If you have moved or are moving to Portugal, tax planning should be high on your priorities. Otherwise, you could easily end up paying more tax than necessary, or even pay tax in the wrong country.
Some expatriates incorrectly assume that they do not need to pay tax in Portugal when they are, in fact, tax residents here. Even if you do not live here full-time, you could still meet the criteria to be a resident. For others, the opposite applies, and they should still be paying tax in the UK.
It is vital to understand where you should be paying tax and to fulfil your obligations under local and international rules. If you get it wrong, you could pay much more than you need to or even find yourself subject to a tax investigation.
Residency and taxation
If you meet the criteria to be a tax resident in Portugal, you are liable for Portuguese taxes on your worldwide income and some capital gains. The exception is for those who currently have non-habitual residence (NHR) status. Income tax rates range from 13% to 48%, and while investment income is taxable at 28%, Portugal offers highly tax-efficient opportunities for capital investments. Residents are also subject to taxes on property rental, the transfer of real estate, vehicle sales and stamp duty.
Non-residents only face taxes on Portuguese income and certain capital gains on Portuguese assets, plus a ‘wealth tax’ on Portuguese property valued over €600,000 (per individual owner). However, they remain liable for taxation in their country of residence.
Identifying your tax residency
While this may seem straightforward, the rules can be complex, and the answer is not always clear. Portuguese tax is levied according to de facto (actual physical) residence, which has nothing to do with citizenship, or the residence visa or work permit you have.
The simplest rule concerns how long you spend in Portugal. If you are here for a total of 183 days or more within a 12-month period, the Portuguese tax authorities (finanças) will consider you a resident. The clock starts from the date you arrive in Portugal with the intention of staying permanently, so you could be deemed tax resident from the day you relocate.
If you spend less than 183 days a year here but own Portuguese property, you could still be seen as a tax resident if there is evidence that the property is your home (habitual residence).
Once you are a tax resident here, your dependent relatives will also be considered residents. The Finanças, however, can recognise different residency types within the same household if one spouse can prove that they are a tax resident elsewhere.
If you meet Portuguese residency criteria, it is your responsibility to declare yourself to the authorities and submit an accurate tax return each year.
The importance of the tax treaty
Where your tax status is unclear because you meet the residency criteria for two countries, it is determined by the relevant double tax treaty. The UK/Portugal treaty sets out ‘tie-breaker’ rules, such as the location of your permanent home, where your finances are based and where you normally live. If residency still cannot be decided, it comes down to your nationality or mutual agreement between the two countries.
Note that you do not have a choice as to where to pay taxes. The rules determine whether or not you are a tax resident. What you can do is carefully watch how many days you spend in each country and what assets you own there to ensure you will be deemed a tax resident in one country and not the other. But be aware that being a tax resident can be necessary to maintain your residence visa if you are not an EU national.
The relevant tax treaty also determines where you need to pay tax when you reside in one country and earn assets in another, for example, if you live in Portugal and receive UK pension, rental or investment income. Follow the rules carefully to ensure you declare the income to the right country.
Taxation anywhere is complicated. As an expatriate, not only do you have to deal with a foreign tax system, but you also need to understand how these rules interact with taxation in your home country or in countries where you own assets. Without expertise, it is easy to get it wrong and with today’s global tax transparency, it is easier than ever for the authorities to find out if you do.
For the best results, take personalised, cross-border advice to ensure you meet your obligations in the most tax-efficient way for your family’s unique circumstances and goals.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com
Dan Henderson is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com
