Contributed by Dennis Swing Greene
International fiscal consultant,
EuroFINESCO S.A.
WHILE, in the ‘good old days’, many were exempt from submitting IRS tax forms, the law has changed and now the overwhelming majority of foreign residents must declare. If you have lived in Portugal for years, yet have never filed an IRS return, why should you start now?
In the 2004 tax year, everyone is required to submit a tax return, with the exception of those earning only Social Security pensions, falling below the minimum wage. No tax return can put you on the wrong side of the law and vulnerable to undesired queries. If you are from a non-EU country, you will not be able to renew your Residência without one. For EU citizens, it’s only a matter of time before presenting your Modelo 3 is compulsory for renewals.
Important dates
All tax returns must be submitted by the following deadlines to avoid penalties.
February 2 – March 15, if only salaried and/or pension income
March 16 – 30 April, in all other cases
Attention: In the past, late returns incurred only a token fine. However, the law has changed and the fines now start at 50 euros and go up quickly. Also remember that the fiscal year in Portugal corresponds to the calendar year (January 1 – December 31). British nationals need to be especially careful since their April-to-April P60s will not correspond to the Portuguese fiscal year.
Where to submit your return
Declarations may be submitted in person at the local tax office (Repartição de Finanças), by post or over the internet http://www.e-financas.gov.pt/. The website and forms are only available in Portuguese. More and more services are becoming available online, such as checking your newly updated Valor Patrimonial (rateable value) of your home. Some business-related submissions can only be submitted over the internet.
Attention: Getting a password takes at least a week, so this step should not be left to the last minute!
Tax forms keep changing and this year is no exception. Modelo 3 is now only an information cover sheet. Different categories of Portuguese sourced income are reported on the appropriate corresponding annexes. Foreign income is reported exclusively on Modelo J. All expenses have moved to Annex H. Net taxable income is calculated by reducing taxable income by personal deductions and tax credits. Certain types of income benefit from specific tax incentives. Tax liability is computed according to tax rate tables, reduced by applicable tax credits.
If non-residents are subject to withholding tax, this payment-at-source represents a final payment and they are not required to file a tax return. However, any other income arising in Portugal, such as rent or capital gains on Portuguese real estate, must be reported. In fact, your first obligation is to report the income and pay the tax in the country where it arises (in this case, Portugal), then report again in your home jurisdiction to claim the international double taxation credit.
When to pay your tax bill
Based upon your submission, Finanças will calculate what you owe and send a demand later in the year. Income tax is due within one month of the issue of an assessment by the tax authorities. Late payment will incur monthly interest charges.
It may come as a surprise that filing a correct tax return in Portugal can actually save you money. Submitting a tax return is not synonymous with paying tax. The Portuguese tax code has generous allowances and unexpected exclusions on certain forms of income, broad deductions for numerous types of expenses and liberal tax credits for many common expenditures. Many people find their tax burden in Portugal to be significantly lower than in their country of origin.
• Dennis Swing Greene is an International Fiscal Consultant for EuroFINESCO S.A., with offices in the Algarve and in Lisbon.Appointments may be scheduled in Guia (Albufeira) telephone 289 561 333 or in Lisbon (Chiado) telephone 213 424 210.
