Tax Guide for US Expats Living and Working in Portugal
Who Is Liable For Income Taxes in Portugal
Residents of Portugal are subject to tax on their worldwide income. Nonresidents are subject to personal income tax on income arising in Portugal.
An individual is considered resident in Portugal if, among other conditions, he or she meets any of the following conditions:
- He or she stays in Portugal for more than 183 days in a calendar year.
- He or she has a dwelling in Portugal, which may imply his or her intention to use it as his or her habitual residence.
- The individual’s spouse is resident in Portugal.
If a spouse does not meet the first two conditions stated above and if he or she submits proof that no connection exists between the majority of his or her economic activities and Portugal, he or she is deemed to be a nonresident of Portugal. However, his or her spouse residing in Portugal is deemed resident and taxed under rules applicable to split couples.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Personal income tax (IRS) is imposed on the earned income of employed individuals.
Business and professional income. Taxable income includes all earned income of a professional individual, including commissions and profits from a trade. Business and professional income is taxed at the personal income tax rates.
Directors’ fees. Directors’ fees are taxed in the same manner as income from employment.
Investment income. A withholding tax of 21.5% is imposed on interest income derived from public company bonds and state bonds and on bank interest. Dividends paid by resident companies are subject to a 21.5% final withholding tax. However, if an election is made, dividends can be included in taxable income in the tax return, and taxed at the rates, with credit given for the tax withheld. Withholding taxes are final with respect to the following:
- Dividends
- Bank interest
- Interest on shareholders’ loans
- Interest from public company bonds, bills or other paper
- Interest on public debt
The taxpayer may elect to include these items in taxable income, with a credit given for the tax withheld. A 50% relief applies to dividends received from resident companies subject to corporate tax or from European Union (EU) companies that fulfill the requirements of the EU Parent-Subsidiary Directive.
In general, other investment income is taxed at the personal income tax rates.
Rental income and royalties are subject to a 16.5% withholding tax. Maintenance, repair expenses and municipal property tax may be deducted from gross rental income if actually incurred and properly documented. Rental income and royalties are taxed at the personal income tax rates, with a credit available for the withholding tax.
Capital gains and losses. Taxable capital gains that are not specifically exempt or taxed separately are taxed at the ordinary rates. No withholding tax applies. In general, gains derived from sales of the following assets are taxed at the personal income tax rates.
Real estate and associated rights
Industrial or intellectual property, including trademarks and registered designs, if the seller is not the original owner
A taxpayer’s property transferred to the taxpayer’s business (however, this gain may be deferred, see below)
Capital gains derived from sales of the following assets are exempt from tax:
- Securities acquired before 1 January 1989
- Shares of stock companies, bonds and debentures, up to an annual positive balance (between gains and losses) of €500
- Real estate, except land for construction, owned prior to 1 January 1989
- A personal residence if the proceeds are reinvested in another personal residence in Portugal within 36 months after the sale or 24 months prior to the sale
The following capital gains benefit from special tax treatment:
- Gains derived from the sale of real estate or associated rights, excluding real estate used in a trade or business, are taxed only to the extent of 50% of the gain.
- Gains derived from transfers of a taxpayer’s property to the taxpayer’s business are deferred until a subsequent disposition of the property occurs, and only 50% of the gain is taxed.
- Gains derived from the sale by non-original owners of copyrights, patents and various other types of intellectual property are taxed only to the extent of 50% of the gain.
- Gains derived from the disposal of securities (including autonomous warrants) and derivative financial products are subject to tax at a rate of 20% (a 50% exclusion from tax applies to gains from shares in unlisted micro and small companies) if an exemption does not apply. An exemption may apply to nonresidents under domestic rules or an applicable double tax treaty.
In calculating the capital gain derived from the sale of real estate, the purchase price is indexed by an official government coefficient to account for inflation.
Capital losses may offset capital gains only.
Taxation of employer-provided stock options. Income derived from employer-provided stock options is taxed in the same manner as employment income (see Employment income).
Taxation of residents in EU member states and European Economic Area countries that have entered into an exchange-of-information agreement with Portugal concerning tax matters. Residents of EU member states and European Economic Area (EEA) countries that have entered into an exchange-of-information agreement with Portugal concerning tax matters may opt to be taxed as if they were tax residents of Portugal. This option is available for certain capital gains, rental income and business and professional income attributable to a permanent establishment. It may also apply to employment, business and professional (not attributable to a local permanent establishment) and pension income, if the individual’s Portuguese-source income is at least 90% of his or her worldwide income derived during the relevant tax year. In determining the tax rate applicable to the income mentioned above, worldwide income must be considered and reported.
Taxation of nonhabitual residents. A special regime applies to individuals who become tax residents of Portugal and have not been taxed as such in the previous five years. Non-habitual resident status applies for up to 10 years, and requires the taxpayer to be registered as non-habitual resident with the tax authorities. Principal aspects of this regime are summarized below.
Employment income and business or professional income derived from high value-added activities of a scientific, artistic or technical nature (including activities of architects and engineers, artists, auditors and tax advisors, physicians, teachers, other professionals, board members on companies with approved investment projects and senior employees), are taxed at a flat rate of 20% on net income.
Foreign-source income, such as employment income, income from certain business or professional activities (as listed above), income from copyrights, industrial property rights or transfer of know-how, investment income, rental income and capital gains, is exempt from tax in Portugal if such income is taxed (for employment income) or may be taxed (for other types of income) in either of the following countries:
- A tax treaty country.
- A non-tax treaty country in accordance with the Organization for Economic Cooperation and Development (OECD) Model Tax Convention rules, provided that the country is not a territory considered a tax haven (not applicable to employment income) and that the income cannot be deemed sourced in Portugal under domestic tax law.
Foreign-source pension income not resulting from contributions that have been claimed as a tax deduction in Portugal is exempt from tax in Portugal if such income is taxed in a tax treaty country or is not deemed sourced in Portugal under domestic tax law.
Income benefiting from the exemption method is considered to determine the tax rate applicable to the remaining income (except capital gains from securities, dividends, interest and other investment income sourced abroad, as well as employment and business or professional income subject to the 20% rate mentioned above, which are taxed at special flat rates). Taxpayers may opt to apply the credit method (rather than the exemption method) to this income. In such case, such income is aggregated with the remaining income and taxed at the normal IRS rates.
Deductions
Personal deductions and allowances. For 2011, employees may deduct 72% of 12 times the notional salary (€4,104). Compulsory social security contributions in excess of 72% of 12 times the notional salary are deductible without limitation. Union contributions and indemnities paid to the employer may also be deducted, subject to applicable limits.
Business and professional deductions. Professionals and individuals carrying on a business may be taxed under one of the following two regimes:
- Simplified regime
- Organized bookkeeping regime
Business and professional income may be taxed under the simplified regime if the taxpayer does not choose to use and is not required to use organized bookkeeping and if the annual turnover does not exceed €150,000.
Under the simplified regime, taxable income is calculated by applying predefined coefficients, which vary depending on the activity’s sector, to gross income. These coefficients have not yet been defined; currently, taxable income is determined by applying 0.2 to the amount of sales, and 0.7 to other income. No activity-related expenses are deductible from the resulting amount.
The simplified regime continues to apply during a three-year period, unless the individual elects to switch to the bookkeeping regime. The simplified regime ceases to apply if the qualifying limit is exceeded for two consecutive years or by more than 25% during a single year.
The organized bookkeeping regime provides for the deduction of activity-related expenses. Taxable income is calculated using the corporate tax rules, with additional limitations imposed on the deduction of the following expenses:
- Travel expenses exceeding 10% of gross business and professional income are not deductible.
- Amounts booked as remuneration paid to the self-employed individual, or to his or her spouse or dependent children who render services to the business, are not deductible.
If a professional’s house is partially used as an office, the professional may deduct certain expenses, including rent, electricity, water and telephone costs, and depreciation, up to 25% of the total amount of expenses incurred.
Certain expenses are taxed autonomously, triggering an additional tax burden. These expenses include the following:
- Undocumented expenses are not tax-deductible and are subject to a surcharge of 50%.
- Entertainment expenses that are deductible from gross business or professional income are subject to a 10% surcharge.
- Expenses deductible from gross business or professional income that are related to cars, recreational boats, aircrafts and motorcycles are subject to a 0%, 5% or 10% surcharge, depending on the nature of the vehicle.
- Per diems and expenses related to the use of a personal car by the employee for the company’s business are taxed at a rate of 5% if such expenses were not charged to clients or taxed as employment income.
- Payments to nonresident entities that are subject to a favorable tax regime are not tax-deductible and are subject to a 35% surcharge if it cannot be proved that these expenses relate to operations effectively performed, that the payments are normal for the type of activity and that the amount is not unreasonable.
Credits. For 2011, individuals may credit the following against their tax liability:
- €261.25 for each individual.
- €190 for each child (€380 for each child who is younger than 3 years old). €261.25 for each ascendant who lives with the taxpayer and does not receive income above the minimum social security retirement pension. This credit is increased to €403.75 if only one such ascendant lives with the taxpayer.
- For expenses that are exempt from value-added tax (VAT) or are subject to VAT at a rate of 5%, 30% of unreimbursed medical expenses of the taxpayer and the taxpayer’s dependents and interest paid on loans incurred to pay these medical expenses. For such expenses subject to VAT at a rate higher than 6%, the credit is limited to the higher of 2.5% of the expenses or €65 if a medical prescription is obtained (the credit is allowed only if a medical prescription is obtained).
- 30% of interest, amortization of loan principal and charges on loans for the acquisition or improvement of a Portuguese, EU or EEA country (with which Portugal has entered into an exchange-of-information agreement concerning tax matters) residence or the rental payments made to the owner of the Portuguese or EU or EEA country (with which Portugal has entered into an exchange-of-information agreement concerning tax matters) residence, limited to
- €591. This limit may be increased for taxpayers with lower levels of income. It may also be increased depending on the energy certificate associated with the property.
- 30% of expenses incurred on the acquisition of renewable energy equipment, equipment and works that positively contribute to the improvement of the thermic behavior (energy efficiency) of buildings, electric cars and cars using nonfuel renewable energy, limited to €803. This reduction can be claimed only once every four years.
- 30% of education expenses of the taxpayer and the taxpayer’s dependent children, limited to
- €760 (for single or married taxpayers). The limit is increased by €142.50 for each dependent if education expenses are incurred for a total of 3 or more dependents.
- 25% of expenses incurred on retirement homes and similar homes, limited to €403.75.
- 30% of medical insurance premiums, limited to €85 for single taxpayers and to
- €170 for married taxpayers, increased by €43 for each child.
- 20% of pension fund contributions that meet certain conditions, limited to between €300 and
- €400 per taxpayer depending on the taxpayer’s age.
- 25% of donations to the state or municipalities, increased by 20%, 30% or 40%, depending on the type of the beneficiary entities.
- 25% of donations to religious institutions, public utility collectives, schools, museums, libraries, cultural associations, and philanthropic and charitable institutions, increased by 30%, with the credit limited to 15% of the total tax liability.
- 20% of alimony payments, up to a limit of €1,048.05 per month.
- 20% of investments made by business angels (individual venture capital investors), provided certain conditions are satisfied, limited to 15% of the total tax liability.
- Advance personal income tax payments and taxes previously withheld at source.
The tax credits concerning medical expenses, education expenses, retirement homes and expenses related to residential property are also capped as a whole in accordance with the taxpayer’s level of income; that is, they are uncapped for the first six income brackets and capped by €1,100 for the higher two income brackets. Certain other tax benefits, such as renewable energy equipment, medical insurance premiums and pension plan contributions, are capped as a whole, up to €100 (except for the first two income brackets).
Relief for losses. Losses from business or professional activities may be carried forward and offset against profits from activities of the same type in the following four years. Losses may not be carried back.
B. Inheritance and gift taxes
Inheritance and gift taxes were eliminated, effective from 1 January 2004. However, stamp duty at a rate of 10% applies if the beneficiary is an individual (except for the spouse, ascendants and descendants who benefit from an exemption), or corporate tax applies at a rate of 25% (plus a municipal surcharge of up to 1.5% in the case of residents or permanent establishments, and a state surcharge of 2.5% on taxable income exceeding €2 million) if the beneficiary is a collective person.
Specific rules apply to determine whether an asset is deemed to be located in Portugal for inheritance and gift purposes.
C. Social security
Contributions. Social security contributions are payable on all salaries, wages, bonuses and other regular income, excluding lunch subsidies. No ceiling applies to the amount of wages subject to social security contributions for employers or employees (however, see below for the rule regarding members of a company’s governing body). The employer’s share is 23.75%, and the employee’s share is 11%, of salaries. An employer must deduct an employee’s contribution and pay the total amount by the 20th of the following month.
A self-employed individual engaged in a business or professional activity is subject to monthly social security contributions calculated on a base preselected by the individual, which varies between 1 and 12 times the monthly notional salary. Currently, the monthly notional salary is €419.22. The following are the contribution rates for self-employed individuals:
- 29.6%, in general
- 28.3% for specific situations
Entities contracting service providers may be subject to a 5% social security contribution rate levied on the amount of services paid. Members of a company’s governing bodies (management, supervisory and general meeting) are usually subject to social security contributions based on actual compensation. For contribution purposes, the actual compensation base must equal at least one monthly notional salary and may not exceed 12 times the monthly notional salary. However, in certain circumstances, no maximum is imposed. The rates are 9.3% for individuals and 20.3% for companies.
Totalization agreements. Foreigners who work temporarily (up to two years) in Portugal and who contribute to a compulsory social security scheme in their country of origin may not be subject to Portuguese social security contributions. To provide relief from double social security contributions and to assure benefit coverage, Portugal has entered into totalization agreements, which generally apply for a period of 12 months (some agreements state a longer period, up to 60 months), with the following jurisdictions.
Andorra
Denmark
Mozambique
Angola*
Estonia
Netherlands
Argentina
Finland
Norway
Australia
France
Poland
Austria
Germany
Quebec
Belgium
Greece
Sao
Tome
Brazil
Guinea*
Principe*
Bulgaria
Hungary
Slovak Republic
Canada
Iceland
Slovenia
Cape Verde
Ireland
Spain
Channel Islands
Italy
Sweden
Guernsey
Herm,
Latvia
Switzerland
Isle of Man
Liechtenstein
Tunisia
Jersey and
Lithuania
Ukraine*
Jethou
Luxembourg
United Kingdom
Chile
Malta
United States
Cyprus
Moldova
Uruguay
Czech Republic
Morocco
Venezuela
* This agreement is not yet in force.
Double tax relief and tax treaties
Residents who receive foreign-source income are entitled to a tax credit equal to the lower of the foreign tax paid or the Portuguese tax payable on such income. The credit applies to income derived from treaty and nontreaty countries; however, for treaty countries, the credit is limited to the amount of tax payable in the country of source.
Brokers resident in countries with which Portugal has concluded double tax treaties are exempt from tax on commissions received from Portuguese entities. This exemption also applies to income from business and professional services. Specific forms are required to qualify for the exemption. Compulsory social security contributions and other deductible expenses (see Sections A and C) incurred overseas may be deducted if properly documented.
Portugal has entered into double tax treaties with the following countries.
Algeria
Iceland
Pakistan
Austria
India
Poland
Belgium
Indonesia
Romania
Brazil
Ireland
Russian
Bulgaria
Israel Federation
Canada
Italy
Singapore
Cape Verde
Korea (South)
Slovak Republic
Chile
Kuwait*
Slovenia
China
Latvia
South Africa
Cuba
Lithuania
Spain
Czech Republic
Luxembourg
Sweden
Denmark
Macau
Switzerland
Estonia
Malta
Tunisia
Finland
Mexico
Turkey
France
Moldova
Ukraine
Germany
Morocco
United Kingdom
Greece
Mozambique
United States
Guinea*
Netherlands
Uruguay*
Hungary
Norway
Venezuela
* This tax treaty is not yet in force.
To learn more about the history, culture, economy and other information about Portugal
We have been preparing US income tax returns for US Citizens and permanent residents living in Portugal for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Portugal and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Portugal.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email