The Portuguese tax year runs from 1 January to 31 December and the tax system comprises of state and local taxes which are generally calculated based on income, property ownership and expenditure.
Portuguese residents are taxed through IRS (Personal Income Tax) on their worldwide income and on a self assessment basis. The income of married taxpayers is based on the entire family unit, and married couples must submit a joint tax return. However, spouses of individuals residing in Portugal for fewer than 183 days in the calendar year, and who are able to prove that their main economic activities are not linked to Portugal, may file a tax return in Portugal disclosing the tax resident individual’s income and their part of the couple’s income.
Income is split into the following categories: revenue from employment, business and professional income, investment income (including interest), rental income, capital gains and pension income. Defined tax deductible expenses are deducted from gross income for each separate category – giving a net taxable income for that category.
A splitting procedure applies to married couples by dividing the family income by two prior to the applicable marginal tax rate being determined. Total taxable income is taxed at progressive rates varying from 14.5% on income under €7,000 to 48% for income over €80,000 to arrive at a final tax liability, then multiplied by two in respect of married couples. There has existed a “Solidarity Tax” of 2.5% which is charged on income over €80,000, and progressively up to 5% for income over €250,000, but this will cease at the end of the 2016 tax year.
Investment income (such as capital gains, interest and dividends etc,) is currently taxed at a rate of 28%. Likewise, rental income is also taxed at 28%, but in both cases tax residents in Portugal may elect for the scale rates to be applied, but once this method is chosen, it will be applied to all income sources. Any tax withheld is considered to be a payment on account against the final total tax liability.
Income from self employment is category B income and is taxed either under a ‘simplified regime’ or based on the taxpayer’s actual accounts. If a taxpayer has earnings below a certain ceiling, they are liable to taxation according to the ‘simplified regime’ whereby 20% of income from sales of products or 80% of income arising from other business and professional services is taxed with a minimum taxable amount due. No expenses deductions are permitted under the simplified regime. If the simplified regime is not applicable then net profits or gains made by an individual are assessed in accordance with the same rules that apply to company tax assessment. Earnings from self-employment or independent activities in Portugal are subject to tax, whether or not an individual is tax resident in Portugal, and may be withheld at source. Tax credits are potentially available for medical expenses, school fees, life and health insurance premiums and where appropriate, mortgage interest, but they are subject to certain conditions. There are other credits available, for example for contributions into retirement schemes and the purchase of eco-friendly renewable energy. Deductions are also available for limited donations to charities, and for payments of alimony that has been determined by a court decision.
It should be noted that with effect from 2010, all foreign bank account holdings are required to be disclosed on income tax returns. In addition, Portugal has a list of jurisdictions that it considers to be “tax havens”. This list includes the Channel Islands and the Isle of Man, and income from these jurisdictions is taxed at the higher rate of 35%. There do exist alternatives to these jurisdictions which are approved by the Portuguese Tax Authority. Likewise, whilst Trust income is considered liable to taxation, this varies depending on whether the payments from such entities arise from distribution by, or dissolution of, the trust. Nevertheless, where estate planning is concerned, this can be of considerable interest.
Non-Habitual Resident scheme
This attractive regime for new residents with substantial assets is still available for those persons who have not been tax resident in Portugal during the previous five years, whether employed or retired. It provides for substantial tax exemptions during the first ten years of residence. Spectrum IFA Group would be pleased to discuss the structure and implications of the scheme.
This is not an exhaustive list of taxable items, and changes may occur during the current tax year, but it is designed to give an overview of the most import and key issues. Taking professional advice from a designated tax-advisor is essential, and Spectrum IFA Group is well positioned to assist in finding the appropriate institution or individual to provide such advice.