Paying income taxes might feel especially complicated if you’re an expatriate. You’re paying your tax in a different country, under an unfamiliar system, and possibly with a language barrier to contend with, too. And you could be in for an especially tough time working out what you owe – and where – if you’re a cross-border commuter, a non-resident foreigner living in a different country for a short while, or a freelance or remote worker.
This overview of the Portuguese income tax system is a great starting point. However, tax is a complex legal area, and it’s important that you understand your own personal situation. If you think you might need to pay tax on some or all of your income in Portugal, getting professional advice to work out exactly what you owe, might be a good idea.
What income is taxable in Portugal?
This depends a bit on whether you’re considered to be a tax resident in Portugal, or not. To keep everything straight, you have to register with the tax authorities before you do any work in Portugal. You’ll need to complete a fiche de inscricao form, and hand it to the tax authorities, so they have a record and can contact you to arrange your tax declaration.
If you’re not a tax resident in Portugal, you still have to pay some tax there. Usually though, this is charged at a different rate to resident taxes, and will only be due on money you’ve earned in Portugal.
Non-resident income tax
In Portugal, the tax year is the same as the calendar year – 1 January through to 31 December. If you live in Portugal for less than 6 months of the tax year, you might get non-resident tax status for that year. In that case, you pay tax in Portugal only on what you’ve earned there. However, you might still be liable for taxes wherever you were resident for the rest of the year.
What are the tax exemptions in Portugal?
Regarding non-residents, only income obtained in Portugal is subject to taxation, at a general tax rate of 20 percent. However, income derived from real estate is subject to a tax rate of 10 percent. Some types of capital gains, such as those derived from transfer of shares, are, in some cases, tax exempt. Depending upon income classification, these can be subject to a definitive withholding tax rate.
You might be eligible for several relevant deductions and tax credits depending on your personal situation. To be eligible for any of these allowances you have to include them on your tax declaration.
General allowance and deductions
There are some deductions you can immediately take off your income when you’re calculating your taxable income. There’s a general tax-free allowance which is currently just over €4,000, then you can also deduct some of your social security contributions, and a fixed rate for family expenses, food and business travel. However, the details of the system are somewhat complex, and all of these deductions are subject to limits, so you’ll need to make sure you’re clear on what exactly you can deduct from your taxable income legally.
There are a number of others, specialist deductions which won’t apply to everyone. For example, you can reduce your taxable income in some cases, if you’re maintaining a property from which you draw rental income, if you’re paying for education, or if you accrue medical expenses. This goes to show that it’s worth really understanding the tax system before you complete your declaration.
What are the tax penalties in Portugal?
Both tax and non-tax residents in Portugal are required to file an annual tax return in the spring of the following year. For incomes from investment or properties rental, the deadline is extended until 30 April.
If you don’t get your tax declaration in on time, you could be liable to a fine. The fines for being late with your tax declaration start at €200, but go all the way to €2,500.
And it gets worse if you forget to pay your taxes on time. The late payment penalties are pretty scary too – from 10% of whatever you’re found to owe, to double the total amount. It’s an expensive mistake to make.
What sort of double taxation agreements are there with Portugal?
It’s possible to be liable to pay tax in 2 countries. If you’re a cross-border commuter, for example, the country in which you earn most of your money may want you to pay them tax – even if you don’t always live there.
Luckily, to make sure that people don’t actually get charged twice, many countries have double taxation agreements. These help to ensure that you only pay tax once on your earnings, so if you pay tax in one country, it’s offset against the bill you might face in the other.
Portugal has double taxation agreements with approximately 80 countries, including China, Hong Kong, Macau, South Korea, Japan, Singapore, Indonesia, Vietnam…
Paying income taxes online
You can pay your tax return online, through the Portal das Finanças website, but in order to access the system, you have to have a password. You can get this from the local tax authorities.
Once registered, using the online system means that you get an extension on the deadline, and can submit your tax declaration later than if you were using the paper forms.
Last but not the least…
Life is not always easy. So do taxes. if you own a Portuguese property through a company, since the entire value of the property would be subject to the new wealth tax, with no allowance. If the company is wound up and the property distributed to a Portuguese resident, it would be liable for 35% corporation tax.
Your estate planning, tax planning and investment planning should be considered together. You should have a tax informed investment strategy, based on a thorough understanding of the tax landscape. Look to protect your wealth for the long-term, for yourself and your family.