Gerard Associates Ltd. Financial Advisory Services does not provide individual tax advice, and nothing contained in this briefing should be construed as such. We make every effort to ensure the accuracy of the information but cannot be held responsible for any liability arising.
It is essential that all clients seek tax advice specific to their own personal circumstances with the relevant tax professional of the jurisdiction(s) in which you are liable to tax.
This has been prepared based on our understanding of current legislation and tax practice as at the date above. However, these are subject to change, and may result in income tax consequences different from those detailed below.
We cannot accept responsibility for its interpretation or any future changes to law.
Introduction
The Portuguese tax system is made up of a series of state and local taxes levied principally on income, property ownership and expenditure. The Directorate General for Taxation (DGCI) controls the tax regime in Portugal.
Tax Year
1st January to 31st December.
Assessment Basis
Portuguese residents are taxed through IRS (Personal Income Tax) on their worldwide income on a self assessment basis. The income of married taxpayers is that of the entire family unit and, as a consequence, married couples must submit a joint tax return. However, spouses of individuals residing in Portugal for fewer than 183 days in the calendar year and who are able to prove that their main economic activities are not linked to Portugal may file a tax return in Portugal disclosing the tax resident individual’s income and their part of the couple’s income.
Income is split into 6 categories: employment income, business and professional income, investment income (including interest and royalties), rental income, capital gains and pensions. Defined tax deductible expenses are subtracted from gross income for each category to arrive at the net taxable income for the category. The net incomes for each category are then added together in order to arrive at a total net income. An apportionment/splitting procedure applies to married couples by dividing the family income by two before the applicable marginal tax rate is determined.
Total taxable income is taxed at progressive rates varying from 11.08% to 45.88% (2010) in order to determine a final tax liability, multiplied by two in respect of married couples. For the years 2011-2013 the rates will increase to 11.5% and 46.5%. Deductions are available for donations to charity (within limits) and alimony that has been determined by a court decision.
Tax credits are also available, depending upon family structure, for health expenses, school fees, life and health insurance premiums and mortgage interest (where applicable) and subject to certain conditions and limits. There are other credits available, for example for retirement contributions, acquisition of new equipment for utilisation of renewable energy, and donations.
Income Tax
Employment income is deemed to be category A income and Portuguese employers withhold tax at source at progressive rates depending on income amount and family status. Any tax withheld is considered to be a payment on account against the final total tax liability.
Income from self employment is category B income and is taxed either under a ‘simplified regime’ or based on the taxpayer’s actual accounts. If a taxpayer has earnings below a certain ceiling, they are liable to taxation according to the ‘simplified regime’ whereby 20% of income from sales of products or 70% of income arising from other business and professional services is taxed with a minimum taxable amount due. No expenses deductions are permitted under the simplified regime. If the simplified regime is not applicable then net profits or gains made by an individual are assessed in accordance with the same rules that apply to company tax assessment. Earnings from self-employment or independent activities in Portugal are subject to tax, whether or not an individual is tax resident in Portugal, and may be withheld at source.
Taxation of Investment Income
Investment income is classed as category E income. Dividends are liable to a final tax of 21.5%. Alternatively, the tax resident individual may elect to include such income as part of their taxable income and be taxed at marginal rates. In this case the taxable amount is reduced by the amount of tax withheld. Income from bonds, debt certificates and interest from bank deposits in Portugal are taxed at 21.5% or an individual can elect to include such income as part of taxable income and be taxed at their highest marginal rate. Other forms of income may be subject to withholding tax at 16.55%, but are ultimately taxed at the highest marginal rate and any tax withheld is treated as a payment on account of the final income tax due.
From 2010 all foreign bank account holdings are required to be disclosed on income tax returns. An anomaly in Portuguese tax law now means that the proceeds of insurance investment contracts written by non-resident companies are now taxed at a lower rate of 20% compared to 21.5% for domestic companies. This anomaly is likely to be rectified in the near future and the tax rates equalised.
Premium Taxes
For life insurance contracts with an underwritten risk a parafiscal tax of 2% is deducted by the insurer and paid to the National Institute of Medical Emergency (INEM). For other forms of investment-linked life insurance, the premium tax does not apply.
Tax on Property Rental Income
Income from renting properties is subject to income tax as category F and is added to other categories of income after deducting all maintenance and repair expenses, as well as the Municipal Property Tax paid for the year, provided these are properly supported by documentation. Tax may be withheld at source depending upon the tax status of the rent payer and is treated as a payment on account of the final income tax due. Rental income earned by non-residents for tax purposes in Portugal is taxed at a final rate of 16.5%.
Stamp Duty/Property Transfer Tax
Since Inheritance and Gift tax was abolished in 2004, Stamp Duty at a general rate of 10% has applied to transfers for non-consideration by gift or by death. However, this tax is not applicable on transfers to spouses, descendents and ascendants. Stamp Duty also exists for the transfer of documents over several applicable transactions and rates vary according to the transaction
Inheritance and Gift Tax
Inheritance and gift tax was abolished in 2004.
Wealth Taxes
There are no wealth taxes in Portugal.
Capital Gains Tax
Capital gains are classed as category G income and, in July 2010 a new law made all capital gains subject to a flat rate tax of 20%. Tax residents are granted a €500 per annum tax free limit. Tax is charged on 50% of the amount of capital gains from the sale by tax resident individuals of immovable property located in Portugal, or of intellectual or industrial property. Rates vary from 11.08% and 45.88%. The gain may be wholly or partially exempt if the property being sold is the taxpayer’s primary residence and the sale proceeds, reduced by any associated loans, are reinvested in the acquisition of further residential property in Portugal or another EEA country.
Regional and Municipal Taxes
The ‘Imposto Municipal sobre Imóveis’ (IMI) is a municipal property tax charged on the registered value of real estate. The rates are 0.8% for rural property, range from 0.2% to 0.4% for urban property and 0.4% to 0.7% for property not updated in accordance with the new property tax rules.
Property Taxes
There are no Property Taxes in Portugal, other than the municipal IMI tax described above.
Transfer Tax
The ‘Imposto Municipal sobre Transmissões onerosas de Imóveis’ (IMT) is the tax payable on the transfer of property. For purchases by individuals of urban buildings intended exclusively for permanent residential use, IMT is levied at progressive rates up to 6%, depending on the value of the property. A rate of 8% is levied if the purchaser is located in a country with a tax regime that is more favorable than the Portuguese regime. The tax is payable by the purchaser. The rate applicable to transfer of nonresidential urban properties is 6.5%. The tax applicable to rural properties is 5%. The duty to pay IMT falls on the party acquiring the property.
Sales Tax
Sales tax is generally added to the sale price of goods at a standard rate of 20%. Some sales are exempt and other goods are subject to lower rates of 12% and 5%.
Social Security Contributions
Social security contributions are paid by all individuals who work in Portugal, unless a certificate of coverage is obtained confirming mandatory contributions in another country. The contribution rate varies according to an individual’s employment status. The current rate for general employees is 11% of gross salary, with members of statutory boards of companies paying 10%. Self employed individuals are liable to 25.4% or 32% on income varying from one and a half times the higher national minimum salary and twelve times that salary, depending upon the contribution scheme they choose. Rates are applied to an individual’s actual monthly salary with the above mentioned exception.
Significant changes to the social security system will in principle be introduced in 2011 with the entrance into force of the new Social Security Code.
Taxation of expatriates living in Portugal
The basis of taxation in Portugal depends on an individual’s residence status, with Portuguese residents being taxed on their worldwide income and non-residents on their Portuguese sourced income only. An individual is determined to be resident if:
• they remain in Portugal for more than 183 days during a calendar year, or
• regardless of the number of days spent in the country, an individual maintains a residence which pertains to be the individual’s habitual residence as at 31 December.
All members of a family unit are considered resident if either the husband or the wife is resident for tax purposes in Portugal. However, this condition does not apply if one of the spouses remains less than 183 days in Portugal and proves that their main economic activities are not linked with the Portuguese territory, as described above. Should this be the case, this individual is considered non-tax resident in Portugal while the other spouse is considered a Portuguese tax resident. Portugal has negotiated over 50 double taxation treaties.
Taxation of ‘Non-residents’ living in Portugal
The basis for taxation in Portugal is determined by an individual’s residential status. Non-residents are liable to Portuguese tax on Portuguese source income, and non-residents receiving employment income from a Portuguese employer are subject to a withholding tax of 21.5%.
Tax residents of other EU/EEA countries earning employment income, self-employed income and/or pension income from a Portuguese source representing 90% of their worldwide income may elect to be taxed in Portugal under the rules applicable to
resident taxpayers.
A new decree-law has been published approving the Tax Code of Investment where capital gains earned by non-residents are generally fully taxable at a flat rate of 25%, with an exception with respect to capital gains on the disposal of shares, which are exempt in certain cases. Only 50% of the net taxable income is subject to capital gains tax if reinvestment relief applies.
Rental income earned by non-residents is taxed at a flat rate of 16.5% and there are no deductions available.
Non-residents who reside in a country with a low tax regime may be subject to higher rates of tax in respect of property transfers and may be subject to tax on deemed income from property.
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