By: DENNIS SWING GREENE
Dennis Swing Greene is Senior Partner and International Fiscal Consultant for euroFINESCO s.a
In this series of articles, we examine different forms of income that must be reported on IRS tax declarations:
1. Income from salaries
2. Self-employment – the Simplified Regime
3. Income from capital
4. Declaring rental income
5. Capital gains on investment portfolios
6. Capital gains on real estate
7. Declaring pension income
MORE PEOPLE have a nest egg tucked away in the bank or an investment portfolio.
More often than not, these investments or bank accounts produce income.
Whether you draw that income or not, whether the money is brought into Portugal or remains in a different jurisdiction, income from capital made available to you in the tax year needs to be reported and assessed for residents of Portugal.
This includes interest from banks, building societies, gilts as well as dividends from stocks and shares, wherever they arise worldwide.
Questions and answers
I receive interest from my local bank in Portugal. How do I declare this income?
Within Portugal, bank interest from financial institutions is taxed at source at a flat rate of 20 per cent and normally constitutes final payment, dispensing the need for further reporting.
However, if one elects to declare interest from one source, then all other sources of interest must also be disclosed and one must give written permission for tax inspectors to access your bank accounts.
Do I have to declare interest from offshore bank accounts?
The EU Savings Directive came into force on July 1, 2005.
If you opted for information sharing, you need to report your interest on your Portuguese IRS declaration.
If you chose withholding, most of this tax will go to Portugal anyway.
If you have done nothing yet, you should contact your bank to see where you stand.
I have heard that there have been changes in the bank secrecy laws. Is this true?
There has been growing concern over recent years regarding bank secrecy, both in the European Union as well as in offshore jurisdictions.
Within Portugal, bank secrecy laws have weakened due to pressure from Brussels.
Internationally, the Organisation for Economic Co-operation and Development (OECD) has spearheaded a drive to eliminate harmful tax practices from “tax havens”. Financial institutions operating in offshore centres have had to tighten their requirements for investors and tax authorities throughout Europe are working steadily to bring down the walls of confidentiality which have traditionally protected these jurisdictions.
In the past, I was not required to report dividends arising in Portugal. Has this changed?
Yes, substantially. In 2006, Portuguese sourced dividends were subject to a withholding tax of 15 per cent.
Fifty per cent is exempt if from Portugal or another EU country. The other half must be reported along with other income from capital and will be added to other sources to determine total taxable income.
I used to be able to claim back a small amount for double taxation from Corporate Tax (IRC) on my dividends. Is this still possible under the new system?
No. There are no longer any tax credits from corporate double taxation. In compensation, only half of the income is now taxable.
What allowances exist in this category of income?
Sadly, except for the 50 per cent dividends exemption, there are no allowances for “income from capital”.
Simply omitting income from abroad may have worked in the past (albeit illegally).
However, in today’s changing world, this practice is more likely to lead to trouble.
If you have undeclared income from capital abroad, sound professional advice is in order.
Many investors do not realise that there are tax efficient yet fully compliant alternatives to declaring income without breaking the law.
Next: Declaring rental income