The tax system in Portugal
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 used to be eligible for a number of tax exemptions under the Non-Habitual Residence (RNH) scheme. However, recent news have revealed the current government's intention to end this regime in 2024.
Below, you will find an overview of taxation requirements in Portugal, a list of the country's basic taxes and tax rates, and your potential tax liabilities as an expat.
Taxes in Portugal: Overview
The Portuguese tax system is not particularly complicated. There are state taxes and local taxes. Taxes in Portugal follow a progressive bracket system and are calculated taking into account your income, expenses and property ownership. The more you earn, the more taxes you pay.
Expats who reside in Portugal need to register as taxpayers before they can make an income in the country. Registering as a taxpayer in Portugal 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.
Currently, IRS (tax on income) percentages can range from 0% (if you earn the minimum wage) to 41% (if you make over 20,000 euros/month), with plenty of other brackets in between. Furthermore, you'll be paying a flat 11% of your paycheck towards your future public retirement fund (Segurança Social), while the remaining taxes (IRS) will depend on how much you make.
As for freelance workers, they will need to register their activities at their nearest Finance Department or online through the Financial Department Platform and issue invoices called Recibo-Verde (green receipt). Freelancers earning less than 13,500€/year are usually exempt from paying VAT (value-added tax) and do not need to pay the IRS on a monthly basis to the government (though they'll have to do their taxes every year between May and June and pay any arrears owed to the state). They also need to pay the pension fund contribution every month, according to the amount they made throughout the previous trimester. Regarding freelance work, we strongly advise consulting with a Portuguese tax adviser or accountant since there are many nuances that will impact how much you'll pay in taxes, including the nature of your activity and how much you make to the dates you issue your invoices and your deductible work expenses.
Unlike the US, when under contract with a company in Portugal, you don't need to do your own taxes, as your employer will be responsible for automatically deducting your taxes from your wage and handing the amount to the government. Needless to say, and in order to abide by the law, everything must be mentioned in your pay slip. However, you are still required to file an annual tax return every year between April and June (regarding the income from the previous year). The system will then take into account your deductible expenses and income bracket to determine whether you need to pay any arrears or receive a tax refund from the state. 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. 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.
Income tax in Portugal applies to different income sources, including:
- Employment;
- Self-employment;
- Investments/capital gains (assets, shares, etc.);
- Rental properties;
- Properties sales;
- Pensions.
Married couples in Portugal can submit a joint tax return. Then, the relevant tax rate is calculated by dividing the collective income in two.
Property tax in Portugal
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. Keep in mind this doesn't necessarily apply to the amount you paid for the property but to the VPT (Valor Patrimonial Imobiliário), an index that takes into account the size of the property, how old it is and where it's located. Considering housing prices in Portugal are through the roof, the VPT is usually lower than the current property market values (translating to lower taxes). 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€, you may benefit from a three-year exemption — but you do have to live in the said property yourself.
Note that IMI only applies to property owners and tenants don't need to pay this tax.
AIMI (Adicional Imposto Municipal Sobre Imóveis) is an additional property tax that was introduced relatively recently — in 2017. AIMI applies to homeowners whose property is valued (VPT) at 600,000€ or above.
Regarding rental income, taxes are 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 rental income rate is set at 28%.
Corporate taxes in Portugal
Companies in Portugal pay taxes (IRC) at a flat rate of 21%. Municipality payments also apply (up to 1.5%). There are also additional charges (at least 3% surcharge) 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 25,000€. Plus, small businesses (with an annual turnover of under 200,000€) 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) in Portugal 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 (RNH) and Golden Visa Schemes in Portugal
Although Portugal used to boast a pretty friendly tax scheme for foreign residents, the government is currently planning to get rid of the Non-Habitual Residents (RNH) scheme in 2024. This code provided tremendous tax benefits for digital nomads establishing themselves (and their businesses) in the city for a period of 10 years. If your line of work falls within one of the designated categories, you could enjoy a flat 20% tax on your income, a percentage that Portuguese workers (or foreign workers without the digital nomad visa) reach when earning over 1,961€/month. That being said, if you made more than that amount, you'd be saving on taxes by adhering to the visa.
At the same time, and in order to crack down on the country's housing crisis currently affecting the nation's biggest cities, the Portuguese government has recently signed a clause that excludes investments in Lisbon, Porto and the Algarve from the Golden Visa Scheme. While many foreign investors used to buy 500,000€ worth of property in order to get access to the visa, allowing them to live legally in the country and apply for citizenship after 5 years, purchasing property in Lisbon, Porto and the Algarve region will no longer allow you to apply for the Golden Visa.
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Last update on 01 November 2023 11:36:06