Do Expats Pay Taxes in Portugal?

A chance of making a mistake because of misunderstanding or ignorance of certain nuances in taxation can cost you a fortune. Following the outbreak of COVID-19 in Portugal, the Portuguese government has adopted several new tax relief and deadline shifting initiatives. Stay well and safe, and step out of your homes again equipped with more knowledge of taxes in Portugal.

The financial cost of the pandemic is escalating. Forecasts suggest the world faces a U- or V-shaped, or even a W-shaped recession. Your industry – from commercial real estate to aviation – has changed a lot and may suffer more write-downs and upheavals because of the COVID-19 aftereffects.

You are planning to challenge your status quo. You intend to invest and apply for residency by investment. 

• You’ve heard that 130,000 foreigners have got the Golden Visas and moved to Portugal since February, and they call it the most peaceful and welcoming European country for expats.
• You’ve read that Portugal is a secure and fast-developing real estate market, and there is every reason to invest in it after the pandemic ends.
• It’s a common knowledge that Portugal has the jurisdiction aimed at supporting business development and wellbeing of residents.
• They say it’s easy to incorporate a company in Portugal remotely.
• It’s no secret that the cost of living in Portugal is considered the lowest in Western Europe.
• Property prices in Portugal are very attractive. 
• The good news is that the tax rates are going to remain reasonably low (except for the personal income tax).  
• Moreover, some fees are not collectible (unless they are merely integrated into the taxable profit, like, for example, the Capital Gains tax).

You think you’d rather start with little steps carefully planned. Slowly, to avoid a bumpy ride. But then it might be too late, so you’d better hurry up. There is a risk of finding out soon that Lisbon and Porto can disappear from the list of places where you can get the Portuguese residency by investment. Such restrictions, however,  will not be imposed until at least 2021. Experts recommend you should act fast.

Oh, well.  You wish you could rely on common sense and sound advice of those seasoned tax professionals who are in the know.  Our experts are ready to explain and assist in your prompt application for the Golden Visa, as well as in your further personal or business matters in Portugal, to help you avoid the unnecessary pitfalls. Please send us an e-mail request, or contact us by any other preferred channel of communication.

Which questions should you discuss with our experts in 2020?

Is it true what social media write about the Golden Visa program suspension?

The offices of SEF (Servico de Estrangeiros e Fronteiras, Office for Foreigners and Frontiers) remain open, though they work remotely during the lockdown and relief period. The actual situation is as follows:

• The Portuguese government has stipulated temporary procedural amendments, but only and exclusively for purely and practical reasons, only until 30 June, and only for the appointments arranged before March
• As the state of emergency has been lifted already, there is a commitment for faster processing of the previous, current and future residency applications
• There are no further delays, restrictions or refusals regarding previous Golden visa applications
• No major changes have been introduced by the government into the Golden Visa program
• The previous proposals for new changes have been now suspended and are likely to be abandoned for good or at least for a couple of years
• For more specific information regarding the Golden visa applications, please refer to our experts.

Why is Portugal called the country with the lowest taxes in Western Europe, while the income tax rate is 48% plus surcharges?

• The 48% tax is only charged if the declared income exceeds 80.000 EUR
• The 5% surcharge is payable only if the declared income is at least 250.000 EUR
• Taxation in Portugal is quite mild, socially responsible. Its principles are similar to taxation in Sweden, Finland, Denmark or Japan: residents with higher incomes pay higher taxes
• Each investment project should be discussed as a specific case. Your Portuguese taxes will depend on the value, property, other features.
• If you need assistance in calculating your Portuguese taxes or look for a legal way to reduce your fiscal burden, it is worth contacting our professional experts.

What will happen to personal taxes in Portugal in 2020?

This is perhaps the most important question to ask. In Portugal, the local attitude towards tax evaders is quite dismissive, and deliberate non-payment of tax dues is commonly considered immoral and held with disdain and scorn. When the Fiscal Service finds out the facts of illegal practice of outright tax evasion, the consequences involve penalties and can be disastrous. But with your social values and commitment to fair play practices, you will have no reason to worry.

Before you read further, we hope you understand that unless you discuss your specific questions with our experts, we cannot accept any responsibility for whatever conclusions, risks, and any negative consequences may arise from your interpretations and use of the hereby generic information presented in this post and other articles published on this web site. Our broad yet simplified outline of the taxes in Portugal should not be used as straightforward guidance for any practical implication.

May we officially assure you that our experts’ professional tax advice is always relevant, comprehensive, and invaluable when given on your request concerning YOUR PARTICULAR situation and YOUR SPECIFIC concerns taken into account. 

Many things are not obvious at first sight. However, they can be extremely important and make a great difference in situations when the Portuguese taxes and fees are subject to inevitable payments, as well as when you can legally save money.

Let us just offer a few examples showing that taxation is a sophisticated category and should be considered on a case-by-case basis:

• The Portuguese taxes and fees charged in 2020 are slightly lower in the Azores or Madeira compared to the continental area. This is for two reasons: the distance from the main business and administrative zone, and the status of special economic zones.
• The Personal Income-tax (IRS) is levied on a progressive scale. For some creative jobs, even if such people are not officially employed, there may be some tax relief, but such cases should be analyzed specifically.
• Individual entrepreneurs pay the mandatory fees either online, or at the local tax offices. You can legally save money if your income is approximately the same as the average wage in the country. The annual income which is less than the minimum filing amount is tax-free.
• Pensioners who are citizens or permanent residents of Portugal are legally exempt from tax on income received by them from foreign pension funds. The permanent residence needs to be officially confirmed.
• There is a big difference between residents and non-residents. Portuguese taxes of residents are computed from the income earned or received in any part of the world. Taxes of non-residents are calculated with consideration of international DTA – Double Taxation Agreements. DTAs are concluded with 78 countries that are Portugal’s major trading partners and jurisdictions, whose citizens most often hold temporary or permanent residence permits.
• The IRS rates are as follows (for more details, please refer to our experts):
• up to 7,000 EUR – 14.5%.
• from 7,000 EUR to 20,000 EUR – 28.5%.
• from 20,000 EUR to 40,000 EUR – 37%.
• from 40,000 EUR to 80,000 EUR – 45%.
• above 80,000 EUR– 28.5%.

Our analysis shows that if the average monthly salary earned in the first quarter of 2020 is 1188 EUR, and the expected total yearly wage is 14256 EUR, the IRS rate will be at 28.5%. The lowest threshold IRS rate is higher than in most other countries but lower than in Denmark, the Netherlands, and Sweden. The highest rate is less than in Finland, Japan, Austria, and many other countries (18 jurisdictions in total).

What is taxable, what can be deductible?

Solidarity surcharge

Solidarity surcharge is an additional fee payable at different rates, depending on the taxable income:

• 3.5 % – if the taxable income is above the minimum (up to 80,000 EUR)
• 2.5% if the income is between 80,000 and 250,000 EUR
• 5% if the income is 250,000 EUR or more.

It was introduced in 2013 following example of several EU countries. Its main purpose is to provide additional funding for major unifying projects.

The taxable income

The taxable income includes both earned and unearned income:

• employment income (salaries and wages)
• business income (revenues)
• professional income (royalties)
• investment returns
• rental income
• net asset value growth
• pensions.

Expats must register as taxpayers before they can start earning money in Portugal.

Tax deadlines revised in Portugal

The Portuguese tax year starts on 1 January and ends on 31 December, with returns to be filed the following spring. Usually the maximum possible term for filing a tax return depends on the method used: March 31 (filing a paper tax return) or April 30 (filing taxes online). If these deadlines are missed one cannot be entitled to the tax exemption, and some penalties are charged.

This year, all IRS statements for 2019 incomes are due between 01 April and 30 June 2020, to be submitted electronically.

The IRS reimbursement deadline, ends annually on July 31^st, but this year it shifted to August 31, 2020.

Tax liabilities in Portugal in 2020 allow for deductions (e.g. education or health expenses) and personal tax credits. The tax credits are refundable depending on your marital status and income.

The new deadlines for completing your tax returns in 2020 are as follows: 15 March – 15 April for employment and pension income. 16 April – 16 May for all other types of income.

As the Portuguese government adopts new provisions regarding taxes, we advise you to seek professional advice from our financial experts.

Property acquisition and transfer tax (IMT, Imposto Municipal sobre a Transmissao Onerosa de Imoveis)

This transfer of title tax is payable by the property purchaser. The purchaser/taxpayer can be a legal entity or an individual, though it is traditionally considered “personal”. The tax is levied once; the liability arises at the time of signing the transaction. Its rate and value depend on two aspects: geographical location (mainland Portugal or islands) and the type / intended purpose of the property (as the main domicile, or for periodic/temporary residence – options 1 and 2). This tax is paid before signing the final deed of sale.

The current IMT rates (in % and the deductible amount):

• Mainland, Option 1. 0% to 8% / from 1848.13 EUR to 11959.32 EUR.
• Mainland, Option 2. From 1% to 8% / from 0.00 EUR to 11035.25 EUR.
• Madeira, Azores, Option 1. 2% to 8% / from 2310.18 EUR to 14949.15 EUR.
• Madeira, Azores, Option 2. From 1% to 8% / from 0.00 EUR to 13794.06 EUR.

The method of calculation is as follows. The tax is assessed as the corresponding percentage of the transaction value. The deductible amount expressed in EUR is deducted from that property value.

Certain purchases can benefit from tax exemptions. Please refer to tax experts.

Municipal Tax (IMI, Imposto Municipal de Imoveis)

The IMI ta paid annually.The basis for its calculation is the ownership of real estate. The rate varies from 0.3% to 0.8% and depends on the region where the property is located. The minimum rates (0.3%) are is Albufeira and Alcoutim, the maximum rate (0.45%) is in Vila Real de St.Antonio. It should be noted that in 2017 the Government introduced an additional discount, the amount of which depends on the number of children in the family: 20 / 40 / 70 EUR for 1, 2, 3, or more children.

This article does not in any way represent a comprehensive statement of the issues discussed. Some IMI tax exemptions are available in certain cases. Therefore, please ask for the advice of our experts.

Stamp Duty (IS, Imposto do selo / Stamp Duty)

This tax is charged only once, for example at the time of the purchase/sale of real estate. The rate is flat and does not change – 0.8% of the transaction amount.

When buying a property, it is advisable to seek legal advice from a lawyer. Legal fees are covered separately from the Stamp tax.

Transportation taxes (ISV – Imposto Sobre Veiculos, IUC – Imposto Unico de Circulacao) that are of two kinds:

• The ISV tax is paid once after the vehicle has been registered and the license plates have been received. The rate depends on the volume of the engine and its environmental safety (i.e. the amount of CO2 emitted).
• The IUC tax is annual and depends on the features of the vehicle (model, age, engine capacity, fuel type). For special vehicles – trucks and buses – the operating time, unladen weight, and the number of wheels are additionally taken into account.

NHR (Non-Habitual Resident) status

NHR is a special regime of tax residence introduced since 2009. If you comply with several qualifying requirements, you may get quite a significant fiscal relief. The NHR ruling applies (subject to certain conditions) to pension income, employment, income from self-employment, ownership of industrial and/or intellectual property, rent, investment, capital gains.

The most important news is the introduction of the flat rate of personal income tax (10%) on the foreign-source pension income of new residents who move to Portugal after 31 March 2020.

NHRs registered before 31 March 2020, or tax residents applying for the NHR tax regime (until the application deadline of 31 March 2021), can enjoy tax exemption (under certain conditions) for their foreign-source pension income.

Portugal offers NHRs the full exemption from certain types of fees, and a tax credit is available for the tax paid abroad.

After you become a resident in Portugal, your worldwide income and certain gains become liable for Portuguese taxation. New residents can enjoy some advantages.

If you are a retiree or going to retire, you should also ask for advice and discover a solution for your safer retirement.

The information on this site is not comprehensive and is not a one-size-fit-for-all recommendation. It is provided here only for your general awareness of the variety of taxes to be payable or exempt depending on each particular case. For reliable solutions please contact our experts.

What will happen to business taxes in Portugal in 2020?

Portugal is neither an offshore, nor even a mid-shore country, and the current corporate tax rates cannot be called too low. But it does not mean that it is unprofitable to do business in this country. Tax payments are a matter of social values and responsibility, which we have already mentioned above: everyone is a prudent taxpayer in Portugal, and everyone takes it for granted that there are reasons for paying taxes.  If someone is not satisfied with this philosophy, it is better for such businesses to seek another jurisdiction, or to develop business remotely, enjoying other advantages of life in Portugal.

Corporate Income Tax (IRC, Imposto sobre o Rendimento das Pessoas Colectivas)

It is charged only from corporate resident entities, applies to the worldwide income generated by companies resident in mainland Portugal. The capital gain is considered in the taxable base and is not taxed separately in Portugal. Profits of branches and other subsidiary offices in Portugal are also integrated into IRC.

IRC is computed as follows:

• The standard flat rate is 21%. (for SMEs the rate is 17%).
• The municipal surtax is 1,5%.
• The state (national) surtax – at the progressive rates:
• 0% of the gross income up to 1.5 mln EUR,
• 3% of 6 mln EUR extra earned (i.e. the total income of up to 7.5 mln.EUR),
• 5% applicable in case the income is above 7.5 mln EUR,
• 9% in case the income exceeds 35 mln EUR.

Thus the maximum corporate tax charges will be 21%+1.5%+9%=31.5%

Business Tax Calendar normally coincides with the calendar year. However, tax resident entities in Portugal, as well as permanent establishments (“PE”) of non-resident entities may choose a different tax year.

IRC must be normally paid within 5 months of the end of the accounting period.

Resident companies have an important privilege: they can ask the Ministry of Finance for a grace period (for valid plausible reasons).

Advance payments of the corporate tax and the surtax are payable in installments based on the corresponding previous year tax amounts in July, September, and until 15 December.

VAT returns have to be completed and submitted periodically (monthly or quarterly) depending on the turnover.

A Summary Declaration referring to the intra-EU transfers of goods and services that must be submitted before the 20th day of the following month, or the next quarter.

The deadline for completing Portuguese corporate tax returns is between 16 April and 16 May each year.

This year, because of the COVID-19 situation, Portugal announced the extension of the deadline for the corporate income tax return and some other duties and reports: the postponement of the deadline regarding the first installment of the special payment on account (due in March) to 30 June 2020; the postponement of the deadline for filing the corporate income tax return (due 31 May) to 31 July 2020; as well as the postponement of VAT returns submissions and payments, some other measures.

 Please note that there are restrictions on tax deductions. According to the current Interest Limitation rules, companies may only deduct net financing expenses up to the higher of the following limits:

• EUR 3 million, or
• 30% of the taxpayer’s earnings before depreciation, amortization, taxes, and net financing expenses, i.e., “tax EBITDA” adjusted for tax purposes.

Capital gains tax. As we have already said, it is not charged as a separate tax in Portugal, or, more precisely and correctly, it is integrated with Corporation Tax (IRC).

Operating losses. According to the current legislation, they can be deferred (maximum – for 5 years) only when they do not exceed 3/4 of the taxable income. In some cases, this requires the specific approval by the Minister of Finance. However, reverse transfer is not possible.

Dividends. If they are paid out and received by resident companies, they are exempt from taxation. The only condition prescribed in the law refers to the transparent status (the beneficiary should not hold it) and possession of at least 10% of the payer’s capital (term – 1 year).

VAT (IVA / VAT, Imposto sobre o Valor Acrescentado / Value Added Tax)

Like all other taxes in Portugal in 2020, the VAT is levied on the supply of goods and services, their import (in case the country of origin is not a member of the EU), international services rendered in Portugal, and the purchase of goods from other EU members.

There are 3 rates of the VAT: standard (23%), intermediate (13%), and reduced (6%).

A VAT refund scheme is available (only for local supplies, if they are made by non-resident companies). However, the refund is a quite complicated procedure, so we recommend that you seek additional advice from our experts.

As we have mentioned above, there are two options for VAT tax periods: 1 month (annual turnover over 650.ooo EUR) and 1 quarter (if the amount is less than 650.000 EUR).

Monthly returns are submitted before the next month, quarterly ones are submitted by the 15th date of the corresponding month.

The suspension or extension of eligible deadlines has been announced this year because of the COVID-19 pandemic. The details are available if you forward your request to our experts.

Tax on passive income (withholding tax)

These traditionally include dividends, interest, royalties, income from intermediation services, or capital investment income and rental income. There is no special tax on such income in Portugal. Fiscal authorities calculate such levies according to corporate tax rules (for individuals – like IRS). The amount of deductions depends on the payer’s status and type of respective income.

Rates:

• Dividends, interest for the non-resident company – 25%.
• Dividends, interest for non-residents (if their jurisdiction is low-tax) – 35%.
• Royalties in favor of non-resident – 25%.
• Technical services – 25%.

Full exemption from payments is allowed if it is stipulated by EU directives and bilateral agreements that allow avoiding double taxation.

What remains unchanged?

They say, changes is the new normal. In this section, we will talk about the so-called special cases. They are often neglected or misinterpreted, and as a result a person volens nolens becomes a tax evader. We will not be able to describe all the points that are worthy of your attention in the short article, so once again we recommend you to refer to our experts.

Social Security. The employer is charged 23.75% and the employee is charged 11%.

Stamp duty. We’ve already written about it. In addition to real estate transactions, it is still payable for the certification of certain agreements, documents, and acts, as well as transactions that are not subject to VAT. The rates depend on the types of transactions.

The annual duty is not levied.

Currency control. Is not practiced.

Transfer pricing. It is based on the OECD (Organization for Economic Cooperation and Development) requirements and norms. Let us clarify that companies are obliged to prepare and maintain documentation justifying the pricing policy.

Thin capitalization refers to the ratio of debt to equity. Formally, the relevant rules have been abolished (01.01.2013). But they have been replaced by restrictions on tax deductions. Since 2013, the interest rate has been consistently reduced, from 70% in 2013 to 30% in 2017 (still in force today).

Controlled foreign companies. The profit of a non-resident entity that has not been distributed may be attributed to interested resident participants provided that its “home” jurisdiction is low-tax. In this case, taxes are to be paid in proportion to the contributions.

Disclosure of information. It is mandatory in case of company restructuring or transactions that may result in significant tax benefits.

Reporting. First of all, please note that reports (annual) are mandatory. The document is approved by the General Meeting of Shareholders; the deadline is 3 months from the end of the financial year.

The publication of information is optional.

Reporting is submitted by the chief accountant. Format – online, deadline – until the end of June.

Requires mandatory compliance with the Portuguese standards.

Mandatory reports: the balance sheet, the income and revenues statement, and reference to relevant information.

The information is kept in the public domain (i.e. it is not a commercial secret).

Audit. Formally, it is optional (for limited liability entities). But if 2 out of 3 indicators are exceeded within two years, the appointment of a registered auditor (Revisor Oficial de Contas) is necessary.

Minimum requirements:

• Revenues: 3 million EUR.
• Net assets: EUR 1.4 million.
• Number of employees: 50.

Annual Return. This report is an annual reference about the current state of the company, including basic information about the business structure, details of the company’s directors, shareholders and registered office address, capital, stock value, etc. In Portugal, there are no legal requirements for mandatory filing.

AIMI. The AIMI tax is the “extended” IMI ( the Addition to the Municipal Property Tax (Adicional ao Imposto Municipal de Imóveis or AIMI). It is levied on real estate assets.  Please note that IMI and AIMI are the two different taxes payable separately.

There are 3 AIMI levels, depending on the value of the property(s) in your legal possession:

• from 0.6 to 1 mln EUR  your AIMI  is 0.7%,
• from 1 mln to 2 mln EUR your AIMI is 1%,
• from 2 mln EUR and above your AIMI is 1.5%.

This year many things are different from normal, and many figures and rulings may become outdated tomorrow.  The information provided is a very broad overview of the current taxation policy in Portugal, but we advise you to seek professional advice from a financial expert regarding your specific situation and the latest developments in taxation in Portugal. Please refer you further questions to our experts.

Will there be any obstacles for the Golden Visa applicants in Portugal in 2020?

• There is no suspension of the program
• Portugal needs investment and reinvestment more than ever
• There was no closure of services in Portugal during the lockdown
• There are no restrictions for non-EU applicants, wherever they come from
• The backlog of previous residency by investment applications has been quickly reduced, the pandemic lessons were learned, more efficient procedures are in place
• Some relaxation measures have been adopted (for example, referring to the opening of bank accounts).
• Specific questions need to be discussed with experts on a case-by-case basis.

The Portuguese Golden Visa application Algorithm remains basically the same:

• The Golden Visa application needs to be submitted by a non-EU citizen investing in Portugal
• the applicants need to explain the best possible reason why they need the Portuguese residency by investment
• the  Golden Visa applicants need to prove they hold no criminal record in the country of their domicile
• there needs to be proof that the applicant pays all taxes and fees involved in the transactions
• the applicant needs to confirm the intention to visit Portugal at least once during the residency application process (to file the biometrics), even though all the paperwork can be done and submitted online
• the applicant needs to obtain the NIF (tax payer’s number), open a bank account and transfer funds for investment
• initially, the applicant is granted the Residence card for only one year (the visa waiver to enter, live and work in Portugal plus Visa-free travel within the Schengen member states)
• in one year after the receipt of the residency permit, it should be renewed for two years, and then for the next two years
• you need to spend in Portugal at least 7 days in year one, and at least 14 days during each consecutive period of two years
• family reunification is allowed to spouse or partner, dependent children, and dependent parents
• Permanent Residency or Economic citizenship applications can be submitted after 5 years of the Golden Visa

In our previous posts we have explained different aspects of the Golden Visa application in Portugal. Please refer to our experts for more details.

Disclaimer

This article is the product of our sincere effort to outline the most comprehensive picture of the current situation in taxation in Portugal in 2020.

But lets us offer once again the two important remarks.

You’ve Heard This Before, Right?You should be aware of the risks of running online into fake ‘gurus’ who profit by circulating malicious sensations, rumors and gossip based on outdated online resources, misconceptions, and ignorance. This year there are even more speculations about Portuguese taxes than usual. That is why please be very cautious when seeking advice.

Even though our resources are very reliable, this article is just for your reference and should not be treated as guidance for your independent decisions that may give rise to tax charges or benefits. We are not liable in whatever manner or to a whatever degree for any negative consequences that may result from your personal judgments. For a well-rounded and profoundly balanced consideration, please contact our experts.