The tax system in Portugal: Everything you need to know

Decoding the Portuguese tax system

Operating on key principles of fairness and sustainability, the Portuguese tax system follows the calendar year from January 1st to December 31st. When it comes to submitting your annual tax return, the primary deadline typically falls on June 30th of the subsequent year. This generous time frame ensures you have ample time to gather the necessary documentation and accurately report your income.

While tax deadlines can be a source of anxiety, staying informed and organized will put you in a favourable position to promptly fulfil your tax obligations, thereby avoiding unnecessary penalties. With careful preparation and a proactive approach, you can navigate the tax season with confidence.

Income tax in Portugal

Portugal employs a progressive income tax system, meaning different tax rates are applied to specific income ranges as your income increases. This ensures that those earning more contribute proportionally to the tax system.

In Portugal, taxable income includes various sources, such as employment, self-employment, rental plus other passive incomes, and capital gains. In addition, you'll deduct certain expenses and allowances from your taxable income to determine your taxable income. These may include business expenses, health expenses, and specific deductions.

Portugal offers various tax benefits for specific situations. For example, you may be eligible for a deduction or tax credit if you have dependents. Likewise, individuals with disabilities may enjoy additional allowances to reduce their tax burden. These provisions aim to support and acknowledge the unique circumstances of different individuals and families.

Taking advantage of applicable deductions and exemptions ensures you pay your fair share while maximizing your financial well-being.

Difference between resident and non-resident tax

Determining your residency status for tax purposes is crucial, as it determines the scope of your tax obligations in Portugal. Tax residency is a subtle issue.

On one hand, Portugal requires new residents to register as tax residents by associating a Portuguese address with their NIF after arriving in Portugal. Normally, Portugal follows that declaration and will the day of obtaining a NIF with a Portuguese address as the day of tax residency. Income from that date to the end of the year would be taxable in Portugal.

On the other hand, there is also a legal definition of tax residency. Generally, you're considered a resident for tax purposes if you spend more than 183 days in Portugal within a given calendar year or have a permanent home available to you in Portugal.

If the self-declaration and the legal definition are not the same, the tax authorities may back-date the date of tax residency.

Therefore, it's important to note that residency rules may vary based on specific circumstances, so it's wise to seek professional advice to ensure accurate determination.

As a resident, you are subject to taxation on your worldwide income, including income earned within and outside Portugal. This includes employment, rental income, and capital gains, among others. On the other hand, non-residents are typically taxed only on their Portuguese-sourced income, such as income derived from employment or property in Portugal.

Understanding these distinctions is essential for managing your tax affairs effectively. By knowing your residency status, you'll be able to comply with the appropriate tax regulations and optimise your financial planning accordingly.

Wealth and property tax

Property tax, known as "IMI" (Imposto Municipal sobre Imóveis), is an annual tax imposed on the value of real estate properties. The rate varies depending on property type, location, and value. It's important to note that primary residences may benefit from exemptions or reduced rates, providing relief for homeowners.

As an expat, you can sigh with relief knowing that your accumulated wealth, such as investments, savings, or assets, is not subject to specific wealth taxation in Portugal. This favorable tax environment contributes to the country's attractiveness as a destination for global citizens.

Rental income derived from properties in Portugal is generally subject to taxation. For residents, the income is considered part of your overall taxable income, and progressive income tax rates are applied accordingly. However, you can claim certain deductions and allowances to reduce your taxable rental income, including expenses directly related to the property's maintenance, repairs, and management.

Portuguese tax for non-habitual tax residents

The Non-Habitual Resident (NHR) regime offers a range of benefits for eligible individuals who become tax residents in Portugal. One of the key benefits is the opportunity for tax exemptions and reduced rates in specific income categories.

For example, under this regime, certain types of income, such as employment income or self-employment income in a list of activities that Portugal considers to be high-value activities may be eligible for a flat tax rate of 20%.

In some circumstances, such as employment income that had been taxed in another country or self-employment income obtained working from a fixed base overseas in a country that has a treaty with Portugal and taxation rights under that treaty - such income may be fully exempt from tax in Portugal.

Equally, dividends obtained from countries that have taxation rights are generally exempt in Portugal, whilst capital gains are normally fully taxation in Portugal (but not for US citizens!).

Pension income under the NHR also used to be exempt from tax until March 2020 but is now subject to a flat 10% rate in Portugal, but pension for work done for the government in many countries is still not taxed in Portugal!

Confused? Try this NHR Tax Calculator developed by Fresh Portugal which addresses all of these scenarios and others.

To qualify for NHR status, you must meet specific requirements:

• You must not have been a tax resident in Portugal in the previous five years.

• You must become a tax resident in Portugal, meeting the standard residency criteria.

• You apply to join the NHR program until 31 March the year following the year you became a tax resident.

It is important to note that despite the common myth, you do not need to engage in a high-value activity in order to qualify for the NHR regime. Indeed, you will only benefit from a tax reduction on your employment and self-employment income if your activity is one one of these categories, but the remaining benefits of the NHR program (such as no tax on overseas investments or low tax on pension) will remain open to you regardless of your profession.

It's important to note that the NHR regime has no downside. You do not have to use it and it does not impact your tax obligations and residency status in your home country. It is therefore highly recommended to apply on time and not miss the opportunity.

Inheritance tax

Instead of imposing an "inheritance tax" as commonly understood, the Portuguese system includes a stamp duty known as Imposto do Selo, which applies at a flat rate of 10% when assets are transferred upon death or as lifetime gifts. It's important to note that this stamp duty is applicable only to assets located within Portugal rather than assets held in other countries.

Importantly, assets transferred in a direct line of succession (i.e. from a parent) are not subject to stamp duty tax.

Where to find tax advice in Portugal

Whether seeking general tax advice, assistance with specific tax matters, or professional expertise, Portugal has many resources available.

Tax Advisors and Professionals: These experts possess in-depth knowledge of the Portuguese tax system and can provide tailored advice based on your circumstances. Look for certified tax advisors or consultants registered with the Portuguese authorities.

Law Firms and Legal Experts: Law firms specializing in tax law can offer comprehensive guidance on complex tax matters. They can assist with tax planning, estate planning, and any legal implications of your tax affairs. Seek reputable law firms with expertise in taxation or international tax law to receive quality advice.

Chambers of Commerce: The chambers of commerce, both local and international, can be valuable sources of information and support. Contact your respective country's chamber of commerce in Portugal for assistance and networking opportunities.

Tax Authorities: The Portuguese tax authorities, Autoridade Tributária e Aduaneira (AT), offer online resources and information on tax regulations and procedures. Their website provides access to forms, guidelines, and FAQs, allowing you to access official information and updates directly.

Expatriate Networks and Communities: Expatriate networks and communities are excellent sources of support and advice. Online forums, social media groups, and local ex-pat associations often share experiences and insights about taxation in Portugal.

Online Resources: Numerous online resources provide information on Portuguese taxes. Government websites, tax blogs, and financial publications can offer insights, updates, and practical tips. 

How to register for tax in Portugal

Tax registration is a mandatory requirement, and failure to register or provide accurate information may result in penalties or difficulties in fulfilling your tax obligations. This section will guide you through registering for tax in Portugal for ex-pats.

Tax Identification Number (NIF): The first step is obtaining a Tax Identification Number (Número de Identificação Fiscal or NIF). Obtaining a NIF (Tax Identification Number) is a simple process that can be completed at your local tax office (Repartição de Finanças) or conveniently through the AT's online portal.

Residents: As a tax resident in Portugal, you'll need to complete the registration form and submit it to the tax authorities either through the AT's online portal or by visiting a local tax office in person.

Non-Residents: Non-residents who have Portuguese-sourced income but do not qualify as tax residents must register for tax using the appropriate forms (e.g., Modelo 36). The registration can be completed online or in person at a tax office.

Tax Representative (Non-Residents): Non-residents who are not citizens of an EU/EEA country or Switzerland are often required to appoint a tax representative. The tax representative is a point of contact between you and the tax authorities.

Submitting your tax return in Portugal

Let's walk through how to submit a tax return in Portugal.

The annual tax return in Portugal is known as the "Declaração de Rendimentos." It is the comprehensive form where you report your income, deductions, and any tax credits or exemptions for the fiscal year. Typically, the deadline to submit your tax return is set for June 30th of the year following the conclusion of the reporting period.

Gather the necessary documentation to support your reported income, deductions, and credits.

This may include:

Employment income statements (e.g., payslips, employment contracts)
Rental income and expense records
Bank statements and investment income statements
Receipts for deductible expenses (e.g., healthcare costs, education expenses)

Ensure your tax return is accurate and complete, providing all required information and supporting documentation. If you have any doubts or complex tax situations, it's advisable to seek professional advice to ensure compliance.

By adhering to the tax return requirements, meeting the deadlines, and submitting your return accurately, you'll responsibly fulfil your tax obligations in Portugal and avoid unnecessary penalties or complications.

Navigating your tax journey in Portugal

We trust that this guide has equipped you with the knowledge, confidence, and practical guidance necessary to navigate your tax affairs seamlessly as you embark on your new journey in Portugal, whether relocating for work or retiring in this captivating country.

Remember, while we've covered many topics, tax regulations may evolve and change. Therefore, it's crucial to stay informed, seek professional advice when needed, and consult reliable sources for up-to-date information. With this knowledge, you can enjoy all this beautiful country offers while complying with the regulations of tax in Portugal.