Income Tax Rate Portugal: A Complete Guide on Navigating Finances

It's important for expats and foreign business owners planning to invest in Portugal to understand the country's tax system. Staying updated with any changes to the tax system is crucial to avoid surprises during tax season. By following this comprehensive guide, you'll gain a solid understanding of Portugal's tax rates and be well-prepared to navigate the tax system.

Understanding Income Tax Rates in Portugal

One of the most important taxes in Portugal is personal income tax, which is levied on residents' worldwide income and the Portuguese-sourced income of non-residents. Personal Income Tax, also known as imposto sobre rendimento das pessoas singulares or IRS, must be submitted every year on the official tax form between 1 April and 30 June 2023.

The Portuguese IRS distinguishes between different income categories based on their sources, such as employment contracts, independent work, pensions, capital investments, and rental income. For calculating IRS, there are six categories of income:

• Category A - Employment income
• Category B - Business and professional income
• Category E - Capital income
• Category F - Real estate income
• Category G - Capital gains (capital gains and other asset increases)
• Category H - Pensions

Tax Residency in Portugal

Your resident status in Portugal is a critical factor in determining your tax liability, as the rates and rules differ depending on whether you are considered a resident or a non-resident for tax purposes.

A resident taxpayer is an individual who spends more than 183 days in Portugal in a calendar year or has a residence in Portugal that suggests an intention to remain in the country permanently. A Portuguese taxpayer would be subject to Portuguese tax.

On the other hand, a non-resident taxpayer is an individual who spends less than 183 days in Portugal in a calendar year and has no permanent residence in the country. Non-resident taxpayers are subject to a different rate from resident taxpayers.

For non-residents, the tax rate is a flat rate of 25 percent on income earned in Portugal. However, this rule has some exceptions, such as income from dividends or capital gains on the sale of immovable property.

Get a NIF

You must submit your tax form online through the Portuguese tax and customs authority website, and you will need your taxpayer identification number and password. Known in Portugal as the numero identificação fiscal or NIF, it is one of your most important documents in Portugal.  You need a NIF to register as a taxpayer in Portugal and sign contracts such as an employment agreement or lease.

We recommend getting an NIF before relocating or as soon as possible once you've moved to Portugal. After submitting your tax form, the tax authorities will review your declaration and send you a tax bill in the post. You will have 30 days to pay. The NIF also allows you to track your tax credits. The tax system is designed to provide tax credits for various expenses and activities, such as healthcare costs, education, and charitable donations.

Open a Portuguese bank account

In addition to our NIF service, we can assist you in opening a Portuguese bank account with one of the country's leading banks. We highly recommend opening a bank account in Portugal as soon as possible, as it will make accessing your funds much easier when you are in the country.

Additionally, you will need a Portuguese bank account / Portuguese IBAN when registering a start of activity with Finanças. Our bank account service is available from anywhere in the world, allowing you to start preparing for your move to Portugal before you even arrive.

Personal Income Tax for Individuals (IRS)

Portugal has a progressive income tax system, which means that the more you earn, the higher your tax rate will be. Taxes in Portugal range from 14.5 percent to 48 percent, with different rates applying depending on your income level. For instance, an individual with an income of up to €7,112 will pay a rate of 14.5 percent, while an individual with an income of over €80,882 will pay a rate of 48 percent.

For residents of Portugal, the tax system is based on the principle of worldwide income taxation. This means that if you are resident of Portugal, you will be required to pay tax on your income earned both in Portugal and abroad. To be considered a tax resident in Portugal, you must either spend more than 183 days in the country during a year or have a permanent home in Portugal. Non-residents, on the other hand, are only required to pay tax on income earned in Portugal.

It's important to note that Portugal has a double taxation treaty with many countries worldwide. If you are a citizen of one of these countries, you may be able to avoid double taxation on your income by taking advantage of the tax treaty. This means you would only pay tax in one country rather than being taxed twice on the same income.

If you plan on becoming a resident of Portugal or conducting business in the country, it's crucial to ensure that you comply with the country's tax laws. Failure to comply with the tax laws in Portugal can result in serious consequences, including fines and legal action.

Resident Income Tax Rates for 2024

Changes to the tax brackets and rates were introduced in 2022, which are now applicable in 2024. The following are the resident income tax rates for 2024:

It's worth noting that these rates only apply to income earned in Portugal. Income earned outside Portugal is subject to a different rate, and the taxpayer must disclose all income earned in their annual tax return.

Additional solidarity rate

In addition to income tax, there is an additional solidarity rate that applies to taxpayers with high incomes. This rate ranges from 2.5 percent to 5 percent, depending on the income level.

The solidarity rate applies to taxpayers with a taxable income above €80,000 for individual taxpayers and €160,000 for couples who file their taxes jointly. The rate starts at 2.5 percent for income between €80,000 and €250,000 and increases gradually to 5 percent for income above €250,000.

Withholding Tax Rate

What is withholding tax?

Withholding tax is a system in which a portion of an employee's income is withheld and sent to the government as a monthly payment for taxes owed. The amount withheld is based on factors such as the employee's income, physical condition, family situation, and location and is subject to progressive rates.

The Portuguese State Budget introduced a new withholding tax model to better align the monthly withholding tax with calculating the annual taxes owed. This new model will switch from a single rate to a marginal rate, increasing taxpayers' net monthly income.

The new model came into effect on 1 July 2023, harmonizing the IRS withholdings with the general table of annual IRS tax brackets. The new model replaced the current reduction of rates per number of dependents with an additional deduction per dependent of a fixed value.

Additionally, the government has committed to extending this change to business and professional income (category B).

Self-employed income tax

Self-employed individuals are required to register to start their activity with the local tax office. They can do this by going to a tax office or through the Finanças portal. We'd recommend that foreign residents contact an accountant or tax expert to help them with their tax return, as they can advise them on the Portuguese invoice system and whether or not they have to pay VAT (value-added tax) or are entitled to certain tax credits.

Portugal Corporate Income Tax Rate (IRC)

Portugal's Corporate Income Tax, known as the Imposto sobre o Rendimento das Pessoas Coletivas, or IRC, is a tax on the profits earned by companies operating in the country. The tax is levied on the worldwide income of Portuguese resident companies and the Portuguese-source income of non-resident companies. The standard IRC rate in Portugal is 21 percent, which is applied to the company's taxable profits.

However, companies can use certain exemptions and tax deductions to reduce taxable profits and lower corporate tax liability. For example, companies can deduct certain expenses, such as interest on loans, depreciation of fixed assets, and research and development expenses, from their taxable profits.

In addition, Portugal has a special tax regime for companies engaged in research and development activities. These companies can benefit from a reduced IRC rate of 17 percent on the income derived from their R&D activities. This is designed to encourage investment in R&D and innovation, and it is part of Portugal's broader strategy to promote economic growth and development.

Furthermore, Portugal has also established a participation exemption regime for dividends and capital gains received by Portuguese companies from subsidiaries and associated companies in Portugal or the European Union.

Capital Gains Tax

In Portugal, capital gains tax is a tax on the profit earned from selling certain assets, such as real estate, shares, and other financial instruments. The tax is levied on the difference between the purchase price and the sale price of the asset, and it is subject to progressive rates, which vary depending on the type of asset and the holding period.

For example, in the case of real estate, capital gains tax is calculated based on the difference between the purchase price and the sale price of the property, minus any expenses related to the sale, such as real estate agent fees, legal fees, and taxes. The tax rate ranges from 0 percent to 50 percent, depending on the holding period of the property. If the property has been held for less than two years, the rate is 50 percent. If the property has been held for over two years, the rate decreases to 28 percent.

Similarly, for shares and other financial instruments, capital gains tax is calculated based on the difference between the purchase and sale prices minus any expenses related to the sale. The rate ranges from 0 percent to 28 percent, depending on the holding period of the shares or financial instruments. If the shares or financial instruments have been held for less than one year, the rate is 28 percent. If they have been held for over a year, the rate decreases to 14 percent.

It is important to note that the capital gains tax is not separate in Portugal but rather part of the individual income tax (IRS) system. Therefore, the gains from the sale of assets are added to the individual's total taxable income, and the rate is determined based on the individual's overall income and deductions.

Rental Income

Rental income is subject to Portugal income tax rates. Individuals who earn income from property located in Portugal must declare this income on their tax return and pay personal income tax on it. The rate for rental income in Portugal varies depending on the amount of income earned.

For non-resident individuals, rental income is subject to a flat tax rate of 28 percent. However, for resident individuals, rental income is subject to the general rates that apply to all types of income. These rates vary from 14.5 percent to 48 percent, depending on the income earned.

It is important to note that certain expenses related to the rental property can be deducted from the income before calculating the taxable income. Expenses that count as tex deductions include property taxes, maintenance costs, and other expenses related to the property. However, keeping all documentation and receipts related to these expenses is essential to provide proof to the tax authorities.

Short-term rentals and designated urban rehabilitation areas

In Portugal, individuals who earn income from short-term rentals (less than 30 days) are subject to a higher rate. This tax rate can reach up to 35 percent, depending on the income earned. Additionally, individuals who earn income from short-term rentals must register with the local authorities and comply with certain regulations.

Portugal also offers a special tax regime for individuals earning income from properties in designated urban rehabilitation areas. Under this regime, individuals can benefit from a reduced rate of 5 percent, provided that they comply with certain conditions related to the rehabilitation of the property.

Rental income is subject to personal income tax rates in Portugal, and the rate varies depending on the type of income and the individual's residency status. It is essential to keep accurate records of all expenses related to the rental property to deduct them from the rental income before calculating the taxable income. Individuals who earn income from short-term rentals must comply with specific regulations and register with the local authorities. Finally, individuals earning income from properties in designated urban rehabilitation areas can benefit from a reduced tax rate.

Property Tax in Portugal

In Portugal, property tax is one of the most important sources of revenue for the government. This tax is levied on the value of a property and is paid annually. The amount of property tax is calculated based on the value of the property and the tax rate, which varies depending on the location and type of property. It is important to note that property tax is separate from income tax, and the two are not directly related. However, taxable profits from the sale of a property may be subject to personal income tax rates.

In addition to property tax, there are other taxes related to property ownership in Portugal. For example, property transfer tax is levied on the transfer of property ownership, and property wealth tax is a tax on the net value of an individual's property assets. These taxes are typically paid at different times throughout the Portuguese tax year, which runs from January 1st to December 31st. Overall, property taxes in Portugal are an important aspect of the country's tax system, and they play a significant role in generating revenue for the government.

Non-Habitual Tax Residency

Non-Habitual Tax Residency (NHR) is a program introduced in 2009 that is designed to attract foreign investors and individuals to become tax residents in Portugal. NHR is a special tax regime for individuals who become tax residents of Portugal and have not been residents in Portugal in the previous five years.

This program aims to offer a significant tax incentive to individuals who transfer their tax residence to Portugal. Under this program, eligible individuals can benefit from a flat-rate tax of 20 percent on most of their foreign-sourced income for a period of ten years. This program is particularly attractive to retirees, entrepreneurs, and individuals who work remotely.

The NHR ended for most applicants in January 2024. The Portuguese government's State Budget Proposal for 2024 included modifications that determined the end of the non-habitual resident regime.

It's possible for some individuals to apply up until March 31, 2025, but the eligibility requirements for this deadline are more stringent. If you're wondering how to apply for NHR in Portugal now, it's necessary to meet at least one of the following criteria to qualify:

• Having an employment contract signed/to be signed by December 31, 2023
• Having a lease agreement or other contract for the use/possession of property signed by October 10, 2023
• Having a contract to buy property in Portugal signed by October 10, 2023
• Having children enrolled or registered in a school in Portugal by October 10, 2023
• Having a residence permit or visa valid from December 31, 2023
• Having an application for a residence permit or visa initiated by December 31, 2023
• Being a member of the household of anyone who meets the above criteria

Anyone who qualifies under these conditions will have NHR status from the date they become a tax resident—whether in 2024 or the first quarter of 2025—until December 31, 2033.

Frequently Asked Questions about Tax in Portugal

Is Portugal a tax haven?

No, the OECD (Organisation for Economic Co-operation and Development) does not consider Portugal a tax haven. Portugal has a territorial tax system, meaning residents are taxed on their worldwide income, while non-residents are only taxed on their Portuguese-source income.

Do expats pay taxes in Portugal?

Yes, expat residents in Portugal must pay taxes on their worldwide income, including any income earned outside Portugal. The rates and rules are the same for both Portuguese and foreign taxpayers, with some exemptions and deductions available to residents. Non-residents who receive income in Portugal are also subject to Portuguese taxes.

Expats can take advantage of the Non-Habitual Resident scheme and enjoy certain tax benefits over a ten-year period. This scheme is open to individuals who have become tax residents of Portugal and have not been residents in Portugal in the previous five years.

What is the income tax for property owners of short-term rentals?

People who earn income from short-term rentals (less than 30 days) are subject to a higher rate. This tax rate can reach up to 35 percent, depending on the income earned. Additionally, property owners who earn income from short-term rentals must register with the local authorities and comply with certain regulations.