Taxes in Portugal: A Guide for Expats

Living abroad can be an exciting experience, filled with new opportunities and the promise of a different lifestyle. Among the many considerations you must grapple with, understanding the local tax system is crucial, particularly if you've chosen to reside in Portugal.

This comprehensive guide will delve into the world of tax rates in Portugal and shed light on what to expect as an expat in the Portuguese tax system.

We will be covering capital gains tax, personal income tax rates, corporate tax, Portuguese-sourced income, foreign pension income, withholding tax, tax laws, and tax allowances.

 

Who has to pay tax in Portugal?

Essentially, anyone residing or owning property in Portugal, earning Portuguese-source income, or operating a business in Portugal have tax liability. A key aspect of tax obligation is having a Número de Identificação Fiscal (NIF), a Portuguese tax identification number.

Without a NIF, conducting several crucial transactions, such as opening a bank account, buying property, or even starting a phone contract is impossible.

See: What Is the Portuguese Taxpayer Number (NIF) and What Is It Used For?

 

The Tax System in Portugal

The Portuguese tax system is a unified structure encompassing federal, local, and specific taxes on goods and services. The Autoridade Tributária e Aduaneira (Tax and Customs Authority) is the overarching tax authority. They are also known as Finanças.

Their responsibility involves collecting taxes, levying fines, and regulating tax compliance. Understanding the tax system in Portugal is fundamental to managing your financial obligations as a resident.

The Portuguese tax year aligns with the calendar year. It starts on 1 January and ends on 31 December. This is important for filing your annual tax return, as the tax due is calculated based on the taxable income earned within this period. The subsequent tax returns for a particular year must typically be submitted between 1 April and 30 June of the following year.

The income tax in Portugal varies depending on your earnings and tax classification. If you're a high-income individual, you may face tax rates exceeding 40 percent. However, for those classified as non-habitual residents, taxes can be set at approximately 20 percent for a duration of ten years.

 

Federal Taxes in Portugal

Federal taxes form the bulwark of the tax system and are divided into three main types: income tax, corporate tax, and Value Added Tax (VAT).

Income tax, known locally as IRS (Imposto sobre o Rendimento das Pessoas Singulares), is applied to a resident's worldwide taxable income. This includes employment income, pension income, rental income, capital gains, and interest. The IRS is a progressive tax, with rates varying from 14.5 percent to 48 percent.

Corporate tax, or IRC (Imposto sobre o Rendimento das Pessoas Coletivas), is levied on the worldwide profits of Portuguese companies. The standard corporate tax rate is 21 percent.

Lastly, VAT, known in Portugal as IVA (Imposto sobre o Valor Acrescentado), is a tax on goods. It is paid by the consumer and collected by businesses on behalf of the state to pay business taxes.

 

Local Taxes in Portugal

Local taxes are primarily focused on property ownership. Key local taxes include:

• IMI (Imposto Municipal sobre Imóveis), or Municipal Property Tax
• AIMI (Adicional ao Imposto Municipal sobre Imóveis) is the Additional to the Municipal Property Tax.

 

Taxes on Goods and Services in Portugal

In Portugal, Value Added Tax (VAT) is a consumption tax imposed on the sales of goods or provision of services.

Consumers pay the VAT as part of the total price when purchasing goods or services. The VAT collected is then remitted by the seller or service provider to the Tax and Customs Authority (AT), thus ensuring the proper allocation of these tax funds.

This tax is often included in marked prices and collected at the point of sale.

 

The Portuguese (NHR) Tax System for Foreigners

The Non-Habitual Residence (NHR) scheme introduced by the Portuguese government in 2009 is a powerful attraction for retirees and foreign investors, providing considerable tax benefits over a decade. This initiative is designed to promote foreign investment in Portugal.

See: A Guide to Non-Habitual Tax Residency (NHR Portugal 2023).

NHR tax regime's advantages

Being a Non-Habitual Resident comes with numerous tax incentives, including a flat tax rate of 20 percent on most types of source income within Portugal, such as employment income, rental income, and capital gains.

This is significantly lower than the 48 percent top marginal tax rate applicable to regular residents in Portugal. Moreover, income originating from abroad isn't taxed in Portugal if it's taxed in another country under a double tax treaty with Portugal, thereby avoiding dual taxation on income.

Retirees stand to gain from the NHR status as well since pension income received from overseas is taxed at a flat rate of 10 percent, leading to substantial tax savings, especially for those coming from high-tax countries.

Some of the key benefits of acquiring NHR status in Portugal are:

• No wealth tax
• No taxation on dividends of foreign origin
• No taxation on foreign income (subject to a double tax treaty agreement)
• Enhanced opportunities for remote work
• A flat tax of 20 percent on self-employment taxable income
• A flat tax rate of 10 percent on pensions received from a foreign source

Portugal has signed Double Taxation Agreements (DTAs) with 79 countries.

NHR Update: March 2024

The NHR came to an end in January 2024. The Portuguese government's State Budget Proposal for 2024 included modifications that determine the end of the non-habitual resident regime.

The ultimate vote on the budget legislation happened on 29 November 2023, introducing the transitional regime before the end of the NHR tax regime in 2025.

Anyone who registered as a tax resident in the country in 2023 and had not been taxed in Portugal in the previous five years can still apply by March 31, 2024.

It's also possible for some individuals to apply up until March 31, 2025, but the eligibility requirements for this deadline are more stringent. To qualify, it's necessary to meet at least one of the following criteria:

• 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 visa or a residence permit valid from December 31, 2023
• Having an application for a residence visa or residence permit 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 that they become a tax resident — whether that’s in 2024 or in the first quarter of 2025 — until December 31, 2033.

What will replace NHR?

The State Budget proposal has introduced a new program known as the Incentivised Tax Status Program (ITS) or the Tax Incentive for Scientific Research and Innovation, which is replacing the existing NHR tax regime.

Those who qualify will benefit from a flat tax rate of 20 percent on eligible professional income arising from Portugal and possibly an exemption on professional foreign-sourced income. They will also have an exemption on the majority of foreign-sourced income, such as dividends, interest, capital gains, and rents. However, unlike under the existing NHR program, this excludes pensions. These benefits will last for a 10-year period. 

 

Opening a Bank Account in Portugal

Opening a bank account in Portugal is crucial for financial transactions and is required when applying for the NHR regime. You can open a bank account as a non-resident, but some banks may ask for additional documentation, such as proof of address or income. Nowadays, online banking is quite popular, and many Portuguese banks offer the possibility to open an account remotely.

To open a bank account in Portugal, you'll typically need the following:

• Proof of address (both in Portugal and your home country)
• Passport or another form of identification
• NIF
• Proof of employment status or income (such as a job contract, payslips, or a letter from your employer)

Need to open a Portuguese bank account? Look no further. We provide a service whereby you can open up an account with one of Portugal's leading banks from the comfort of your home.

 

Personal Income Tax (IRS) Rates in Portugal

Income tax in Portugal is progressive, with rates ranging from 14.5 percent to 48 percent. The tax brackets are adjusted annually for inflation, and tax is calculated based on your source income in the previous year.

Portugal's income tax system is progressive, meaning your tax rate increases as your income does. The tax rates in Portugal fluctuate between 14.5 percent and 48 percent, with varying rates applicable based on your specific income bracket.

To illustrate, an individual earning up to €7,112 is subject to a 14.5 percent tax rate, whereas someone earning over €80,882 faces a tax rate of 48 percent.

The tax system for Portugal residents operates on the premise of worldwide income taxation, indicating that if you reside in Portugal, you are obliged to pay tax on source income within and outside Portugal. A Portuguese tax resident is someone who either stays over 183 days within a year in the country or has a permanent home there. Non-residents, conversely, are only obligated to pay income taxes on their income in Portugal.

Resident income tax rates 2023

In 2022, the Portuguese government announced changes to tax brackets and their corresponding income tax rates. These changes will now apply in 2023.

* Note that these personal income tax rates only apply to income earned within Portugal for residents who are not part of the NHR program. 

Solidarity rate

In 2023, besides the personal income tax rates, Portugal imposes a solidarity rate on high-income taxpayers, ranging from 2.5 to 5 percent, based on their income level. This applies to individuals earning over €80,000 and couples filing jointly with incomes above €160,000.

How to file your tax return in Portugal

Filing your personal income tax return in Portugal can be done online through the "Portal das Finanças" website. The Portuguese tax year aligns with the calendar year, and tax returns must typically be submitted between 1 April and 30 June of the following tax year.

Self employment income tax in Portugal

Self-employed individuals in Portugal are subject to Personal Income Tax (PIT). They must register the start of financial activity with the local tax office, and this can be done through the Finanças website or at a tax office in person.

We recommend contacting an accountant or tax expert for help with your annual tax returns, as self-employed individuals must use the Portuguese invoice system, may have to pay VAT, and are entitled to some tax credits. There are also two types of tax regimes, and you can be advised whether you qualify for the simplified regime.

See: Navigating the Income Tax Rate in Portugal: A Complete Guide.

 

Taxes on Property and Wealth in Portugal

For tax purposes, taxes on property in Portugal are divided into two main categories: IMI and AIMI.

Property Tax (IMI)

The Immovable Property Tax (IMI), or the Imposto Municipal sobre Imóveis, is an annual municipal levy on property, similar to the UK's council tax. Rates range from 0.3 to 0.45 percent for urban areas and 0.8 percent for rural areas, depending on when the property was last valued. Property owners or right-holders pay the tax.

Exemptions exist for certain properties like those owned by individuals over 65, in urban rehabilitation areas, or with low taxable values.

Property Wealth Tax (AIMI)

Property Transfer Tax (IMT) or Imposto Municipal sobre Transmissões Onerosas de Imóveis is a significant one-time tax levied on property purchases. Rates range from 1 to 8 percent, calculated on the property's deed or rateable value. Certain exemptions apply, like properties below €92,407 used as primary residences and properties for agricultural or tourism use.

Stamp Duty

Stamp Duty (IS) or Imposto do Selo applies to certain legal transactions, including property purchases, with rates from 0.4 to 0.8 percent of the purchase price. Note that different rates apply for other transactions like mortgages or leases.

The IS rate fluctuates depending on the nature of the transaction and the type of deed involved. For instance, mortgages are subjected to an IS rate of 0.6 percent of the total amount loaned, whereas leases are taxed at 10 percent of the annual rent.

Non-residents without a Portuguese tax identification number (NIF) face an increased IS rate of 1 percent. Acquiring a NIF before purchasing property in Portugal can offer significant savings. We offer a straightforward process for obtaining a NIF; just complete our online form, and we'll deliver your NIF to your inbox within two to three weeks.

Tax on Rental Income

Rental income is taxable in Portugal and must be declared on the annual IRS tax return.

If you plan to rent your property, you'll face net rental income taxes - IRS and IS. IRS is a tax on rental income, usually at a flat rate of 28 percent. A tourist tax also applies if you rent out your property for short-term holiday rentals.

Wealth Tax

AIMI (Adicional ao Imposto Municipal sobre Imóveis), an annual municipal tax on property, was introduced in 2017 in Portugal. Wealth Tax applies to individuals with properties valued over €600,000. Rates are 0.7 percent for properties valued between €600,000 and €1 million and 1 percent for those over €1 million. Exemptions exist for primary residences and rural properties.

Properties held by companies or other such legal entities must also pay a flat rate of AIMI, regardless of their value. The rate for companies is 0.4 percent on the total property value.

Portugal Capital Gains Tax

Capital Gains Tax applies to profits from property sales, with non-residents taxed at 28 percent on gross capital gain arising from the sale of the property. There are exemptions for Portuguese tax residents selling their primary residence under specific conditions and for properties bought before 1989.

See: Property Tax Portugal: A Guide to Navigating Portuguese Property Taxes.

 

Inheritance Tax in Portugal

Portugal abolished its inheritance tax in 2004. However, a stamp duty of 10 percent may apply to certain transfers of assets upon death. It's important to note that this does not apply to spouses, direct descendants, and ascendants.

 

Company Tax Rates in Portugal

The Corporate Income Tax (Imposto sobre o Rendimento das Pessoas Coletivas, or IRC) in Portugal is a tax imposed on the earnings of businesses operating in the nation. This tax applies to the global income of Portuguese-based companies and the Portugal-sourced income of non-resident companies, with the standard IRC rate being 21 percent of a company's taxable profit.

However, through certain tax deductions and exemptions, companies can decrease their taxable profits and lessen their corporate tax obligations. For instance, expenses such as loan interest, fixed assets depreciation, and research and development costs can be deducted from taxable profits.

Moreover, Portugal offers a preferential tax regime for companies involved in research and development, providing a reduced 17 percent IRC rate on income generated from these activities. This incentive aims to stimulate investment in R&D and innovation, aligning with Portugal's overarching economic growth and development strategy.

 

Expat Taxes in Portugal

Do I need to pay tax in Portugal as an expat?

Recommended Reading

The following blog posts cover topics closely related to taxes and tax payments in Portugal:

• Taxes in Portugal for Foreigners: Navigating the Tax System
• Your Complete Guide To Working In Portugal As An Expat in 2023
• Digital Nomad Tax: The Tax Benefits Available in Portugal
• Getting a NIF Number in Portugal
• Do I Need a Mandatory Tax Representative in Portugal?

 

In Conclusion

It's important to stress that tax matters can be complex, and tax rates can change over time. While this guide provides a comprehensive overview of the tax system in Portugal, it's strongly recommended that you seek professional advice specific to your circumstances when dealing with Portugal tax, especially if you're unfamiliar with the system.

Though comprehensive, the tax system in Portugal can be navigated efficiently with proper guidance. Whether you're considering moving to Portugal or have recently arrived, getting to grips with your tax obligations will make your transition smoother and ensure you avoid any unwelcome surprises.

Portugal offers attractive tax regimes for newcomers, but understanding how to make the most of these opportunities requires a clear understanding of your tax obligations. So, when considering taxes and tax rates, research, ask for advice, and ensure you comply with all the requirements.

 

Frequently Asked Questions about Taxes in Portugal

How much tax do you pay in Portugal?

The tax you pay in Portugal depends on several factors, including your residency status, income, and whether you're an individual or a corporation. For individual income tax, the rates range from 14.5 percent to 48 percent based on income, with progressive rates applied.

The standard Corporate Income Tax (IRC) rate for corporations is 21 percent. Social security contributions are also an important aspect of Portugal's tax system. Typically, employees contribute 11 percent of their gross salary to social security, while employers contribute 23.75 percent. To pay social security in Portugal, you need to have a Social Security Identification Number (NISS).

See: Guide To Getting a Social Security Number in Portugal (NISS).

Do foreigners pay taxes in Portugal?

Yes, foreigners do have tax liability. Non-residents are required to pay taxes on any income they earn within Portugal. However, they are not taxed on their worldwide income, as residents are. Also, there are double tax treaties with many countries to avoid double taxation. Non-residents also need a NIF for tax purposes.

Is Portugal a tax-friendly country?

Thanks to the Non-Habitual Resident (NHR) tax regime, Portugal can be tax-friendly, especially for retirees and expats. The NHR program provides significant tax advantages for ten years, including tax exemptions on foreign-source income such as pensions, dividends, royalties, and interest income.

Is Portugal tax-free for expats?

Portugal is not tax-free for expats, but it does offer some tax benefits under the Non-Habitual Resident (NHR) regime. Expats who qualify for the NHR status can benefit from a flat income tax rate of 20 percent if they work in specific professions and can also enjoy tax exemptions on certain types of foreign income. However, they are still subject to other taxes such as VAT, Capital Gains Tax, corporate tax, and social security contributions.

How much taxes do you pay in Portugal?

In Portugal, the amount of tax you pay depends on your taxable income. Tax rates range from 14.5 percent to 48 percent based on progressive rates. This tax applies to income earned in Portugal and, for residents, worldwide income, including capital gains and investment income. It's important to consult a tax advice professional to understand the specifics based on your personal situation.

Is Portugal a high-tax country?

Portugal's tax system uses progressive rates, with the tax percentage increasing as your income increases. The highest tax rate can reach up to 48 percent for high-income earners. However, specific types of income, like capital gains and investment income, might be subject to a flat rate. Therefore, whether Portugal is a high-tax country can depend on the type of income and the individual's financial situation. Proper tax advice is essential in these situations.

Is Portugal still a tax haven?

Portugal has been known for its Non-Habitual Resident (NHR) scheme, which offers a flat rate of 20 percent on income earned in Portugal, and most foreign-source income can be exempt from tax for ten years.

Will my US Social Security be taxed in Portugal?

The taxation of US Social Security benefits in Portugal depends on the tax treaty between the US and Portugal. US citizens living in Portugal might have to declare this income on their annual tax return in Portugal but should seek tax advice to confirm. It's essential to keep track of the tax year, which in Portugal runs from 1 January to 31 December.

Please note that all income, including US Social Security, capital gains, and investment income, might be subject to withholding tax, where the tax is deducted before the income is paid out. Tax credits may be available to reduce the amount of tax you owe. Whether dealing with local tax in Portugal or expat taxes, planning your tax year properly is important, as is filing an annual tax return.