Tax Considerations for Expats Moving To Portugal

As a first time expat in Portugal, one of the biggest shockers you’ll encounter will be the tax system (along with language, culture, and cost of living). Therefore, you will need financial advice from professionals who are conversant with living and investing in Portugal. These professionals will help you structure your income, taxes and other activities in a way that helps you save big time.

One thing you will realize pretty quickly is that the Portuguese tax system is one of the most generous in the EU, which is why this country is rapidly gaining popularity as the expat and retirement destination. For starters, despite the significant increase in the recent past, the Portuguese personal income tax rate is below the average of fellow EU countries.

The Portuguese Tax System

A normal tax year follows the calendar and ends on 31st December. An expat moving into Portugal is expected to register as a tax payer before embarking on any paying activity. The registration form, fiche de iscricao, should be duly filled and submitted to the local tax office.

All tax residents in Portugal, including expats, are expected to file annual returns. The deadline for the returns depends on the type of income.

As an employee, the returns should be filed by 15th March the following year

For all other sources of income, the returns should be filed by 30th April the following year

Portugal runs on pay-as-you-earn (PAYE) income tax type. This means that it is the responsibility of the employer to submit the tax on your behalf. This applies to residents. For non-residents, they are subject to the nonresident tax, which is 25% of all Portuguese earnings.

Family taxes are even simpler to compute since one family (husband, wife and dependent children) submits a single return. When it comes to paying taxes, dependants are defined as:

Children up to 18 years of age

Anyone between 18 and 24 years of age whose income is below the set Portuguese minimum wage

Tax Residence

In order to qualify for habitual resident tax system, you need to

Have stayed in the country for up to 183 calendar days

Own residential property by 31st of December even if you haven’t stayed the required 183 calendar days

Have made it clear that your intentions are to be a resident

As a resident, you will be taxed on all your gains and incomes (even outside Portugal). But as a non-resident, you will only be taxed on your Portuguese income. You can also be considered a non-habitual resident under special circumstances. However, if you do want to be employed in Portugal, you must have a resident card.

Tax Allowances and Rates

Since the employer is responsible for paying taxes on your behalf, you will need to submit your tax payer identification number. This number is also used to deduct social security contributions. The amount of tax you pay will depend on your income and whether or not you are a resident. Under the NHR Program, expats are taxed a flat rate of 20% (regardless of the income amount), while the nonresident taxes are at a 25% flat rate.

The progressive resident tax rates are as follows; 

Taxable income in € (000)        The Rate (%)
7   14.5
7 – 20   28.5
20 – 40   37
40 – 80    45
80 and above    48

For married residents, the combined income is divided by 2 and the normal progressive rates are applicable on each half. Depending on the year, you may be required to pay additional surtax and solidarity surtax. The income is also subject to social security deductions of 11%.

Portuguese Tax Penalties

It is important to note that if you do not correctly and timely file your taxes, you will incur heavy penalties. Filing your returns later than required attracts a €200 penalty which can go up to €2,500. These late payment penalties are 10% of the amount owed, although it is capped at €55,000. Remember that these penalties also attract interest, although they are dependent on personal circumstances.

Get Advice on Portuguese Taxes

As obvious as it may sound, it is important to get professional advice on the Portuguese tax system. As simple as it may sound, the system can be complex. Additionally, if you are advised by someone who is conversant with the system, you will know where you can save some cash, get credits and other benefits.

For example, non habitual residents benefit from a range of tax benefits. They are not required to pay inheritance tax, wealth or gift tax. In some cases, the income is tax exempt. Pensioners also enjoy beneficial tax options on their pension and income from life insurance products. 

Depending on your circumstances, you can also be a beneficiary of generous tax exemptions. It depends on how well you are aware of the tax system and how you can benefit from it.

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