There are a few things in life that are certain, and one of them is taxes. We've explained the tax system and how to navigate it for those thinking about living in Portugal. Though not wildly different from the UK system, there are a few things to bear in mind so you don't get caught out.
Well known for great weather, food and culture, a lesser known fact about living in Portugal is that the tax system is favourable to expat residents and employees. However, before moving to Portugal, you'll still need to be aware of how the tax system operates and how it'll impact the decisions you make about residency.
The first stage in understanding the Portuguese tax system is to know if you'll be a resident for tax purposes. Fortunately, the rules for tax residency are quite straightforward. The main criteria applied is whether or not you've been living in Portugal for more than 183 days per year. If you have, you're a tax resident. If you haven't, you're not. It really can be that simple.
Other factors that impact your tax residency include:
- Whether or not you were permanently living in a property in Portugal on December 31st of that tax year.
- If the head of your household is 'tax resident' in Portugal.
- If you work for the Portuguese state, irrespective of whether you're living in Portugal to fulfil your duties.
Portuguese tax residents get taxed on personal income from worldwide earnings and must submit a self-assessment every year to calculate how much they owe. It's worth noting that married couples are required to file a joint tax return. Income tax in Portugal applies to the following categories of income:
- Income earned from employment
- Income from your business or self-employment
- Investment income (including interest)
- Income from rental properties
- Capital gains
- Pension income
As with the UK, there are defined expenses that you may deduct from your income to give a net taxable income for the year. Acceptable expenses vary by type of income, so it's probably wise to engage someone familiar with the Portuguese tax system to guide you through any potential missteps.
Unlike the UK there is no 'tax-free allowance' in Portugal, and most people could expect to pay a tax-rate anywhere between 14.5% (under €7,091) to 48% (over €80,640) on income earned. Fortunately, UK citizens benefit from the 'Non-Habitual Resident' program. This scheme means you’re taxed a flat rate of 20% on all income earned in Portugal while income earned in the UK will be exempt from taxation.
Remember that it’s only your UK income that is exempt from taxation in Portugal under this agreement... you'll need to pay tax on income generated here the same as always.
Property Transfer Tax
If you're moving to Portugal with the aim of living there permanently, then it's likely you’re going to be purchasing a property.
The acquisition of property in Portugal is subject to the ‘Imposto Municipal sobre Transmissões Onerosas de Imóveis’ (Property Transfer Tax), more commonly referred to as 'IMT'. A tax due on the transfer of property rights, IMT is based on the declared value of sale. This works on a sliding scale, up to a maximum of 8%, and you can pay at any local tax office. You'll need to pay the tax before completing the purchase, as the IMT certificate will need to be provided to the Notary who signs the deed confirming sale of the property.
In addition to IMT, you'll also need to pay Stamp Duty (‘Imposto de Selo’) when buying property in Portugal. Calculated on the same basis as IMT, Stamp Duty amounts to 0.8% of the property value.
Municipal Property Tax
The Portuguese equivalent to Council Tax, the Municipal Property Tax, or'Imposto de Municipal sobre Imoveis', commonly referred to as IMI, is payable by the owners of residential property in Portugal. Raised and spent by local authorities (Town Halls) this tax applies whether the owner is living in their property in Portugal or not. |As with IMT and Stamp Duty, they determine the amount payable based on the declared value of the property at the time of assessment.
Tax Penalties in Portugal
Like all economically developed countries Portugal does not look favourably on any attempts to avoid paying tax - whether accidental or otherwise - and failure to submit your tax return and payments on time can prove costly. Forgetting to file your tax return on time will result in penalties getting applied to your tax account. Currently, these range from between €200 to €2,500. Late payment penalties range from 10% of the total owed, to 200% of the total owed; up to a maximum of €55,000. So it's best to pop it on the calendar well in advance.
The tax no one (really) wants to discuss. Also, probably, the most important to consider if you're living in Portugal as an expat, especially if you're an asset rich retiree. Fortunately, Portugal has one of the most favourable inheritance tax systems in Europe - set at just 10% and only applying to your Portuguese assets. It's worth remembering that keeping your UK residency alongside Portuguese residency means you'll still have to pay UK inheritance tax. Moreover, unlike Portugal, the UK taxes your estate based on worldwide assets.
Some important points to remember:
- Expats living in Portugal have to register as a taxpayer before receiving any form of income, this is done by completing the 'fiche de inscrição' form and submitting it to the local tax office.
- Once you've submitted your form, you'll get given your tax number, or ‘Número de Identificação Fiscal' , which you'll need before you can complete any significant financial transaction.
- You'll need to take ID with you when registering for tax: your identity or residency card, driver's licence or passport will be required to prove your identity.
- You'll need an address so you can confirm that you're living in a property in Portugal, or you'll need proof of your non-Portuguese address.
- The tax year in Portugal runs alongside the calendar year, so from 1 January to 31 December.
- Portugal has both state and local taxes which, similar to the UK, are based on income, property ownership and property transfer.
- Income tax as we know it in the UK (PAYE) doesn't exist and even paid employees must submit tax returns by March 15th each year for paper returns, or the end of April for online tax returns.
If you're considering whether living in a property in Portugal is right for you, there are a multitude of decisions to be made and important considerations to think on. Not least among these considerations is the tax system, if only because a mistake here on your part could result in a financial penalty that could end your dream before it has begun.