Navigating Portuguese Taxes as a Foreign Resident: A Comprehensive Guide to the Portuguese Tax System for Expats

Navigating Portuguese Taxes as a Foreign Resident: A Comprehensive Guide to the Portuguese Tax System for Expats

 

Farrukh Dall

Taxation in Portugal can be a tricky subject for foreigners. When it comes to living and working in Portugal, it’s important to understand the rules and regulations around taxation in order to ensure compliance. In this blog, we’ll take a look at the specifics of taxation in Portugal, exploring what foreigners need to know in order to pay the right amount of tax.

Portuguese Taxation System

The Portuguese taxation system is based on the country’s Tax Code, which determines how individuals and businesses should pay their taxes. Taxes in Portugal are primarily levied by the central government, although regional and local governments also impose taxes.

In Portugal, taxpayers are generally divided into two categories based on their residency status: residents and non-residents.

Resident taxpayers are those who have their permanent home or habitual residence in Portugal, or who stay in Portugal for at least 183 days in a calendar year. They are subject to tax on their worldwide income and assets.

Non-resident taxpayers are those who do not have their permanent home or habitual residence in Portugal, or who stay in Portugal for less than 183 days in a calendar year. They are subject to tax only on their Portuguese-source income and assets.

It’s worth noting that there are some exceptions and special rules that may apply to certain types of income or to taxpayers with specific circumstances. Additionally, there may be tax treaties in place between Portugal and other countries that affect how taxes are levied and paid by residents and non-residents.

The Portuguese taxation system is complex and consists of several types of taxes, including personal income tax, corporate income tax, social security contributions, property taxes, VAT and wealth taxes. The type of tax you will be liable to pay depends on your residence status and the type of activity you undertake in Portugal.

Generally speaking, foreign investors who want to do business in Portugal will be subject to both corporate income tax (IRC) and Value Added Tax (VAT). Foreigners who purchase property or rent a property in Portugal are also liable to pay taxes.

In addition, those who stay in Portugal for more than 183 days during a twelve-month period may be considered tax residents and become liable for personal income tax and wealth tax. Spending more than 183 days in Portugal in a 12-month period or making Portugal your habitual residence can make you a tax resident.

In addition to spending more than 183 days in Portugal in a 12-month period or making Portugal your habitual residence, it is important to note that Portugal also applies the principle of deemed residence. This means that even if you do not meet the criteria for tax residency, you may still be considered a tax resident if you have a permanent residence or family ties in Portugal. Furthermore, the split tax year system applies to individuals who arrive or depart from Portugal during the year, allowing for a partial tax exemption in the year of arrival or departure. It is always advisable to seek advice from a tax professional to ensure compliance with the Portuguese tax regulations.

Types of Taxes in Portugal:

The Portuguese taxation system is made up of several different types of taxes. These include income tax, capital gains tax, social security contributions, and value added tax (VAT).

Income Tax: This is charged on the earnings of individuals and companies. Individuals pay progressive rates up to 48%, while companies pay a flat rate of 21%.

Capital Gains Tax: This is charged on profits earned from the sale of assets such as stocks, property and other investments. This is charged at a flat rate of 28%.

Social Security Contributions: These are taxes paid into the social security system, which covers health care, pension payments and other benefits. Employers must pay 21% of their employees’ salaries into the system, while employees pay 11%.

Value Added Tax (VAT): This is a sales tax that is applied to goods and services. The standard rate of VAT in Portugal is 23%. There are reduced rates for certain items, such as food and medicines.

 

Who is liable for taxes in Portugal?

Anyone residing in Portugal, either as a Portuguese national or as a foreign resident, is liable for taxes in Portugal. Taxes are based on income and residence status, meaning that non-residents may still be liable for taxes in Portugal.

For individuals, tax rates depend on their personal income and assets. This includes any income generated from employment, investment, property rental, business activities, pensions and other sources. Portuguese residents are taxed at a progressive rate on their total worldwide income.

Foreigners who work in Portugal, whether employed or self-employed, must register with the Portuguese tax authorities and declare all income earned in Portugal. This includes any salary paid by an employer as well as income from investments and pensions. Non-residents are generally subject to a flat rate of 25%.

In addition to income tax, Portuguese nationals and foreigners may also be liable for additional taxes such as wealth tax, property tax, inheritance tax and capital gains tax. Some of these taxes may have different rates depending on the residency status of the taxpayer.

Foreigners who are resident in Portugal may benefit from some double taxation agreements between their home country and Portugal. These agreements are designed to ensure that income is not taxed twice in two different countries.

Do foreigners need to pay tax in Portugal?

if you are a tax resident in Portugal and spend 183 days or more per year, you are required to pay income tax on your globalincome. If you reside in Portugal for less than 183 days, you only pay taxes on your income earned in Portugal. However, many expats in Portugal may benefit from the Non-Habitual Resident (NHR) tax regime. This tax regime is designed to attract foreign investors and highly skilled professionals to Portugal by offering a reduced tax rate of 20% for certain types of income. NHRs may qualify for a 10-year tax exemption on foreign-sourced income, provided they meet the necessary criteria. The NHR tax regime is subject to specific eligibility requirements, and it is essential to seek advice from a tax professional to determine whether you qualify.

Non-Habitual Resident (NHR) Tax Regime

The Non-Habitual Resident (NHR) tax regime in Portugal attracts thousands of residents by offering reduced tax rates and even full tax exemptions for the first ten years of residence. The NHR tax regime was introduced in 2009 and is available to all new tax residents in Portugal. Let’s go through the main benefit of the NHR tax regime.

The NHR is a generous tax program with numerous benefits pertaining to your global income. It offers tax-free incentives on certain categories for a period of up to ten years.

Some of the significant advantages under the NHR status are following:

• You can benefit from special personal income tax treatment over ten years
• You can enjoy the tax exemption on almost all foreign source income
• 20 percent flat rate for certain Portuguese source incomes (from specific professions and self-employment), as opposed to national Portuguese income tax rates of up to 48 percent
• No minimum stay requirement
• Become part of a white-listed tax environment within the EU
• A tax exemption for gifts or inheritance to direct family members
• No wealth tax
• Free remittance of funds to Portugal

Personal Income Tax (IRS):

Some NHRs are taxed at a flat rate of 20% on their income and are exempt from paying taxes on global income. Those who work in Portugal (freelance or regular employment) under the NHR tax regime only pay a 20% flat rate on personal income tax (IRS). To be considered “high value”, the job must be related to activities of scientific, artistic, or technical character. See what you would save below with a high-value tax rate under the regime.

 

 

Global Income

You will also not pay any tax on dividends, interest, royalties, capital gains, rental income from real estate outside Portugal, and income from employment in another country. These will be paid in the source country if your country has a Double Taxation Agreement (DTA) with the country. The UK, USA, and many more countries have a DTA with Portugal where this is the case. Therefore, you could be working for an American or English company and not pay any income tax in Portugal under the DTA. Rather, you would pay taxes in the US. You could also just choose to pay the flat tax rate of 20% if you fall under a “highly qualified professional” or if the latter is the case and you are paid by a Portuguese source.

Value Added Tax

Known as IVA in Portuguese, VAT is paid by consumers when purchasing goods and services. The seller receives the VAT and then pays it to the tax authorities.

The VAT rate varies around Portugal. For mainland Portugal, the rates are either 6%, 13%, and most commonly 23%. In the Azores, the VAT rate is either 5%, 10%, or 18%. In Madeira, the VAT rate is either 5%, 12%, or 22%.

Self-employed people and companies that produce, market, or provide products and services in Portugal must pay the VAT to tax authorities.

Income Tax

If you can take advantage of the NHR tax regime, the general income tax rate will not apply to you. However, even under the NHR tax regime, after 10 years, you will have to pay the general income tax rate, also known as the imposto sobre o rendimento de pessoas singulares (IRS) in Portugal. Most workers pay taxes automatically through their pay slips, but everyone must still complete an annual tax return. If you are married, you must submit a joint return with your partner. To calculate the tax rate applied to you as a married couple, your collective income will be divided into two. The rates below are applied currently.

 

 

Social Security

If you are working in Portugal, either employed or self-employed, you will also have to pay social security which will one day assure you a retirement pension. The Portuguese Social Security is a system that also secures the basic rights of citizens and ensures equality in opportunities, providing measures of support such as unemployment allowances, paternal leave, and other financial support.

Inheritance Tax

Inheritance tax has been abolished a few years ago, but you must still pay stamp duty, Imposto de Selo, which is 10%. In Portugal, inheritance law follows forced heirship rules. This means that legitimate heirs get a minimum of 50% of the deceased’s estate. If there is more than one, this usually increases to 60%.

Property Taxes

If you are buying a house in Portugal, you must pay a number of property taxes to the government. You’ll need to calculate each of them, which a Portugal property tax calculator is helpful. Property owners have to pay three types of taxes:

1. Municipal Property Tax (IMI)

The IMI translates to Imposto Municipal Sobre Imóveis and will be different in each municipality. This money is used to maintain public infrastructures in municipalities. The IMI rates usually range from 0.3% to 0.45%. To calculate the IMI, you multiply the value of the tax asset with the IMI rate. You must pay the IMI every year. For example, if your property is valued at €500,000 and you live in the municipality of Cascais with a rate of 0.34%, then your yearly IMI is €1,700. You can be exempted from the IMI if your annual taxable income of the whole household does not surpass €15,295.

2. Property Purchase Tax (IMT)

The IMT is also known as the “Imposto Municipal sobre as Transmissões Onerosas de Imóveis”. This tax is paid when a house is bought in Portugal, so it is a one-time payment for buying a house. The rate of the IMT will depend on the type and value of the property, as well as whether this property is a principal or secondary residence. You must pay this before you buy a house. This is how you calculate the IMT = value of the deed or net worth tax (the larger amount) x rate – tax reduction. You won’t have to pay IMT if you buy a house in mainland Portugal and the price doesn’t exceed €92,407. IMT usually will range between 2% to 8%, depending on the case. However, properties acquired by companies located in a “blacklisted jurisdiction” pay 10% for IMT.

3. Tax on Stamps (IS)

You’ll also need to pay an Imposto de Selo, a stamp tax, contracts, loans, documents, and more. The rate also changes depending on the property and task, but it is usually between 0.4% and 0.8%. For example, for a mortgage of five years, the stamp duty tax is 0.6%.

Do you pay income tax if you are self-employed in Portugal?

Yes. Freelancers and those that are self-employed in Portugal pay income tax, rather than a corporate tax. Therefore, the general IRS rates apply, unless you can take advantage of the NHR tax regime or the 10 years of your status are over. You will also be paying your own social security, taxed at 21.4% for self-employed individuals. Self-employed people with a turnover of more than €10,000 on taxable goods and services must also pay VAT.

You can also deduct business expenses such as the rent of your office and utility bills, which will not be calculated in your taxable income. However, there are limits to this. Expenses for travel and entertaining clients can only be deducted if they amount to less than 10% of your overall income. If you work from home, you can claim expenses up to 25% of your overall income.

Freelancers can also take advantage of the simplified regime where they pay income tax on 75% of their overall income and the remaining 25% is offset with expense receipts. If you make over €200,000 you aren’t eligible for the simplified regime.

Corporate Tax for Companies

Corporate tax is set at a flat rate of 21% on taxable profit, slightly below the EU average. Small and medium-sized businesses paid a discount fee of 17% in mainland Portugal, 11.9% in Madeira, and 12.5% in other areas on their first €25,000 of taxable profit.

If your company turns over more than €10,000 a year, you’ll need to pay VAT. Along with corporate tax, you need to pay a surcharge to your local municipality, at around 1.5% on the profit charged by the regional municipality. Other surcharges on top of your corporate tax bill include:

• 3% state charge on profit between €1.5 million and €7.5 million (2.1% in Madeira, 2.4% in the Azores)
• 5% surcharge on profit between €7.5 million and €35 million (3.5% in Madeira, 4% in the Azores)
• 9% surcharge on profit over €35 million (6.3% in Madeira, 7.2% in the Azores)

In a nutshell, companies and businesses are required to pay Corporate Tax at a standard rate of 21% on any taxable profits, with additional charges on profits exceeding €1.5 million and local municipality surcharges of up to 1.5%. Small and medium-sized companies can benefit from a reduced corporate tax rate of 17% on their first €15,000 of taxable profit. Furthermore, small businesses and sole traders with an annual turnover of less than €200,000 can opt for a simplified tax regime, which requires them to pay taxes based on their turnover instead of their profits. The deadline for filing Portuguese corporate tax returns is typically between April 16 and May 16 each year, with electronic submission required using the online system provided by the Portuguese tax authority. It’s crucial to stay updated on any changes in tax laws or rates to ensure that your company meets its tax obligations in Portugal. Seeking guidance from a tax specialist or accountant can be helpful in this regard. 

Taxes on Cryptocurrency

The Portuguese Tax & Customs Authority (PTA) officially announced in 2019 that buying or selling cryptocurrency in Portugal is tax-free. Portugal does not view cryptocurrencies as an asset, but rather as a form of payment so they do not tax it as the former. Cryptocurrency is treated like any other currency, essentially. You will not be charged VAT or Personal Income Tax (IRS), as an individual. However, businesses that provide services related to cryptocurrency are taxed on gains between 28% and 35%. If you trade cryptocurrency as your primary income source (as your main profession) you will also be taxed this amount. There are many factors that determine whether this is the case like your profit and the frequency of your trade. To be sure, contact a tax advisor in Portugal.

If this is not the case for you, you can cash out your crypto into fiat currency (euro) without paying any tax. At times, Portuguese banks will contact you and ask you for a receipt or proof of exchange.

However, this is likely to change in the near future. In mid-May 2022, The new Minister of Finance Fernando Medina confirmed in parliament that cryptocurrencies will be subject to taxation in the future. While details are not yet set in place for the taxation of crypto in Portugal, the government has said the future plan will include, among others, a tax on the gains of selling cryptocurrencies such as bitcoin. The Secretary of State for Fiscal Issues Mendonça Mendes also announced that the government will not only tax crypto gains but cryptocurrencies will be included in other types of taxation, such as VAT (known as IVA) and Stamp Tax (known as Imposto de Selo).

 

Tax Registration

If you are a foreigner working or doing business in Portugal, you will need to register for taxes with the Portuguese Tax Authority. This is a mandatory requirement and non-compliance can result in heavy fines and penalties.

To register, you will need to fill out the relevant form (Form 10), and provide documents such as your passport, identity card, residency permit, proof of residence in Portugal, and bank details. If you are registering a company, you will need to provide additional documents such as the Memorandum of Association and Articles of Association.

Once registered, you will receive your Portuguese tax number which is used for all types of tax filing and payment.

 

Filing and Paying Taxes

For individuals living and working in Portugal, the tax year runs from 1 January to 31 December. All income earned during the year must be reported and taxes paid on or before 31 March of the following year. Self-employed workers are also required to file tax returns with the Portuguese tax office (Serviço de Finanças).

For most individuals, the filing process is done online through the electronic filing system, E-Fatura. This system requires all taxpayers to have an electronic signature and valid credentials in order to submit their returns. Taxpayers may also file their returns manually, either through the Tax Office or through a third-party service provider.

Individuals may opt to pay their taxes by direct debit, credit card or bank transfer. Non-residents are required to submit a statement of non-residency when filing their taxes. In addition, foreign nationals must provide proof of residence in another country in order to be exempt from Portuguese taxation.

Businesses must also file and pay taxes in Portugal. The filing process for businesses is similar to that for individuals, except that businesses may also need to register for a Value Added Tax (VAT) number. Businesses must file quarterly VAT returns and monthly corporate income tax returns. The payment method for businesses is typically through direct debit, credit card or bank transfer.

Tax Incentives

The Portuguese government has implemented several tax incentives in order to attract more foreign investment. These include:

• Corporate Tax Reduction: Companies that start business activities in Portugal before the end of 2020 may be eligible for a corporate tax reduction of up to 75%, depending on the type and size of the company.
• Research and Development Tax Credits: Companies investing in research and development activities can qualify for a credit of up to 25% of the amount invested.
• Tax Exemptions: Companies that create jobs in Portugal are eligible for a reduced corporate tax rate of 10% or full exemption from taxation for five years.
• Tax Breaks: Companies that reinvest their profits in Portugal are entitled to a 50% reduction in corporate tax.
• VAT Exemption: Foreign companies that provide goods or services in Portugal can receive an exemption from paying Value Added Tax (VAT).

In addition, there are several other tax incentives available to businesses that invest in specific sectors, such as renewable energy and film production.

Foreign investors should consult a tax specialist to ensure they are taking advantage of all available tax incentives in Portugal.

Double Taxation Agreements

Portugal has entered into Double Taxation Agreements (DTAs) with many countries to prevent double taxation of income and assets. These agreements are designed to eliminate the possibility of a taxpayer being taxed twice on the same income in both Portugal and another country.

Under these agreements, the taxation rights on specific types of income are allocated between the two countries. This means that one country may agree to exempt certain types of income from taxation, while the other country may tax that same income. Alternatively, both countries may agree to tax the income, but provide relief through a tax credit or a deduction for taxes paid in the other country.

The provisions of each DTA may vary depending on the country involved, but they typically cover the following types of income:

• Income from employment
• Business profits
• Dividends, interest and royalties
• Capital gains
• Pensions and annuities

In addition to the DTAs, Portugal also has agreements with several countries to exchange tax information, which is intended to prevent tax evasion and promote transparency.

It’s important to note that tax laws and regulations can change, so it’s a good idea to consult with a tax professional or financial advisor to determine how the DTAs may affect your specific tax obligations in Portugal.

Double taxation agreements are a way of avoiding double taxation, which happens when two countries tax the same income earned by an individual or business. This is why Portugal has entered into double taxation agreements with a number of countries. Under these agreements, Portugal and another country agree to share the taxes imposed on a particular income so that only one country will be taxing it.

The most important benefit of these double taxation agreements is that they allow individuals and businesses to reduce their overall tax burden, as only one government has the authority to tax a particular income. Double taxation agreements also ensure that taxpayers are not subject to double taxation on their income.

In addition, double taxation agreements can make it easier for businesses to transfer profits from one country to another without having to pay additional taxes. This can be beneficial for businesses with international operations, since it allows them to save money on taxes.

Furthermore, double taxation agreements may provide additional benefits such as allowing tax credits in both countries, eliminating withholding taxes on certain payments, and ensuring the exchange of information between tax authorities in the two countries.

If you or your business is liable for taxes in Portugal, then it’s important to understand the country’s double taxation agreements. This can help you to ensure you are paying the correct amount of taxes and taking advantage of any tax benefits available.