Taxation in Portugal

Last Updated on July 4, 2022 by Victor Queiroz

Do employees need to pay income tax in Portugal?

Let’s talk about taxes in Portugal. Before doing this, please consider that each case is a different case. We will explain only the guidelines, as an individual analysis must be carried out for a tax decision.

To pay taxes in Portugal the person must have a NIF (Tax Number) and be a resident in this country.

But what is required to be a resident? Article 16 of the Income Tax Code can answer us: “People who, in the year to which their income relates: a) have lived in Portugal for more than 183 days, and b) have spent less time, but under conditions that suggest that they currently intend to reside permanently.”

So, calculating income tax is not simple, so we need the guidance of an accountant.

Let us give you some useful information:

To calculate the Income Tax (IRS), it is necessary to consider the following information: Gross monthly salary, tax withheld at source (yes, the employer has already separated an amount of your tax), monthly social security contribution, reimbursable expenses.
After the sum of the annual income, the employee must reduce this amount with applicable deductions.
Then, it’s time to check which scale you fit, in order to check the tax rate.

Portugal:

Scale 1 – up to 7,112€ – rate: 14.50%
Scale 2 – from 7,112€ to 10,732€ – rate: 23%
Scale 3 – from 10,732€ to 20,322€ – rate: 28.50%
Scale 4 – from 20,322€ to 25,075€ – rate: 35%
Scale 5 – from 25,075€ to 39,967€ – rate: 37%
Scale 6 – from 39,967€ to 80,882€ – rate: 45%
Scale 7 – more than 80,882€ – rate: 48%

After this step, the accountant will choose the best procedure for calculating the tax, as there are different methods for doing so.

The important thing at this point is that you can be taxed between 14.5% and 48%. It is true that if you are a wealthy person, almost half of your income can go to the State.

On the other hand, it is important to underline that the majority of Portuguese are classified in scale 2, at the rate of 23%.

How are income tax rules for businesses?

Corporate income is also taxed in Portugal.

The IRC is the main tax levied on income resulting from the exercise of a business activity.

There are many rules for calculating IRC and a good accountant can save a company a lot of money just by choosing the best tax regime.

It’s important to mention that profit obtained by non-resident companies (but with  a permanent establishment in Portugal) can also be taxed.

As mentioned, the calculation of IRC is a complex process that implies understanding some important concepts, such as:

  • Taxable profit – income obtained by the development of the company’s activity, less expenses incurred.
  • Taxable amount – the amount of taxable profit, less tax benefits and tax losses that can be deducted.
  • IRC rate – the standard rate is 21%.
  • Municipal surcharge – municipal revenue that is levied on the taxable profit of companies.
  • Autonomous Taxation – tax payable on some costs that the company may have (fuel, allowances, representation expenses, etc.).
  • Extra Fee – if the taxable profit exceeds 1,500,000€, a additional fees is applied.

Therefore, please keep in mind that the company’s standard tax rate is 21% and that it is mandatory to have an accountant to manage the company’s taxes.

What is the Non-Habitual Resident regime?

The NHR regime is the champion in tax matters. Every expat wants to know the details of this interesting tax incentive program.

Luckily we’ve already published a complete article just to address this regime. To have access, just click here.

The NHR regime is a Portuguese program focused on attracting highly qualified and retired professionals to Portugal.

It was created in 2009 and although some rules have changed during this period, its main purpose is still in effect.

If the citizen is eligible for the NHR regime, he / she will have the following benefits over a 10-year period:

Tax rate of 20% for the IRS for any income obtained in Portugal
Tax rate of 10% for the IRS for foreign income

The income obtained in Portugal must be related to one of the professions referred to in the law, which comprises, among others:

  • Architects
  • Engineers
  • Auditors
  • Dentists
  • Physicians
  • Professors
  • Programmers
  • Designers
  • Executives

As for income obtained outside Portugal, they can be related to:

  • Pensions
  • Dividends
  • Royalties
  • Capital gains
  • Property gain

It’s important to emphasize that not every income will be taxed by the amount of 10%, but only those considered as passive income, according to the Portuguese laws.

For this reason, the applicant’s situation must be analyzed individually (case by case) as the same income can be considered as passive income in the USA and not in Portugal, for example.

We strongly recommend reading the referred article where we untangle this topic.

If I receive income outside Portugal, will I also have to pay taxes in Portugal?

This is a very common question that does not have a standard answer. Depending on the citizen’s situation, different outcomes can be considered.

Overall, Portugal levies tax on foreign income.

The key here is that the lawyer needs to analyze the legal situation regarding the country where the income is originated and Portugal. Do these countries have an international agreement to avoid double taxation?

If so, what is stated in the agreement? Does it cover all types of income? Is there tax-free type of income? These are some reasonable questions that the lawyer will have to answer.

If I receive income outside Portugal, will I also have to pay taxes in Portugal?

This is a very common question that does not have a standard answer. Depending on the citizen’s situation, different outcomes can be considered.

Overall, Portugal levies tax on foreign income.

The key here is that the lawyer needs to analyze the legal situation regarding the country where the income is originated and Portugal. Do these countries have an international agreement to avoid double taxation?

If so, what is stated in the agreement? Does it cover all types of income? Is there tax-free type of income? These are some reasonable questions that the lawyer will have to answer.

Property Tax related questions

What are the taxes related to buying a property in Portugal?

Usually, when you buy something, you need to pay tax, when you sell something, you need to pay tax. This is sad, but it is true.

Real estate is no exception. Buying a property requires paying taxes, but what kind of tax?

First, let us suggest our Complete Guide to Real Estate in Portugal. A must-read article if you plan to buy a property in this country.

Municipal Tax related to Property Transactions (IMT): This is a tax that must be paid whenever there is a financial transaction related to the purchase and sale of property.

It must be addressed to the Portugal government prior to the execution of the Deed of Purchase and Sale and its value varies according to the type of property, location and purpose.

Its value corresponds to the result of the following equation: Value of the property (property value or deed value, whichever is greater) multiplied by the rate published by the State, subtracted from the portion to be deducted.

Check out the simulated table for calculating the IMT, as published by the APEMIP portal:

Property – Value IMT
100,000 € – 152 €
200,000 € – 4,913 €
300,000 € – 12,040 €
400,000 € – 23,240 €
500,000 € – 28,040 €
1,000,000 – € 60,000 €

Stamp Tax: This tax must also be paid to the State if the property is acquired through bank financing and corresponds to a rate of 0.8% on the value of the transaction.

In the case of Real Estate financing (mortgage loans), this tax is also levied on this amount in the same percentage.

Municipal Property Tax (IMI): This is a tax on property and must be paid annually by the owner.

This is a continuous expense and its value varies from 0.3% to 0.8% of the taxable equity value.

These are the property-related taxes.

Of course, there are other costs related to acquiring a property not directly related to taxes, such as the issuance of certificates, attorney fees, broker fees and so on.

Will I have to pay tax if I sell a property in Portugal?

Along with all the expenses related to the purchase of the property, the sale of a property will certainly result in capital gains that, as imagined, will be taxed.

Like many other countries, Portugal imposes a capital gain tax on the sale of assets in general (depending on the capital origin).

Capital gain related to property selling can be calculated by the difference between the sale value and the acquisition value, with the calculation of monetary coefficients added by certain charges and expenses.

Depending on whether you are a resident or not in Portugal, and also if this property is your primary residence, different tax rates will apply.

If you are a resident of Portugal:

the gains obtained worldwide (including the sale of the property or even retirement) are taxed as income.
any real estate gains are added to your income for the year and taxed based on income tax rates, which range from 14.5% to 48%.
capital gains will be considered at 50% of their value, applying the general rates provided for in the IRS Code.

If you reinvest your income in another main property in Portugal (or anywhere in the EU / EEA that has a tax treaty with Portugal) you may not be taxed for the capital gains.

The new property must be purchased between 24 months prior and 36 months after the date of sale of the property that generated the capital gain.

If you are not resident of Portugal:

The capital gain from the sale of real estate in Portugal is subject to a tax rate of 28% for individuals and 25% for legal entities.
This is a subject that draws a lot of attention, if you have any specific questions, please let us know.

How is inheritance tax in Portugal?

Inheritance is taxed under the Stamp Tax at a rate of 10%. To calculate the tax payable on inheritance, you must multiply that tax by the taxable amount of all goods received.

The value of each type of the asset is determined according to specific rules.

But here is the good news: Spouses or de facto partners (since 2009), descendants and ascendants are exempt from Stamp Tax on the inheritance.

They are called legitimate heirs. Although they do not have to pay inheritance tax, these family members have to declare the assets received to Finance.

Does Portugal taxes wealth?

No, Portugal does not tax wealth.

Nowadays just four countries charges wealth tax: Switzerland, Norway, Spain and France.

The main purpose for not charging wealth tax is certainly to avoid the withdraw of money by wealthy people from the country.

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