Planning to relocate to Portugal but unfamiliar with its tax system? You've come to the right place. This comprehensive guide aims to assist you in navigating Portugal's tax system.

Renowned for its exceptional quality of life and moderate weather, Portugal is also known for its favorable tax regime, which has attracted a substantial number of expatriates to the country.

Understanding Portugal's Tax System: A Comprehensive Guide for Expats

If you plan to move to Portugal or are already residing there and earning an income, understanding the taxation process is crucial. As a resident spending 183 days or more in Portugal within a tax year, you are required to pay income tax on your worldwide earnings.

How to register

To begin the process, you must register as a taxpayer and obtain your NIF (Número de Identificação Fiscal) number. You can easily request your NIF online through the official website or visit a local Finanças office to apply in-person.

Once you have your NIF, you will need to complete a form declaring that you are starting a new tax activity and submit it to your nearest tax office. You can locate the appropriate tax office by accessing the Portuguese Tax Agency's online portal, known as "Portal das Finanças."

It is essential to keep track of the tax year in Portugal, which follows the calendar year, commencing on 1st January and ending on 31st December. Tax returns must be filed between April and June of the subsequent year. You have the option to complete your tax returns online via the Portuguese Tax Authorities' website or by using printed forms.

Timeliness is of utmost importance when it comes to filing your tax returns. Failure to meet the deadline could lead to significant penalties, ranging from €200 to €2,500. If you engage in business activities within the country, it is highly advisable to hire an accountant or bookkeeper to ensure accurate and timely submission of your tax returns.

Exploring Local Taxes in Portugal: What Expats Need to Know

Before diving into specific taxes like income tax and VAT, it's essential to be aware of some local taxes in Portugal.

One such tax is the IMI (Imposto Municipal Sobre Imóveis), which is similar to council tax in other countries and is paid by property owners. The IMI rates vary across different municipalities and are determined based on your property's area. The revenue generated from IMI is utilized to maintain essential public infrastructures like waste collection and street cleaning.

To be eligible for IMI tax, you must be the owner of the property on the last day of the respective tax year. Additionally, there's a special category known as AIMI (Additional Municipal Property Tax) for residents who own homes with a value exceeding €600,000. AIMI is often considered as Portugal's version of a "wealth tax."

Unraveling Taxes on Goods and Services in Portugal

Value Added Tax (VAT), known as Imposto Sobre o Valor Agregado (IVA) in Portugal, has been in effect since its establishment in 1986. Under the current regulations, established businesses in Portugal with a turnover of more than €10,000 on taxable goods and services are required to pay VAT.

VAT in Portugal is structured into three chargeable bands based on the type of goods and services:

• Reduced Rate: The reduced rate applies to specific goods and services listed in List I of the Value Added Tax Code. In mainland Portugal, the reduced rate is 6 percent, while it is 4 percent in the Azores and 5 percent in Madeira. Goods falling under this category include essential items such as bread, pasta, milk and dairy products, books, newspapers, and certain food items like chocolate.
• Intermediate Rate: The intermediate rate of VAT is applicable to goods and services listed in List II of the Value Added Tax Code. In mainland Portugal, this rate is set at 13 percent, while it is 9 percent in the Azores and 12 percent in Madeira. Some of the goods covered by the intermediate rate include pickles, wine, musical instruments, and contraceptives like condoms.
• Standard Rate: The standard rate is the highest VAT rate and is applicable to all remaining taxable goods and services. In mainland Portugal, the standard rate is currently set at 23 percent, while it is 18 percent in the Azores and 22 percent in Madeira. This rate is levied on a wide range of products and services not covered by the reduced or intermediate rates.

It is essential for businesses operating in Portugal to be aware of the VAT rates and comply with the necessary regulations to avoid any penalties or legal issues. For more detailed information on VAT regulations, including exemptions and registration requirements, businesses should refer to Article 18 of the Value Added Tax (VAT) Code or consult with a qualified tax advisor.

Obligations and Eligibility: Who Must Pay Taxes in Portugal?

Understanding your tax status as an expatriate in Portugal is crucial, and it primarily hinges on your residency status, determined by the amount of time you spend living and working in the country each year.

To be recognized as a tax resident in Portugal, you must meet one of the following criteria:

• Physical Presence: If you reside in Portugal for 183 days or more in a single calendar year, you will generally be considered a Portuguese tax resident.

Additionally, you may also be considered a tax resident if:

• Permanent Residence: You have a permanent residence in Portugal as of 31 December of that specific tax year.
• Household Head: If the head of your household is a tax resident in Portugal, you could potentially be considered a tax resident as well.
• Maritime or Aviation Crew: Being a crew member on a ship, yacht, or aircraft owned by a Portuguese entity can also qualify you as a tax resident.
• Working for the Portuguese State: Irrespective of your physical presence in Portugal, if you are employed by the Portuguese state, you will be considered a tax resident.

As an expatriate living in Portugal, understanding your tax residency status is essential, as it directly impacts your tax liabilities and obligations in the country. To ensure compliance with the local tax laws, it is advisable to consult with a qualified tax professional who can provide personalized guidance based on your specific situation. Keep in mind that tax regulations can change over time, so staying up-to-date with the latest information is vital for accurate tax planning and reporting.

The Portuguese (NHR) Tax System Demystified for Foreigners

Portugal offers two enticing options for foreign individuals looking to live, work, and invest in the country while enjoying significant tax benefits and residency opportunities:

1. Non-Habitual Residency (NHR) Tax Scheme

Introduced in 2009, the NHR tax scheme aims to attract foreign residents by providing generous tax incentives. Eligible individuals who haven't been Portuguese tax residents in the past five years can enjoy either tax exemptions or a flat 20 percent tax rate on their foreign-sourced income for a ten-year period. This flat rate also applies to Portuguese-sourced income from certain professions or self-employment, making it highly attractive compared to regular income tax rates, which can go up to 48 percent.

The NHR program is particularly appealing to digital nomads, retirees, and those seeking a beautiful and welcoming country to live and work while maximizing their income. To qualify for the NHR regime, applicants must either be EU/EEA/Swiss citizens or have a residence visa, such as the Portugal Golden Visa, and must not have been Portuguese tax residents in the five years preceding their move to Portugal.

2. Portugal Golden Visa Program

The Portugal Golden Visa Program, also known as the Residence Permit Program, was established as a five-year residency-by-investment initiative for non-EU nationals. This program aims to attract investors to Portugal and has been highly successful since its launch in 2012.

Through the Golden Visa Program, non-EU nationals can obtain residency in Portugal by purchasing property worth more than €500,000 in designated interior areas of the country or the autonomous islands of Madeira and the Azores. Alternatively, there are no location restrictions for commercial properties. Holders of the Golden Visa can freely travel within the European Union.

Thousands of families have already relocated to Portugal and benefited from the Golden Visa Program, making it a sought-after option for those seeking investment opportunities and a new life in Portugal.

These two attractive schemes make Portugal an appealing destination for those looking to optimize their financial situation while enjoying the charm and allure of this beautiful country. If you're interested in exploring these opportunities further, check out our comprehensive "Portugal Golden Visa: A Complete Step-by-Step Guide 2023" for more details, including information on designated interior areas eligible for the Golden Visa route to residency.

Personal Income Tax (IRS) Rates in Portugal: A Breakdown for Expats

Personal income tax (IRS) applies to both Portuguese residents and non-residents earning income in Portugal. Taxes are usually deducted automatically from pay slips, but an annual tax return is still required. Taxable income is determined, and legal deductions are subtracted to calculate the tax owed.

For couples and civil partnerships, joint filing is an option, where tax is charged on the total household taxable income. Portugal's individual tax rates for 2023 range from 14.5 percent to 48 percent.

Income tax in Portugal applies to earnings in the following categories:

• Employment income
• Self-employment income
• Investment income
• Rental income from properties in Portugal
• Capital gains from selling properties, assets, or shares
• Pensions, including private pension plans

Foreigners classified as non-residents in Portugal are subject to a flat income tax rate of 25 percent on all earnings.

Filing Income Tax Returns in Portugal

The Portuguese tax year runs from 1 January to 31 December, with returns submitted in the following spring. You can file your tax return online through the Finances Portal or in person at designated locations, such as Serviço de Finanças offices, Citizen Shops (Lojas de Cidadão), or Parish councils (Câmara Municipal).

Self-Employed Income Tax

Sole traders, freelancers, and individuals running unincorporated businesses are taxed on their personal earnings rather than corporate tax.

Navigating Taxes on Property and Wealth in Portugal

Capital Gains Tax in Portugal is levied on the profits obtained from the sale of capital assets like real estate, stocks, and bonds. Both residents and non-residents are subject to a tax rate of 28 percent, while companies face a rate of 25 percent.

Some exemptions and reductions may apply. For assets held for more than two years, there is a 50 percent reduction. Additionally, capital gains made from the sale of a main residence can be completely exempted. Residents can also enjoy exemptions when selling their primary home and buying another property in Portugal or the EU, as well as when selling a property purchased before 1989.

Property Tax in Portugal (IMI):

As a property owner in Portugal, you are required to pay the property tax known as Imposto Municipal Sobre Imóveis (IMI). The rates vary according to the municipality and the location of your property.

In urban areas, IMI ranges from approximately 0.3 percent to 0.45 percent of the property's value. In rural areas, the rate is 0.8 percent. Homeowners with properties worth less than €125,000 in urban areas may benefit from a three-year exemption on IMI if they reside in the property. Additional deductions are available for dependents, low-income individuals, and energy-efficient homes.

Property Wealth Tax (AIMI):

The Adicional Imposto Municipal Sobre Imóveis (AIMI), often referred to as the Portuguese Wealth Tax, is applicable to individuals with total real estate holdings exceeding €600,000. For jointly owned properties, the threshold is €1.2 million.

The AIMI tax rates in Portugal are as follows:

• 0.7 percent on property valued between €600,000 and €1 million
• 1 percent on property valued between €1 million and €2 million
• 1.5 percent if the total value exceeds €2 million

Tax on Rental Income:

If you decide to rent out your property, you will be taxed on the profits from rental income. Generally, net rental income is taxed at a flat rate of 28 percent. However, certain contracts may offer reduced rates or exemptions.

When declaring rental income to Portuguese tax authorities, deductions for expenses like fire insurance (compulsory for all rental properties), IMI, energy certificate costs, and condominium fees (if applicable) can be claimed.

For more comprehensive information on Portugal's property taxes, consider reading our article dedicated to this topic if you're considering renting out your property.

Inheritance Taxes in Portugal: Implications for Expats

In Portugal, direct family members are exempt from inheritance tax, making it a favorable option for passing down assets. However, it's essential to be aware of the 10 percent stamp duty (Imposto do Selo) applied to Portuguese assets when transferring an estate to a spouse or children. This duty is relevant during inheritance or gifting processes. Overall, the absence of inheritance tax for direct family members is a significant advantage, but individuals should consider the stamp duty implications while planning their estate transfers in Portugal.

Decoding Company Taxes in Portugal: What Expats Should Be Aware Of

• Corporate Tax Rate: 21% on taxable profits for all companies/businesses.
• Local Municipality Surcharges: Up to 1.5% additionally apply.
• Extra Charges: Profits exceeding €1.5 million may attract additional charges.

Tax Benefits for Small and Medium-sized Companies:

• Reduced Corporate Tax Rate: Small- and medium-sized companies enjoy a lower rate of 17% on their first €15,000 of taxable profit.

Simplified Regime for Small Businesses and Sole Traders:

• Eligibility: Small businesses and sole traders with an annual turnover below €200,000.
• Tax Calculation: Tax is based on turnover, not profit.

Corporate Tax Return Deadline:

• Filing Period: The deadline for completing Portuguese corporate tax returns falls between 16 April and 16 May each year.

Note: Always ensure to verify the most recent tax regulations and consult with a tax professional for personalized advice.

Seeking Tax Advice in Portugal: Expert Guidance for Expats

Navigating tax-related administrative work in Portugal can be complex, especially for self-employed individuals or non-EU residents managing a business. Seeking assistance from an accountant or tax expert can provide peace of mind.

Benefits of consulting a tax expert:

• Ensuring accurate tax and social security filings.
• Confidence in compliance with regulations.

By relying on expert advice, you can avoid potential pitfalls and focus on your business with assurance that all tax matters are handled correctly.

FAQ

Q1: Do I need to pay tax in Portugal as an expat?

A1: As an expat, you are considered a Portuguese taxpayer if you reside in Portugal for more than 183 days in a calendar year or have a permanent residence in Portugal.

Q2: Can I benefit from tax exemptions as a foreigner?

A2: Yes, thanks to the Non-Habitual Resident (NHR) tax regime, foreigners can benefit from a unique personal income tax treatment over ten years, with low tax rates or exemptions on almost all foreign source income.

Q3: Does Portugal have an inheritance tax?

A3: Portugal does not apply any inheritance tax on direct family members; however, it imposes a 10 percent stamp duty on Portuguese assets inherited or gifted outside the immediate family.

Q4: Does Portugal tax worldwide income?

A4: Yes, residents in Portugal are taxed on their worldwide income at progressive rates. Non-residents will only be taxed on incomes earned in Portugal, typically at a flat rate.

Q5: Does Portugal have a high-income tax?

A5: Portugal's income tax is proportional to the amount you're earning and your tax status. If you're a high earner in Portugal, income taxes can reach over 40 percent. However, if you're a non-habitual resident, tax can be fixed at rates of around 20 percent for a ten-year period.

Q6: What is income tax in Portugal?

A6: Personal income tax in Portugal is known as Imposto sobre o Rendimento das Pessoas Singulares (IRS).