Tax guide for Americans in Portugal

Residents vs. non-residents of Portugal

The Portuguese tax system distinguishes between tax residents and non-residents, who are subject to different tax rules and obligations.

• Tax residents: Individuals who spend more than 183 days in Portugal during a tax year, or who are ordinarily resident in Portugal, are considered tax residents.
  They are taxed on their worldwide income.
• Non-residents: Those who spend less than 183 days in Portugal and do not have a habitual residence in the country are classified as non-residents.
  Non-residents are only taxed on their Portuguese source income.

Who can be considered a resident of Portugal

The determination of tax residence in Portugal is based on specific criteria:

• Physical presence: If an individual spends more than 183 days in Portugal in a calendar year, whether consecutive or not, they are considered to be a tax resident. These days do not have to be consecutive but must fall within the same tax year.
• Habitual residence: Owning a property in Portugal that is deemed to be the individual's habitual residence at any time during the tax year may also confer tax residence status. This applies even if the individual spends less than 183 days in the country.
• Other considerations: Special circumstances, such as being a member of a ship or aircraft crew operating from Portugal or performing duties for the Portuguese State abroad, may also result in being considered a tax resident.

Types of taxes in Portugal

Portugal's tax system includes several types of taxes, each with its own rules and rates. Understanding these is essential for anyone living or doing business in Portugal.

Personal income tax rates

In Portugal, personal income tax is levied on various types of income, including earned income, business income, and investment income.

The country has a progressive system of tax rates, which means that the rate increases as the level of income increases.

The tax rates for individuals are as follows:

These rates apply to residents who are taxed on their worldwide income. Non-residents, on the other hand, are usually taxed at a flat rate on their Portuguese source income.

Additional solidarity contribution

In addition to the standard income tax rates, Portugal levies an additional solidarity tax on higher income levels. This rate is applied to part of the income above certain thresholds, as follows:

This solidarity surcharge is intended to increase the contribution of those in higher income brackets to government revenue.

Value Added Tax

Value Added Tax, commonly known as VAT (Imposto Sobre o Valor Acrescentado in Portuguese), is a consumption tax that applies to most goods and services in Portugal. The standard VAT rate is 23%, but reduced rates apply to certain goods and services. VAT rates in Portugal are categorized as follows:

• Standard rate (23%): This rate applies to most goods and services.
• Medium rate (13%): This applies to certain foodstuffs, some agricultural products, and some services such as restaurant services.
• Reduced rate (6%): This lower rate applies to some essential goods such as certain foodstuffs, books, pharmaceutical products, and hotel accommodation.

The VAT system in Portugal is similar to that in other European Union countries, where the tax is added at each stage of the supply chain and is ultimately borne by the final consumer. Businesses act as tax collectors, ensuring that VAT is collected and remitted to the tax authorities.

Wealth tax

Portugal does not have a traditional wealth tax, but it does have a version of it in the form of the Adicional Imposto Municipal Sobre Imóveis (AIMI).

This tax applies to individuals and companies that own properties with a combined taxable value exceeding certain thresholds.

The AIMI rates are as follows:

• 0.7%: For individuals with properties valued between €600,000 and €1 million.
• 1%: For properties valued over €1 million.
• 1.5%: For properties valued over €2 million.

For companies, a flat rate of 0.4% is applied regardless of the value of the property. It's important to note that this tax is in addition to the regular municipal property tax (IMI).

Inheritance tax

Portugal abolished inheritance tax in 2004. However, there is a stamp duty (Imposto do Selo) on inheritances. The stamp duty is levied at a flat rate of 10% on inherited or gifted Portuguese assets.

Immediate family members, such as spouses, children, and parents, are exempt from this tax when inheriting property.

Gift tax

Gift tax in Portugal is similar to inheritance tax. A stamp duty of 10% applies to gifts, with an exemption for immediate family members.

If the gift is of immovable property, an additional 0.8% stamp duty is charged.

Property tax

Property tax in Portugal is known as Imposto Municipal Sobre Imóveis (IMI). It is an annual tax levied on property ownership and is calculated based on the property's rateable value.

Rates vary according to the location and type of property:

• Urban properties: The rate varies from 0.3% to 0.45%.
• Rural properties: A flat rate of 0.8% is applied.

Newly acquired properties may be exempt from IMI for up to three years, depending on the location and value of the property.

In addition, properties used for rental purposes or as primary residences may qualify for reduced rates or exemptions under certain conditions.

Crypto tax

Portugal's approach to cryptocurrency taxation is particularly favorable.

Cryptocurrencies held for more than one year are exempt from capital gains tax, making it an attractive option for long-term investors.

However, assets sold within a year are subject to a tax rate of 28%. In addition, Portugal does not levy VAT on cryptocurrency transactions, further enhancing its attractiveness in the crypto market.

The Non-Habitual Resident (NHR) regime in Portugal may also offer tax exemptions on foreign income, which may include cryptocurrency gains.

Self-employment & business taxes for expats

Expatriates in Portugal who are self-employed or run a business have specific tax obligations. Self-employed persons are taxed on their income under category B (business and professional income) of the Portuguese tax system.
The main points are:

• Simplified regime: For those with an annual income of less than €200,000, taxation is based on a fixed percentage of their gross income, with 75% of services and 15% of sales being taxable.
• Organized accounting: For higher earners or those who opt for it, taxation is based on actual profits.
• Social Security contributions: Self-employed expats are also required to pay social security contributions, generally at a rate of 21.4% of their taxable income.
• Corporation tax: Companies in Portugal pay corporation tax on their profits at a standard rate of 21%. Small and medium-sized companies may qualify for a reduced rate on part of their taxable income.

Tax rate in Portugal compared to the USA

Filing a tax return in Portugal

Navigating the tax system in Portugal can be a complex process, especially for expats unfamiliar with local regulations.

Understanding when and how to file income tax returns, as well as the consequences of late or incorrect filing, is crucial to ensuring compliance and avoiding potential penalties.

When to file a tax return in Portugal

The time frame for filing tax returns in Portugal is clearly defined:

• The tax year: The Portuguese tax year is based on the calendar year and runs from 1 January to 31 December.
• Filing period: Taxpayers must file their annual income tax returns between 1 April and 30 June of the year following the tax year. For example, for the 2022 tax year, returns should be filed between 1 April and 30 June 2023.

How to file a tax return in Portugal

Filing a tax return in Portugal involves several steps:

1. Before filing a tax return, make sure you have a Número de Identificação Fiscal (NIF), which is your tax identification number in Portugal.
2. Gather all the necessary documents, including income statements, proof of expenses, and any other relevant financial information.
3. The most common way to file taxes is through the Portuguese tax authority's online portal, Portal das Finanças. The portal provides filing instructions and forms.
4. For those unfamiliar with the process or the Portuguese language, it may be beneficial to seek the assistance of a tax professional or accountant.

Penalties for late or incorrect submissions

Failure to file a tax return on time or providing incorrect information may result in penalties:

• If you miss the 30 June deadline, you may be subject to a fine of between €25 and €3,750, depending on the delay and the circumstances.
• Filing a tax return with errors or incomplete information can also result in a fine. The amount depends on the nature of the error and whether it is considered negligent or fraudulent.
• In addition to fines, interest may be charged on unpaid tax from the original due date.

Types of income in Portugal

The Portuguese tax system categorizes income into different types, each of which is subject to specific tax rules.

Understanding these categories is crucial for individuals and businesses operating in Portugal, especially for expats who may be unfamiliar with the local tax system.

Employment income

Employment income in Portugal includes all income received from work as an employee.

This includes:

• Salaries and wages: Regular payments made by an employer to an employee.
• Bonuses and commissions: Additional earnings based on performance or sales.
• Allowances: Payments made for specific purposes, such as travel or housing allowances.
• Benefits in kind: Benefits in kind provided by an employer, such as a company car or health insurance.

Corporate income

Business income refers to income from self-employment or business activities.

This includes income from:

• Sole proprietorships: Income from businesses owned and operated by an individual.
• Freelance and independent contract work: Income from providing services as a freelancer or contractor.
• Partnerships: Income distributed to partners in a business.

Individuals with business income can choose to be taxed under the simplified regime or based on actual profits.

The simplified regime applies a fixed percentage to gross income, while the actual profits method involves detailed accounting.

Dividend income

Dividend income in Portugal refers to income distributed to shareholders from the profits of a company.
Key aspects include:

• Taxation rate: Dividend income is generally taxed at a flat rate of 28%. However, taxpayers may elect to include this income in their total taxable income, subject to progressive rates.
• Foreign dividends: Dividends received from foreign sources are also subject to taxation in Portugal, with possible relief under double taxation treaties.
• Exemptions and deductions: Certain exemptions and deductions may apply, in particular under the Non-Habitual Resident (NHR) regime, which offers favorable tax treatment for ten years.

Interest income

Interest income in Portugal is a key component of the tax system, particularly for individuals with investments in savings accounts, bonds, or other interest-bearing financial instruments.

Key points include:

• Taxation: Interest income is generally taxed at a flat rate of 28%. However, taxpayers have the option of aggregating this income with their other income and being taxed at the progressive rates applicable to their total income.
• Foreign interest: Foreign interest is also subject to taxation in Portugal. Taxpayers may benefit from double taxation treaties between Portugal and the country of origin of the income.
• Savings and investments: Interest earned on savings accounts, government bonds, and corporate bonds falls under this category.

Rental income

Rental income is another important category in the Portuguese tax system, especially for expats who own property in Portugal and rent it out.

This includes:

• Tax rate: Rental income is usually taxed at a flat rate of 28%. However, taxpayers can choose to include this income in their total taxable income, which is subject to progressive tax rates.
• Deductions: Certain expenses related to the property, such as maintenance, repairs, and property management fees, can be deducted from rental income for tax purposes.
• Non-resident landlords: Non-residents receiving rental income from Portuguese properties are also subject to the same tax treatment.

Capital gains

Capital gains tax in Portugal applies to gains from the sale of assets such as property, shares, and bonds.

The main aspects are:

• Tax rate: Capital gains are taxed at a flat rate of 28% for individuals. However, only 50% of gains from the sale of real estate are taxable.
• Exemptions: There are exemptions, notably for the sale of a primary residence if the proceeds are reinvested in another primary residence in Portugal or the EU.
• Non-residents: Non-residents are also subject to capital gains tax on the sale of assets located in Portugal, with some exceptions based on tax treaties.

Social security in Portugal

The social security system in Portugal plays a crucial role in providing welfare and protection to its residents, including expatriates. This system is comprehensive and covers various aspects such as healthcare, pensions, and unemployment benefits.

Expatriate benefits in Portugal

Expats living and working in Portugal are generally required to contribute to the Portuguese social security system, which in turn entitles them to various benefits:

• Healthcare: Access to the public health system, which includes medical consultations, treatment, and hospital care.
• Pension: Entitlement to a state pension at retirement age, provided that the required contribution period has been completed.
• Unemployment benefits: Financial support during periods of involuntary unemployment.
• Family benefits: Allowances for families with children, including maternity and paternity benefits.
• Sickness and disability benefits: Support in the event of temporary inability to work due to illness or disability.

Expats need to register with the Social Security system and understand their contributions to ensure they are eligible for these benefits.

Portugal Pension system

The pension system in Portugal is a key component of the social security framework, providing income to individuals upon retire to Portugal.

The pension system is primarily contributory, meaning that individuals must pay social security contributions during their working lives to be eligible for a pension.

The standard retirement age in Portugal is currently 66 years and 6 months but is subject to change as life expectancy increases.

Tax deductions for expats in Portugal

Expatriates living in Portugal have access to various tax deductions that can significantly reduce their taxable income.

These deductions are particularly useful for managing the financial implications of working and investing in a foreign country.

Employment costs

Expats working in Portugal can take advantage of several deductions related to professional expenses:

• Professional expenses: A standard deduction of 35% of earned income, capped at €4,104, is automatically applied to cover professional expenses such as work-related travel, uniforms, and other professional necessities.
• Social Security contributions: Portuguese social security contributions are deductible from taxable income.
• Specific deductions: Expenses related to professional training, trade union dues, and certain job-related insurances may also be deductible, subject to certain conditions and limits.

These deductions are intended to reduce the tax burden on earned income, making it more financially viable for expats to work in Portugal.

Deductions from rental income

For expats who own property in Portugal and receive rental income, several deductions are allowed:

• Costs incurred in maintaining and repairing the property can be deducted from rental income.
• Local property taxes (IMI) paid on the rented property are deductible.
• The annual depreciation of the property and its fixtures and fittings is deductible.
• If a property management company is used, these fees are deductible.
• Insurance premiums on the property are also deductible.
• Interest paid on loans for the purchase, construction, or improvement of the property is deductible, although principal repayments are not.

The tax treaty between the USA and Portugal

The tax treaty between the United States and Portugal is designed to prevent double taxation for individuals who may be subject to tax in both countries.

The treaty covers different types of income and provides mechanisms to ensure that taxes are applied fairly.

Tax treaty advantage

The treaty allows US expats in Portugal (and vice versa) to avoid being taxed twice on the same income. Tax credits, exemptions, or reduced rates are applied according to the treaty provisions.

The treaty clearly defines which country has the right to tax different types of income, such as employment income, business profits, dividends, interest, and royalties.

The treaty provides a framework for resolving any disputes or double taxation issues that may arise, ensuring fair treatment of taxpayers.

Totalisation agreement between the USA and Portugal

The Totalisation Agreement between the US and Portugal covers social security coverage and benefits for people who work or have worked in both countries.

This agreement is crucial for expats as it helps to:

• The agreement specifies which country's social security system applies to expats working in either country, thus preventing double social security taxation.
• For expats who have social security credits in both countries, the treaty allows these credits to be combined to qualify for retirement, disability, or survivor benefits.
• The treaty ensures that expats and their families can receive social security benefits while living in either country.

Most popular tax forms for US expats

For American expatriates living in Portugal, compliance with US tax laws is crucial. Understanding and using the correct tax forms is an important part of this process.

Some of the most commonly used tax forms for US expats include:

1. Form 1040: The standard form for filing individual income tax returns in the US. US citizens and expatriates must use this form to report their worldwide income.
2. Form 2555 (Foreign Earned Income Exclusion): This form is used to claim the Foreign Earned Income Exclusion, which allows expats to exclude a certain amount of their foreign-earned income from their US taxable income.
3. Form 1116 (Foreign Tax Credit): For those paying income tax in Portugal, this form helps avoid double taxation by claiming a credit for taxes paid to a foreign government.
4. FBAR (Foreign Bank and Financial Accounts Report, FinCEN Form 114): Required if the total value of the expatriate's foreign financial accounts exceeds $10,000 at any time during the calendar year.
5. Form 8938 (Statement of Specified Foreign Financial Assets): This form is required if the total value of specified foreign financial assets exceeds certain thresholds.

Portugal tax forms for US expats

In addition to US tax forms, American expatriates in Portugal need to be familiar with Portuguese tax forms, especially if they earn income in Portugal or become tax residents. The main Portuguese tax forms include:

1. Modelo 3: The primary form used for filing individual income tax returns in Portugal. This form covers various types of income, including employment, business, and investment income.
2. Anexo G and G1: These annexes to Modelo 3 are used to report capital gains from the sale of property, shares, and other capital assets.
3. Anexo H: This annex is used to claim deductions and tax benefits on Modelo 3, such as health expenses, education expenses and general household expenses.
4. Anexo J: For declaring foreign income, including pensions, rental income, interest and dividends, which is particularly relevant for expats under the Non-Habitual Resident (NHR) regime.