Declaring IRS for 2007 – Part six: Capital gains on real estate
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
FOREIGN RESIDENTS receiving pensions from their home jurisdictions first need to study the nature of their pension to see how it is to be reported and assessed.
Three types of pensions are taxable under the rules of this category.
Each may receive different treatment under the Double Taxation Agreement between Portugal and the home country that governs which jurisdiction is entitled to assessment:
• Civil service pensions: government, military, foreign service etc;
• Social security pensions: old age, disability;
• Private pensions: company pensions, annuities, SIPPs etc.
If you take early retirement, there are complex rules for determining whether early retirement benefits are considered salary or pension.
Before making your first submission, it is wise to get professional advice on the correct interpretation of your individual circumstances within the context of Portuguese legislation.
Questions and answers
Q. I receive a military pension, which is taxed at source. Should I pay tax here in Portugal?
A. Civil service or government pensions (not to be confused with what state pensions or “old age pensions in the UK which are, in fact, from social security) are solely taxable in the country of origin in most cases (although Germany is a notable exception to this rule).
However, although not taxed in Portugal, these pensions should be reported both for reasons of transparency as well as determination of your tax bracket.
Q. I turn 65 this year and start receiving a social security pension. Where do I pay tax?
A. Social security pensions are customarily taxed in the country of residence (Portugal).
However, these are subject to specific negotiations in Double Tax Treaties and the outcome is most varied.
In some instances, the source country retains the sole taxation rights. In other instances, it is the country of residence that taxes exclusively.
Finally, there are cases when both jurisdictions are allowed to assess: first the home jurisdiction, then the residence country after granting the appropriate tax credit.
It goes without saying that it is crucial to be fully informed before filing.
Q. Where do I pay tax on my company pension?
A. Private pensions from company service, personal pension plans and annuities among others, are normally assessed in the country of residence – in this case, Portugal.
In most double tax treaties, the source country cedes the taxation rights to the country of residence. This means that all withholding tax should stop and that the pension should be paid in gross.
In order to achieve this, you must first declare yourself to be resident for tax purposes in Portugal, normally after your first IRS submission.
This is done via a Certificate of Fiscal Residency issued by the Finanças (tax office) or via a special dual-language form that is submitted to the authorities in both jurisdictions.
Once accepted and processed, you should receive a full refund from your country of origin for any tax withheld after the commencement date of your residency in Portugal.
From then on, you should be paid your income gross and are required to declare this income in Portugal.
Q. Are there any pension allowances?
A. In the year 2007, the deductible allowance for pensions is 6,000 euros per individual.
Those receiving pensions above 35,000 euros are no longer entitled to this allowance.
While couples must file a joint declaration, their income is viewed individually within the return. As such, each is entitled to a pension allowance but cannot pass on any unused benefits to the spouse.
This is the final article in the series on IRS 2007 and taxable income.
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