The taxation system in Portugal

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Updated 2021-09-23 10:00

Portugal can be a great place to live. The country has a favorable climate, a stunning coastline, a developed infrastructure and a very beneficial location. Over 900,000 expats call Portugal home and enjoy the country's lower cost of living (compared to neighboring countries in Europe) as well as a favorable tax environment.

All expats relocating to Portugal should familiarise themselves with the taxation system before they move. As Portuguese residents, expats will be required to pay income tax on earnings, purchases, real estate, and other income sources. With that, depending on your status in the country, you may also be eligible for a number of tax exemptions under the Non-Habitual Residence scheme.

Below, you will find an overview of taxation requirements in Portugal, a list of the country's basic taxes and tax rates, your potential tax liabilities as an expat as well the steps to take to apply for the Non-Habitual Residency status.

Taxes in Portugal: at a glance

The Portuguese tax system is not particularly complicated. There are state taxes and local taxes. Taxes are calculated taking into account your income, expenses and property ownership.

Expats who reside in Portugal need to register as taxpayers before they can make an income in the country. Registering as a taxpayer is very straightforward: you will simply need to fill in a form and submit it at your local tax office. To locate your local tax office, refer to the Portal das Financas website (Portuguese Tax Authority).

The tax year in Portugal runs from January 1 to December 31. State taxes comprise income tax, corporate tax and capital gains tax while local taxes are handled at a local level.

Do expats have to pay tax in Portugal?

The answer to this question depends on your residency status in the country as well as how much time you spend here.

If you stay in Portugal for more than 183 days in a calendar year, you will be identified as a tax resident. In this case, you will need to pay income tax on your earnings — whether they come from local sources or from abroad.

Income tax in Portugal

All Portuguese residents have to pay income tax on both Portuguese and worldwide income. It is best to check in advance if your home country has any non-double taxation agreements with Portugal, to avoid paying more tax than necessary.

Generally, if you are employed within Portugal, by a Portuguese or international company, your employer will automatically deduct the estimated taxes from your wages. However, you are required to file an annual tax return and pay arrears, if any. Income tax rates are calculated based on income levels and range from 14.5% to 48% (in 2020)

Income tax in Portugal applies to different income sources including:

  • Income from employment
  • Income from self-employment
  • Income from investments
  • Income from rental properties
  • Income from selling properties, assets and shares
  • And income from pensions

Good to know:

Married couples in Portugal can submit a joint tax return. Then, the relevant tax rate is calculated by dividing the collective income in two.

The Portuguese tax year runs from 1 January to 31 December. All taxpayers are to file taxes by May of the following year. Late penalties are applicable, so make sure to submit on time. It may be worth hiring an accountant, if you are unfamiliar with the requirements, or if you are not fluent in Portuguese. As in most other countries, tax deductions are available for a wide range of expenses, such as educational and health expenses, pension contributions, and charitable donations.

How to file your income taxes in Portugal

As we've mentioned earlier, the tax year in Portugal goes from January 1 to December 31 — and your tax returns need to be submitted the following spring. You can complete your tax forms online or in paper form. To calculate the amount of tax that you need to pay, you can use the tax calculator on the Public Services website.

Property tax in Portugal

Property tax is the tax paid on owned property. There are several property-related taxes in Portugal:

  • Capital gains tax is levied on the sale of property or other assets.
  • Property tax, IMI (Imposto Municipal sobre Imóveis) is paid by property owners in Portugal. IMI is managed by your local municipality and is calculated based on the value of your home — as well as the wealth of the area where you are settled. If you live in an urban area, IMI rates vary from 0.3% to 0.45% of the home value. If you own a property valued under 125,000 EUR, you may benefit from a three-year exemption — but you do have to live in the said property yourself.
  • The tax money collected from IMI is used to maintain the neighborhood and pay for services such as garbage collection, recycling and others.
  • Note that IMI only applies to property owners and tenants don't need to pay this tax.
  • AIMI (dicional Imposto Municipal Sobre Imóveis) is an additional property tax that was introduced relatively recently — in 2017. AIMI applies to homeowners whose property is valued at 600,000 EUR or above.
  • Rental income tax is paid by homeowners who have decided to rent out their property. In this case, you will be taxed on the profits from renting out your house or apartment. The net rental income rate is set at 15%.

Corporate taxes in Portugal

Companies in Portugal pay taxes at a flat rate of 21%. Municipality payments also apply (up to 1.5%). There are also additional charges if a business makes over 1.5 million in profits.

As the government in Portugal offers strong support to small and mid-sized companies, they can pay a reduced tax rate (17%) on their first taxable profit of 15,000 EUR. Plus, small businesses (with the annual turnover of under 200,000 EUR) can use a simplified tax scheme and choose to pay taxes on their turnover instead of profit.

Inheritance tax in Portugal

There is no inheritance tax in Portugal. Instead, inheritance gains are taxed under the stamp duty at a flat rate of 10%.

Value Added Tax in Portugal

Value Added Tax (VAT) is a consumption tax placed on goods. In Portugal, companies with a turnover that exceeds 10,000 are required to pay VAT.

VAT is levied at three levels:

  • The general rate stands at 23% (taxable goods and services)
  • The intermediate rate stands at 13% (food and drink goods and services)
  • The reduced rate stands at 6% and is meant for certain essentials: basic food items, books, medicine, transportation, accommodation, etc.).

Taxes for Non-Habitual Residents in Portugal

One of the advantages of living in Portugal is a friendly tax scheme for foreign residents. Some expats living here can qualify for the Non-Habitual Residency (NHR) tax codes. Portugal introduced the Non-Habitual Residence status to offer its foreign residents a way to reside in the country, earn money, save and invest without paying taxes on inheritance, asset disposal, income from other countries, etc. Under this arrangement, you will be able to benefit from substantial tax exemptions during your first 10 years of residence.

There are two key advantages that come with having the NHR status in Portugal:

  • You can live in Portugal as a resident but you will not be required to pay tax on your income sources from outside the country.
  • Second, your Portuguese income will be below taxes at the reduced 20% flat rate (instead of the standard progressive rates going up to 48%).

Here is what foreign income is tax exempt in Portugal under this scheme:

  • Foreign pensions (both private and personal). Your pensions may be taxed at the source — but, if you manage to transfer your pension to Portuguese jurisdiction, tax won't be deducted at the source either.
  • Income from your investments abroad. This includes dividends, capital gains, rental income, etc. The royalties that you receive in another country may also be tax-exempt.
  • Income you receive from foreign employment. If your income is taxed at the source, you won't have to pay tax in Portugal.

In order to qualify for the NHR status you need to satisfy a number of conditions:

You must not have been a tax resident in the country for the previous five tax years.

You need to be a tax resident in Portugal at the moment of your application. For this, you need to stay in Portugal for over 183 days in a calendar year.

If you meet the above conditions, you can apply for the NHR status via the Portuguese tax authorities office.

Good to know:

One of the ways to acquire the Non-Habitual Residency (NHR) status is by qualifying for the Golden Visa. You can apply for the Golden Visa in Portugal via property purchase valued at

over 500,000 EUR or by investing in the country's economy and creating new jobs. Learn more about the Golden Visa Scheme and residency permits in Portugal.

Important:

The Portuguese government has recently signed a clause that excludes investments in Lisbon and Porto from the Golden Visa Scheme. When the clause comes into effect, purchasing property in Lisbon, Porto and the Algarve region will no longer allow you to apply for the Golden Visa. The deadline to exclude the above regions from the Golden Visa Scheme has recently been extended to January 22.

Tax penalties in Portugal

While Portugal does offer a lot of tax benefits to its residents, it is essential that you follow all the rules and tax submission deadlines. Submitting your tax returns incorrectly or with a delay can turn out to be quite costly.

The penalties for submitting your tax returns late start at 200 EUR but can go all the way up to 2,500 EUR depending on the severity of the case.

As you can see, the tax system in Portugal is not particularly complicated. Plus, as an expat, you have access to some favorable conditions when it comes to managing your taxes in the country.

With that, it is essential to do proper research if you decide to become a tax resident in Portugal. By learning more about the tax system, tax residency and all related regulations, you will be able to make the most out of your tax benefits and avoid paying tax penalties.

If you feel like handling taxes on your own is overwhelming and if your knowledge of Portuguese doesn't allow you to feel comfortable when dealing with paperwork, it may be best to consult an accountant or a tax expert.

Useful links:

Ministry of Finance - Portuguese tax system

Public Services website

Income tax information

NIF (Tax identification number)

Tax rates

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