Are you considering relocating to Portugal or investing in this picturesque European nation? Understanding the tax system is crucial for making informed financial decisions.
In this comprehensive guide, we’ll delve into the intricacies of taxation in Portugal, providing you with essential insights to navigate the fiscal landscape.
Portugal, located on the Iberian Peninsula in Southwestern Europe, boasts a rich history and a vibrant culture. Bordered by the Atlantic Ocean to the west and south and Spain to the east and north, it’s a nation renowned for its stunning landscapes and welcoming atmosphere. With Lisbon as its capital, Portugal is divided into 18 districts, and its official language is Portuguese. The currency used is the euro (EUR).
Once a global maritime power during the 15th and 16th centuries, Portugal faced various challenges, including the devastating Lisbon earthquake of 1755, occupation during the Napoleonic Wars, and the independence of Brazil in 1822. However, it has since evolved into a diversified and service-based economy, becoming a member of the European Union (EU) in 1986 and adopting the euro in 2002.
As of 2022, Portugal’s projected gross domestic product (GDP) stood at 6.8%, with a projection of 1.5% for 2023.
Whether you’re a resident or non-resident in Portugal, understanding the taxation of personal income is essential. Residents are subject to taxation on their worldwide income at progressive rates, ranging from 14.5% to 48% for the year 2023. Non-residents, on the other hand, are only taxed on income sourced in Portugal, with a flat rate of 25% for 2023. If married or in a de facto marriage, couples have the option of joint taxation, effectively dividing their taxable income by two.
Special rates also apply to capital gains and investment income.
In 2023, an additional solidarity rate, ranging from 2.5% to 5%, applies to taxpayers with a taxable income exceeding EUR 80,000.
Portugal’s tax law, effective since January 2015, defines tax residency based on specific conditions:
Spending more than 183 days, consecutively or not, in Portugal during any 12-month period starting or ending in the fiscal year.
Maintaining a habitual residence in Portugal during any day of the specified 12-month period, regardless of spending less than 183 days in the country.
The tax reform introduced a partial residence concept, establishing a direct link between physical presence in Portugal and tax residency. Generally, taxpayers become residents as of their first day in Portugal and non-residents as of their last day, with some exceptions.
Social security contributions in Portugal are shared between employees and employers, with rates of 11% and 23.75%, respectively. These contributions cover family, pension, and unemployment benefits. Employers are also required to purchase insurance to cover occupational accidents, with the premium varying based on work and risk classification.
For self-employed individuals, the contribution rate is 21.4%, and a 10% contribution rate applies to employers if 80% or more of the fees earned by the self-employed come from services for the same company or person.
As of 2023, the Portuguese monthly minimum wage is EUR 760.
Portugal employs a value-added tax (VAT) system with three rates: the standard rate of 23% (22% in the Autonomous Region of Madeira; 16% in the Autonomous Region of the Azores), the intermediate rate of 13% (12% in Madeira; 9% in the Azores), and the reduced rate of 6% (5% in Madeira; 4% in the Azores).
Notably, Portugal does not impose net wealth or worth taxes. Inheritance and gift taxes apply, with property donations taxed at 0.8%, and free acquisitions of goods by individuals taxed at 10%.
Employment income in Portugal encompasses a wide range of payments, including salary, bonuses, commissions, tax reimbursements, pensions, allowances, and benefits in kind, among others. It is taxable at the employee level, covering both domestic and foreign travel allowances.
Benefits in kind provided by employers are subject to income tax at the employee level. Specific provisions govern taxation for employer-provided housing, company cars, and share plans.
Redundancy payments in Portugal are taxable on the portion exceeding the average remuneration of the last 12 months of employment, multiplied by the number of years worked. Exceptions apply when a new employment contract or service contract is concluded within 24 months of termination.
For managers and administrators, redundancy payments are fully taxable, extending to public sector managers and permanent establishment representatives.
Portugal grants a tax exemption of EUR 4,104 on pension income. The specific deduction rules regarding pension income changed in 2015, simplifying the process and providing a fixed deduction amount.
Income from commercial, industrial, agricultural activities, sole proprietorships, and intellectual rights may be taxed under simplified regimes or based on taxpayers’ accounts. Simplified regimes are applicable to those with turnover or gross business income below EUR 200,000 in the previous year.
Capital gains are generally subject to a flat rate of 28%, with exceptions for certain assets and conditions.
Dividends and interest are taxed at a flat rate of 28% in Portugal. However, taxpayers may opt for taxation at marginal rates ranging from 14.50% to 48%, plus the solidarity tax rate. A tax credit is available for taxes paid in foreign countries, and tax treaties may affect these rates.
In Portugal, rental income is generally taxed at a special rate of 28%. However, in certain situations, taxpayers have the option to include rental income in their total aggregated income. Specific provisions apply under particular conditions.
Understanding Portugal’s tax system is essential for residents and investors alike. By navigating these taxation waters with insight, you can make informed decisions about your financial future in this beautiful European destination.
In Portugal, Personal Income Tax (PIT) returns must be submitted by the 30th of June in the year following the one to which the income relates.
Joint Tax Returns for Married Couples
Married couples have the option to file a joint tax return, which combines their total income for assessment.
For taxpayers who choose not to file a joint tax return, it is necessary to report dependents in the annual income tax returns of both parents.
Disclosure of Foreign Bank Accounts
Individuals in Portugal are required to disclose their foreign bank accounts on their annual income tax returns.
Portugal employs a PAYE system, where taxes are deducted at source from income and subsequently adjusted through annual tax return filings. Any additional payments or refunds are determined based on the information provided in these returns.
For electronically submitted Portuguese income tax returns filed by the legal deadline (i.e., by June 30th of the year following the relevant income year), the tax authorities are expected to issue tax assessments by July 31st of the same year. If applicable, the respective tax dues must be settled by August 31st. If the tax authorities fail to issue the tax assessment by July 31st, the tax liability must be cleared within one month from the issuance of the assessment.
In 2015, significant changes were introduced regarding the taxation of income and gains from trusts in Portugal. Previously, Portuguese tax law did not explicitly address the taxation of trust operations, except for considerations related to the controlled foreign companies (CFC) legislation.
The new legislation focuses on ‘fiduciary structures,’ which includes trusts. Tax rules apply to the following scenarios:
Amounts received by individuals from the liquidation, revocation, or extinction of ‘fiduciary structures’ are treated as capital gains (Category G). Taxation rates range from 28% to 35%, with the higher rate applied if the structure is considered ‘domiciled’ in a blacklisted tax haven.
Distributions made by ‘fiduciary structures’ outside of the operations mentioned above are taxable as investment income (Category E) at a flat rate of 28% or 35% (if the trust is domiciled in a blacklisted jurisdiction), regardless of whether the recipients are settlors.
The 2022 State Budget introduced additional provisions, classifying the transfer of rights on trusts as a taxable capital gain, subject to a 35% rate for trusts domiciled in jurisdictions with favorable tax regimes.
The 2023 State Budget included a framework for the taxation of crypto assets in Portuguese tax legislation.
Key provisions:
Gains from the transfer of non-securities crypto assets are classified as capital gains (Category G) for tax purposes. A tax relief is applicable for crypto assets held for 365 days or more. No taxation applies to assets held for less than 365 days if consideration is also received in crypto assets.
Activities involving mining, on-chain transactions, or the validation of crypto asset transactions (e.g., staking) are considered commercial and industrial activities, taxed under Category B of income.
Income derived from investment in crypto assets is categorized as investment income (Category E). When received in crypto asset form, taxation occurs as capital gains (Category G) upon their transfer for consideration.
Termination of self-employment activities and the cessation of Portuguese residency are treated as transfers for consideration, subject to exit tax.
In conclusion, understanding the intricacies of individual taxation in Portugal is crucial for compliance and effective financial planning. By adhering to deadlines and navigating the evolving tax landscape, individuals can ensure they meet their obligations and optimize their financial strategies in this European jurisdiction.
If you’re a digital nomad looking for a visa in Portugal, read our guide on that.
