treaty.

    Capital losses may offset capital gains only.

    Taxation of non-habitual expat residents - A special regime applies to expats who become tax residents of Portugal and have not been taxed as such in any of the previous five years. Non-habitual resident status applies for up to 10 years, and requires the taxpayer to be registered as non-habitual resident with the tax authorities. Principal aspects of this regime are best summarised through a professional expat tax adviser given intricacies that could trip up an expat filing their expat tax return.

    Exemption for outbound expatriates working abroad - An exemption for outbound expatriates (working abroad) is introduced. The exemption applies to employment income, in the part corresponding to the compensation for travel and stay abroad that exceeds the legal limits foreseen in the Personal Income Tax Code, earned by tax resident individuals temporarily assigned abroad for a period not less than 90 days (of which 60 are consecutive days).

    The exempt amount cannot exceed the higher of the following:

    • The difference between the annual employment income subject to tax of the individual, including compensation, and the total amount of his or her regular employment income subject to tax in the preceding year
    • EUR10,000

    This regime operates as an exemption with progression. The exemption also applies to non-resident expats with a limit of three years from the date of the assignment.

    Finally...

    We believe the above information is accurate, however tax rates and rules can change, and we are NOT tax experts.  Therefore, please do not rely exclusively on the information to determine your liability for tax.

    Speak to a local tax expert for personalised advice, or consult an international taxation consultancy.

    If you'd like our help to source someone to assist you, please get in touch and we will do all we can to help.

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