Understanding taxes is key to settling into life in Portugal for expats. Our tax guide for Americans offers a detailed look at Portugal’s tax system, giving you the insights and resources you need to manage your taxes effectively and make smart financial choices.
Residents vs. Non-Residents of Portugal
Portugal’s tax framework differentiates between tax residents and non-residents, each with their distinct set of rules and obligations.
- Tax Residents: Staying over 183 days in Portugal or having a permanent residence designates you as a tax resident. This means you’ll be taxed on your global income.
- Non-Residents: Those in Portugal for under 183 days without regular residency are classified as non-residents. They are taxed solely on the income they earn within Portugal.
Who needs to pay taxes in Portugal?
Tax residency in Portugal is established through certain conditions:
- Physical Presence: Anyone who stays in Portugal for more than 183 days within a calendar year, consecutive or otherwise, qualifies as a tax resident. The days need to be within the same tax year, but not necessarily in a row.
- Habitual Residence: Having a property in Portugal that serves as one’s usual place of living at any point during the tax year can also grant tax residency status, regardless of whether the individual is present for less than 183 days.
Types of income in Portugal
In Portugal, the tax system divides income into various types, and each category has its own set of tax regulations. This distinction is particularly important for both individuals and businesses, including expats who may not have a strong understanding of Portugal’s tax laws. Here’s a brief overview of each type of income and their respective tax treatments:
Employment Income
Employment income refers to salaries, wages, and other forms of compensation received for services rendered. This income is subject to progressive tax rates, which range from 14.5% to 48% based on the amount of taxable income.
Corporate Income
Corporate income pertains to the profits earned by companies. In Portugal, the standard corporate tax rate is 21%. However, small and medium-sized enterprises (SMEs) may benefit from a reduced rate on a portion of their taxable income.
Dividend Income
Dividend income is the distribution of a portion of a company’s earnings to its shareholders. For residents of Portugal, the government imposes a flat tax rate of 28% on dividends, although individuals can reduce this rate under certain tax treaties or choose to be subject to the progressive tax rates.
Interest Income
Interest income includes earnings from bank deposits, bonds, and other forms of lending. Similar to dividend income, Portugal taxes interest income at a flat rate of 28% for residents, but individuals can also opt to be subject to the progressive rates.
Rental Income
Rental income is derived from leasing property and is taxed at a flat rate of 28%. Taxpayers have the option to include this income in their general taxable income and have it taxed at progressive rates.
Capital Gains
Capital gains are the profits from the sale of assets such as real estate or stocks. For individuals, capital gains are taxed at a flat rate of 28%. However, individuals may exempt 50% of real estate capital gains if they reinvest the proceeds in purchasing, building, or improving a primary residence in Portugal.
Types of taxes in Portugal
The Portuguese tax framework encompasses a variety of taxes, each governed by its specific regulations and rates. It’s crucial for residents and those conducting business in Portugal to grasp these details.
Personal Income Tax
Income tax, known as “Imposto sobre o Rendimento das Pessoas Singulares” (IRS), is applicable to individuals’ income from various sources, including employment, self-employment, pensions, and investments.
The income tax system in Portugal operates on a progressive scale with different tax brackets and rates based on income levels.
Solidarity Contribution
The Additional Solidarity Contribution is a tax measure that Portugal applies, targeting higher income brackets to support social solidarity. This contribution is levied on top of regular income tax for individuals earning above a certain threshold, aiming to redistribute wealth and assist in funding social programs.
- €80,000 – €250,000 – 2,5%
- €250,000 and above – 5%
Value Added Tax (VAT)
The Value Added Tax (VAT) regulations in Portugal align with the guidelines established by the European Union (EU):
Reduced Rate (6%): The government applies this rate to specific goods and services considered essential or falling within categories that warrant a lower level of taxation.
Intermediate Rate (13%): Goods and services that do not qualify for the reduced rate but are not subject to the standard rate fall into this category. The government typically applies this rate of 13% to items such as certain food and beverages, agricultural supplies, and other specified goods and services.
Standard Rate (23%): The general VAT rate in Continental Portugal is 23%, and it applies to most goods and services. This includes a broad range of products and services that do not fall under the reduced or intermediate categories.
Wealth tax
Portugal doesn’t implement a conventional wealth tax; however, it incorporates a similar concept through the Adicional Imposto Municipal Sobre Imóveis (AIMI).
It is an annual property tax in Portugal that is levi on the combined fiscal value of all residential properties own by a taxpayer as of January 1st of each year worth above €600.000.
There are three levels of AIMI Tax in Portugal:
- 7% on properties valued between €600,000 and €1M
- 1,0% on properties valued between €1M and €2M
- 1,5% if the total properties value is over €2 million
Inheritance Tax
Portugal eliminated its inheritance tax back in 2004, but inheritances are still subject to a stamp duty (Imposto do Selo). This duty applies a uniform rate of 10% on inherited or gifted assets within Portugal.
Gift Tax
In Portugal, the tax on gifts mirrors the approach taken with inheritance tax. The government applies a stamp duty rate of 10% to gifts, except for those individuals who give gifts to immediate family members, as they are exempt. For gifts involving real estate, there’s an additional stamp duty of 0.8%.
Property Tax
The Municipal Property Tax (IMI)
An annual tax imposes on the ownership of real estate properties in Portugal. The tax is levied by local municipalities and is based on the taxable value of the property. The taxable value is determined by the Portuguese tax authority (AT). And takes into account factors such as the property’s location, type, size, and market value.
- Urban properties: The rates typically range from 0.3% to 0.45%
- Rural properties: Flat rate of 0.8%
The Municipal Property Transfer Tax (IMT)
Tax imposes on property transactions, such as the purchase or transfer of real estate in Portugal. The buyer of the property pays IMT, a one-time tax calculated based on the purchase price or the property’s market value, whichever is higher.
- Residential properties: the IMT rates range from 1% to 8%
- Commercial properties: tax can reach up to 6.5%
Crypto tax
Portugal offers a notably favorable tax environment for cryptocurrency. Investors benefit from an exemption from capital gains tax on cryptocurrencies held for over a year, appealing to those looking at long-term investments.
Corporate Tax
In Portugal, companies are subject to corporate tax, known as “Imposto sobre o Rendimento das Pessoas Coletivas” (IRC) on their profits at a standard rate of 21%.
However, small and medium-sized enterprises (SMEs) may be eligible for a reduced rate applicable to a portion of their taxable income, offering potential tax relief based on specific criteria.
It is important to note that this rate competes relatively within the European Union. However, Portugal also offers certain tax incentives and provisions that can impact the effective tax rate for companies.
Self-employment Tax
Self-employed individuals’ income falls under Category B, which covers business and professional income. We can broadly divide the taxation approach for self-employed persons into two main regimes: the simplified regime and organized accounting.
Simplified Regime: This regime is applicable to self-employed individuals whose annual gross income does not exceed €200,000. Under this scheme, taxation is simplified by applying a fixed percentage to the gross income, deeming only a portion of it as taxable. Specifically, 75% of income from services and 15% of income from sales are considered taxable.
Organized Accounting: This regime is for self-employed individuals who either earn above the threshold for the simplified regime or choose this method voluntarily. Taxation under organized accounting is based on the actual profits, which requires detailed bookkeeping and financial statements.
Filing your annual tax return in Portugal
Are you an expat filing your Portuguese annual tax return for the first time? Navigating the tax system in Portugal can indeed be a complex task, particularly for those not well-versed in local regulations. It’s essential to grasp both the timing and the correct procedures for filing income tax returns to ensure compliance with Portuguese tax laws.
When to submit a tax declaration in Portugal?
The schedule for submitting tax returns in Portugal is precisely established:
Tax Year: In Portugal, the tax year aligns with the calendar year, extending from January 1st to December 31st.
Submitting Period: Individuals must submit their yearly income tax returns within the timeframe from April 1st to June 30th of the year following the tax year in question. For instance, individuals must submit tax returns for the year 2022 from April 1st to June 30th, 2023.
How to fill a tax return in Portugal?
Submitting a tax return in Portugal requires a few key actions:
- Ensure you possess a Número de Identificação Fiscal (NIF), your Portuguese tax identification number.
- Compile all required documentation, such as statements of income, evidence of expenditures, and any other pertinent financial details.
- The preferred method for tax filing is via the Portal das Finanças, the online platform of the Portuguese tax authority.
- If you’re not acquainted with the procedure or lack proficiency in Portuguese, it could be wise to consult a tax expert or accountant for assistance.
Penalties for delayed or inaccurate filings
Not submitting a tax return by the due date or submitting one with inaccuracies can lead to fines:
- Failing to meet the June 30th filing deadline could incur a penalty ranging from €25 to €3,750, based on the extent of the delay and specific conditions.
- A tax return filed with mistakes or lacking information may also attract a fine, the size of which varies depending on the severity of the error and its classification as either careless or intentional deception.
Social security in Portugal
The social security system in Portugal is a cornerstone of the country’s welfare and protection mechanisms, extending its benefits to all residents, including expatriates. This comprehensive system encompasses a wide range of services and benefits aimed at supporting individuals throughout different stages of life and in various circumstances.
Social Security Benefits for Expats in Portugal
Healthcare: Expatriates contributing to the social security system gain access to the national health service (Serviço Nacional de Saúde, SNS), which provides a broad spectrum of healthcare services at reduced costs or free of charge. This includes doctor’s visits, hospitalization, maternity care, and prescription medications.
Pensions: Foreign residents who work and contribute to the social security system in Portugal are entitled to a pension upon reaching the retirement age. The amount of the pension depends on the number of years of contributions and the average earnings over a person’s career.
Unemployment Benefits: If expatriates lose their job after being employed and making contributions to the social security system, they are eligible for unemployment benefits. The benefits aim to provide financial support while the individual seeks new employment.
Family Benefits: The system offers various family allowances to support children, including child benefits, pre-natal grants, and parental leave payments. These benefits help to alleviate the financial burden on families and ensure the well-being of children.
Sickness and Maternity Benefits: Expatriates contributing to social security are eligible for sickness benefits if they are unable to work due to illness. Maternity and paternity benefits are also available, providing financial support to parents during the initial period following the birth or adoption of a child.
Disability Benefits: Individuals who are unable to work due to a disability may qualify for disability benefits. These benefits aim to provide financial support and help with rehabilitation and integration into the workforce, if possible.
Social Security Contributions
Social security contributions, known as “Contribuições para a Segurança Social,” are mandatory payments made by employees and employers to fund social security benefits in Portugal.
Employees in Portugal contribute to social security at a rate of 11% of their gross salary and is automatically deducted from their monthly wages.
Employers also have a responsibility to contribute to social security on behalf of their employees. The employer’s contribution rate is 23.75% of the employee’s gross salary.
Self-Employed expatriates in Portugal must also contribute to social security. Generally, the social security contribution rate for self-employed individuals is set at 21.4% of their taxable income.
The tax treaty between the USA and Portugal
The tax treaty between the United States and Portugal serves as a critical framework to avoid double taxation, ensuring that individuals with tax obligations in both nations do not pay taxes on the same income twice. This agreement encompasses various types of income, establishing a clear set of rules and mechanisms that facilitate equitable tax application for those affected.
Under this treaty, provisions determine which country holds the taxing rights over specific types of income, including but not limited to employment income, business profits, dividends, interest, and royalties.
Moreover, the treaty establishes a procedure for addressing and resolving any disputes or instances of double taxation that might arise, ensuring fair treatment of taxpayers.
Totalization Agreement between the USA and Portugal
The Totalization Agreement between the United States and Portugal plays a pivotal role in addressing social security coverage and benefit entitlements for individuals who have employment histories in both nations.
This agreement is instrumental for expatriates, as it clarifies the applicability of each country’s social security system to workers, effectively preventing the scenario where expats could be subject to social security contributions in both countries simultaneously.
Tax forms for US expats
For U.S. expats living in Portugal here’s a breakdown focusing on the U.S. side of things, as U.S. citizens and green card holders are required to file U.S. taxes, reporting their worldwide income, even when living abroad.
Form 1040: All U.S. citizens and residents must file Form 1040, the U.S. individual income tax return, if their income is above the IRS-defined filing threshold. This form is where you report your worldwide income, including any income earned in Portugal.
Form 1116: Foreign Tax Credit (FTC) – To avoid double taxation on the same income taxed by both the U.S. and Portugal, you can claim the Foreign Tax Credit on Form 1116. This allows you to offset taxes paid to Portugal against your U.S. tax liability on the same income.
Form 2555: Foreign Earned Income Exclusion (FEIE) – If you meet certain requirements regarding your tax home and physical presence or bona fide residence in Portugal, you may use Form 2555 to claim the Foreign Earned Income Exclusion. This exclusion allows you to exclude a certain amount of your foreign earned income from U.S. taxation.
FBAR (FinCEN Form 114): If you have foreign financial accounts in Portugal (or any other foreign country) and the total value of your accounts exceeded $10,000 at any time during the calendar year, you must file the Report of Foreign Bank and Financial Accounts (FBAR) electronically with the Financial Crimes Enforcement Network (FinCEN).
Form 8938: Statement of Specified Foreign Financial Assets (FATCA) – Some taxpayers may also need to file Form 8938, which is part of the Foreign Account Tax Compliance Act (FATCA) requirements. This form is required if you have certain foreign financial assets exceeding the applicable reporting threshold.
Portugal tax forms for US expats
For American expatriates living in Portugal, becoming familiar with the Portuguese tax system is essential, especially if you earn income in Portugal or establish tax residency there. Here’s an overview of key Portuguese tax forms you might need to be aware of:
Modelo 3
This is the primary income tax return form for individuals in Portugal (IRS – Imposto sobre o Rendimento das Pessoas Singulares). Taxpayers use it to report various types of income, including employment income, business and professional income, investment income, and rental income, among others. Tax residents in Portugal must report their worldwide income on this form.
Anexo G: This annex to Modelo 3 is specifically for reporting capital gains from the sale of property or other investments. If you sell property or realize capital gains from investments, you’ll need to complete this form.
Anexo J: This annex is used to report foreign income by tax residents of Portugal. It includes income from employment, pensions, rental income, interest, and dividends from abroad. This form is crucial for U.S. expatriates who may have income sources from the U.S. or other countries.
Anexo H: This part of Modelo 3 is for claiming tax deductions, including health expenses, education expenses, general family expenses, and costs related to properties and rentals. It’s essential for maximizing your allowable deductions under Portuguese tax law.
Anexo SS: This annex is related to social security contributions for self-employed individuals. If you’re working as a freelancer or have your own business in Portugal, you’ll likely need to fill out this form to report your social security status and contributions.
Modelo 22
This is the corporate tax return form used by companies operating in Portugal. If you own a business in Portugal, you will need to file Modelo 22 annually to report your company’s income and calculate corporate tax due.
Why you should work with us?
At Portugal Residency Advisors, we understand that navigating the complexities of residency and taxation requires a strategic and comprehensive approach. In our commitment to providing our clients with the highest standards of service, we cooperate with top-tier tax firms, ensuring a synergistic collaboration that elevates your financial experience.
Frequently Asked Questions About Tax Guide for Americans in Portugal
Do American expats need to file taxes in Portugal?
Yes, if you are a tax resident in Portugal (meaning you spend more than 183 days in Portugal in a year or have a primary residence there), you must file taxes on your worldwide income in Portugal. Non-residents only need to file taxes on their Portuguese-sourced income.
Do I still need to file US taxes if I live in Portugal?
Yes, US citizens and green card holders must file US taxes annually, reporting their global income, regardless of where they live. However, provisions like the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC) can help prevent double taxation.
What is the Foreign Earned Income Exclusion (FEIE)?
The FEIE allows qualifying US expats to exclude a portion of their foreign earned income from US taxation. For 2023, the exclusion amount is up to $112,000 per person, subject to annual adjustments for inflation.
How does the Foreign Tax Credit (FTC) work?
The FTC allows US expats to credit most of the income taxes they pay in Portugal against their US tax liability on the same income, potentially reducing or eliminating the US taxes owed.
Do I need to report my foreign bank accounts to the US government?
Yes, if you have financial accounts in Portugal and the total value of all your foreign accounts exceeds $10,000 at any point during the calendar year, you must file an FBAR (Foreign Bank Account Report) with the US Treasury.
Can I work as a self-employed individual in Portugal?
Yes, you can work as a self-employed individual. You’ll be taxed under Category B for business and professional income. Depending on your income, you may qualify for the simplified regime or may need to opt for organized accounting. You’ll also be required to make social security contributions.
