The starting point to determine what a potential exposure to taxation in Portugal lies with the consideration of whether a person is ‘resident’ in Portugal.
If you are ‘resident’ in Portugal you will be taxed on your worldwide income.
If you are non-resident in Portugal you will liable to Portuguese tax on your Portuguese sourced income.
There are a number of triggers that determine whether an individual will be deemed to be ‘resident’ in Portugal.
The most frequent triggers for residence will be if an individual is physical present in Portugal for 183 days or more in a calendar year, or if an individual has a house in Portugal which is deemed the ‘habitual ‘ residence.
Portuguese sourced income
Residents and non-residents would pay tax on Portuguese sourced income at incremental rates ranging from 14.5% through to 48%.
Portugal also imposes surcharges for those earning over 80,000 EUR per annum, with surcharge rates rising once Portuguese sourced income exceed 250,000 EUR.
Portugal categorizes taxable compensation into six main types, for which different exemptions and reliefs are available – for example non-residents pay tax at a flat rate on Portuguese employment income.
Aside from these exemptions they are no special concessions or other allowances that are set off against income tax liabilities in Portugal, although relief for taxes paid abroad by Portuguese residents is available.
There are however a number of general concessions that are available, subject to upper limit thresholds for relief, to Portuguese residents, such as a 10% allowance for general healthcare expenses, payments made accredited institutions such a charities and a relief for interest on loans made and used to improve the taxpaying residents own home.
Taxation of Investment income and capital gains
As previously mentioned, Portuguese residents will be taxable on worldwide basis for all income, although particular types of investment income do offer a choice to a resident tax payer to be taxed at a withholding tax rate, or to have the income added to the general tax liability.
Non-residents are usually exempt, subject to anti-avoidance provisions, of taxation on non-Portuguese sourced capital gains or investment income.
Rental income on Portuguese property is taxed at a flat rate of 28% for non-residents, with residents again being given the option to be taxed at this flat rate or to have the rental income added to the general tax pool calculation.
Property and Estate/ Inheritance Taxation
Portugal levies a municipal property tax on property, similar to a number of continental European countries. These rates vary depending upon whether the property is classified as being ‘urban’ or ‘rural’, and rates range from between .3% to .8% of the assessed value of the property.
Although there is no Wealth tax or Inheritance tax in Portugal, the effective rate due to property transfers attracting Stamp Duty, is a flat rate 10%
Relief for Foreign Taxation
Portugal has a number of tax treaties, across Europe and Asia
Since 1 January 2010 individuals from a number of EU countries taking up residency in Portugal for the first time are able to benefit from a new tax regime for the first 10 years of residency. This exempts them from Portuguese tax on income which comes from countries with which Portugal has a double tax treaty, so long as the income is taxable in the other country under the terms of the treaty.
For passive income, such as dividends, it is only necessary for the income to be taxable in the other country – It is not necessary for the income to actually be taxed in that country.
An example is dividends from a tax treaty country to a Portuguese resident. Under the most common of these provisions, the country of origin of the dividend retains the right to tax such income; therefore Portugal does not tax this income.
However under most countries tax rubric, where such income might arise there is no tax due on this income as the individual is non-resident.
Any employment income will be tax-free in Portugal only if it is actually taxed in the other jurisdiction.
The proper planning and structuring of an individual’s wealth and assets, both active investment income, employee remuneration and long term capital appreciation assets, can mitigate significantly the exposure to both Portuguese and ‘nation of origin’ taxation.
It is essential however this planning is executed before residence or the right of residence is granted in Portugal.
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