Portugal Tax System: How It Works
Venture into the heart of Portugal’s tax system, a blend of Mediterranean charm and fiscal responsibility. Whether you’re soaking up the sun on a golden beach or wandering through historic streets, understanding the tax landscape is essential for residents and expats alike.
This guide unravels the complexities of Portuguese taxes, from income to VAT, offering a clear and concise overview.
With a touch of levity, we’ll navigate the nuances of Portugal’s tax obligations, making them as digestible as a pastel de nata.
Let’s dive in!
What Expat Services Does The Portuguese Tax Authority Provide?
You can register by filling out a form and submitting it to your local tax office, which you can find on the internet portal of the Portuguese Tax Authority (Portal das Finanças).
If you require assistance in registering, you can contact an expat-friendly services:
- Anchorless
- Bordr
- e-residence
The Portuguese tax year runs alongside the calendar year from 1st January to 31 December. Portugal has federal taxes.
Income tax on earnings for employed and self-employed workers, corporate tax and VAT for firms, capital gains tax on sales of property and other assets, and estate inheritance taxes are all examples of federal taxes.
Portuguese Tax System
If you are moving to (or currently live in) Portugal and earn some income, you are required to pay taxes. If you live in Portugal for more than 183 days a year, you must pay income tax on your earnings.
Local Taxes In Portugal
Some taxes are levied at the local level in Portugal. The most important is IMI (Imposto Municipal sobre Imóveis), which is Portugal’s equivalent of a council tax.
Your municipality assesses IMI depending on the value of your property and the perceived richness of the region in which you live. IMI applies solely to homeowners; therefore, tenants are exempt.
IMI revenue pays for continuing care and repair of the neighborhood, including services such as garbage collection and recycling.
Residents with residences worth more than €600,000 must pay an additional level of IMI. This is known as AIMI, and it is widely regarded as Portugal’s equivalent of a wealth tax.
Who Pays VAT In Portugal?
Businesses in Portugal that have a taxable turnover of more than €13,500 must pay VAT. This amount will increase to €14,500 in 2024 and €15,000 in 2025.
VAT (Imposto Sobre o Valour Agregado, or IVA) was introduced in Portugal in 1986 and has three charged bands:
- On taxable goods and services, the general rate is 23%.
- The intermediate rate is 13% on food and beverage items and services.
- 6% discount on some needs such as food (e.g., meat, fruit, vegetables, cereal), medicine, books, newspapers, transportation, and hotel accommodations.
Who Is Required To Pay Taxes?
Your responsibility for taxes as an expat is decided by your residency status, which is determined by the amount of time you spend living and working in Portugal.
You will be considered a resident/citizen if you spend around 183 days or more in Portugal in a calendar year and must pay income tax on your worldwide income.
If you live in Portugal for less than 183 days, you will only be required to pay taxes on income earned in Portugal.
Income tax rates in Portugal are progressive, which means you pay more tax the more you earn. Non-residents pay a flat tax of 25% of their income.
Foreigners’ Tax System In Portugal
Some expats in Portugal benefit from the Non-Habitual Residency (NHR) tax regulations, which allow significant exemptions for the first ten years of residency.
NHR status is available to workers in eligible occupations and comes with two major advantages.
Firstly, you can live in Portugal as a resident while not paying tax on your worldwide earnings (including employment and capital gains), granting you non-resident status.
Second, rather than the usual progressive rates of up to 48%, you will pay a flat rate of 20% on your Portuguese earnings.
The Portuguese government raised the tax rate on foreign pension income from 0% to 10% in 2020.
Golden Visa Scheme
Foreigners who buy property in Portugal worth more than €500,000 are granted golden visas. This allows investors to get residency in Portugal and freely travel within the European Union.
Since 2022, real estate investments in Portugal’s interior, the Azores, and Madeira have solely counted towards a golden visa. The Portuguese government announced plans to end the scheme in 2023.
What Are The Income Tax Rates In Portugal?
Personal income tax must be paid by Portuguese residents on their earnings. Although most employees automatically pay their taxes through their pay stubs, everyone is obliged to file an annual tax return.
Married couples in Portugal must file a joint tax return. Divide the couple’s total income in half to determine the applicable tax rate. Individual rates in Portugal for 2022 and 2023 are as follows:
Portuguese income tax bands | Portuguese tax rate |
up to €7,116 | 14.5% |
€7,117 – €10,736 | 23% |
€10,737 – €15,216 | 26.5% |
€15,217 – €19,696 | 28.5% |
€19,676 – €25,076 | 35% |
€25,076 – €36,757 | 37% |
€36,758 – €48,033 | 43.5% |
€48,034 – €75,009 | 45% |
€75,010+ | 48% |
2023 Income Tax Bands:
Portuguese income tax bands | Portuguese tax rate |
up to €7,479 | 14.5% |
€7,480 – €11,284 | 23% |
€11,285 – €15,992 | 26.5% |
€15,993 – €20,700 | 28.5% |
€20,701 – €26,355 | 35% |
€26,356 – €38,632 | 37% |
€38,633 – €50,483 | 43.5% |
€50,484 – €78,834 | 45% |
€78,835+ | 48% |
Portuguese income taxes are levied on the following six types of earnings:
- Employment income
- Self-employment income
- Investment income
- Rental income from properties rented in Portugal
- Capital gains from the sale of real estate, assets, or shares
- Portuguese pensions, including private pension programs
In 2023, taxpayers earning more than €80,000 per year will face an additional solidarity tax ranging from 2.5% to 5%.
How Do You File Your Income Tax Return?
The fiscal year in Portugal runs from 1 January to 31 December, with returns due the following spring. Returns can be submitted electronically or on paper. Penalties for late returns might range between €200 and €2,500.
The current deadline for filing your tax return for 2022 is April 1, 2023.
If you owe tax on income that was not deducted under Portugal’s pay-as-you-earn system, you can pay in installments, which are usually due in July, September, and December.
Self-employment Income Is Taxed
Individuals who work as sole proprietors, freelancers, or run unincorporated firms in Portugal will have their earnings assessed as personal earnings and will pay Portuguese income tax rather than corporate tax.
Property Taxes In Portugal
Capital gains tax is levied on the sale of property or other assets in Portugal at a rate of 28% for individuals and 25% for corporations and non-residents. Residents only pay taxes on half of their gains.
Residents selling their primary home and purchasing another property in Portugal or elsewhere in the EU, as well as those selling a property purchased before 1989, are exempt.
Property Tax (IMI)
You must pay IMI, the Portuguese equivalent of council tax if you own property in Portugal.
Each municipality establishes its rate, which is decided by the local assembly.
In metropolitan regions, IMI ranges from 0.3% to 0.45% of the value of a residence. In rural areas, the rate is 0.8%.
Homeowners in metropolitan areas with properties valued less than €125,000 are eligible for a three-year exemption from IMI if they live in the property.
You can get an additional deduction of roughly €20 for each dependent, and there are other deductions for persons on low incomes or who live in energy-efficient homes.
Property Taxation
The Adicional Imposto Municipal Sobre Imóveis (AIMI), which was introduced in 2017, affects owners of Portuguese property valued at more than €600,000. If you and your partner own the property jointly, you only pay AIMI if the valuation exceeds €1.2 million.
Regardless of residency status, the rates for properties held by firms are 0.4% on the whole amount, 0.7% for individuals, and 1% for those owning property worth more than €1 million.
Rental Income Tax
If you elect to rent out your home after purchasing it, you will be taxed on any gains you make from rental revenue. Net rental income is taxed at a flat 15% rate.
Inheritance Tax
Although the Portuguese government abolished inheritance tax several years ago, a 10% stamp charge known as Imposto do Selo may still apply.
If you must pay inheritance tax in Portugal, you must do it within three months of the death date. This is a severe deadline; if you are late, you may be fined.
Portugal has double taxation treaties with over 60 countries, including Germany, the United Kingdom, and Hong Kong. It will be helpful to lessen the burden faced by foreigners.
This means you can offset the tax paid in Portugal against any you might owe in your home country.
Portugal’s Company Taxes
Businesses in Portugal pay a fixed rate of 21% on all taxable profits. Local municipality fees of up to 1.5%, as well as additional charges on revenues exceeding €1.5 million, apply.
In 2023, small and medium-sized businesses will be able to pay a reduced corporate tax rate of 17% on their first €50,000 of taxable profit (up from €25,000 in 2022).
Small enterprises and single proprietors with annual sales of less than €200,000 might choose to pay business taxes under a simplified scheme in which they pay tax on turnover rather than profit.
The deadline for completing Portuguese corporate tax returns is the last day of the fifth month following the end of the fiscal year, so if the company’s fiscal year runs from January to December, the deadline is the end of May the following year.
Tax Rebates And Relief In Portugal
Individual taxpayers can benefit from a number of deductions from their taxed income. These include a €4,104 general allowance and deductions for any dependents. It is also feasible to deduct a portion of your healthcare, education, and housing expenses.
Tax Avoidance And Evasion In Portugal
The Portuguese government is increasingly concerned about tax avoidance. Companies must record a comprehensive inventory when paying their taxes under new rules that go into effect in 2023, rather than just providing data of raw materials and items for sale.
You will be penalized if you do not file your tax return. Individuals who file late or incomplete returns face fines ranging from €200 to €2,500. Late payment interest ranges from 10% of the outstanding tax to double its amount (up to €55,000).
Corporate tax penalties are significantly greater. Companies that submit late suffer daily interest penalties of 4% of the tax owed. Penalties are limited to €45,000 in situations of negligence and €165,000 in cases of willful delay.
Tax Advice In Portugal
Filing a tax return can be difficult, particularly if you are self-employed or operate your own business. With this in mind, consulting an accountant or tax professional makes sense.
You can also seek tax and social security assistance from an English-speaking chartered accountant through the Institute of Chartered Accountants in England and Wales (ICEAW) international directory.
Conclusion
Having journeyed through the intricacies of Portugal’s tax system, you’re now better equipped to engage with it confidently.
From progressive income taxes to the specifics of VAT and real estate levies, you possess the knowledge to navigate the fiscal waters of this beautiful country.
Remember, the key to managing your taxes in Portugal lies in understanding your obligations and planning accordingly. Here’s to mastering the art of Portuguese tax efficiency, ensuring you can enjoy everything Portugal has to offer without fiscal worries.
Até breve (See you soon)!
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