The vast majority of foreign residents share a common trait: most, if not all, of their livelihood comes from outside of Portugal. Great confusion and disinformation abound regarding such income from abroad. Before analysing the different requirements surrounding Individual Income Tax (IRS) in Portugal, it is useful to dispel some of the myths and establish a few of the basics regarding Portuguese taxation and the obligations of the foreign resident. So, the first question to consider is: who is required to become resident for tax purposes in Portugal?
It is important to distinguish between a Residency Permit (Residência) and Fiscal Residency. The former requires a lengthy bureaucratic process at the Estrangeiros Office. The latter is circumstantial in nature.
An individual is deemed to be tax resident if:
• physically present in Portugal for more than 183 days in a calendar year; or
• physically present in Portugal for less than 183 days but has established a permanent place of residence at December 31; or
• if an individual at the end of a tax year owns a dwelling in Portugal that the tax authorities might reasonably assume to be his or her usual residence, the individual generally is considered resident for that tax year; or
• if the head of a family is resident in Portugal for tax purposes, other family members may also be considered resident, even if living abroad.
However, if the foreign country has a double tax treaty with Portugal, the treaty contains rules to decide in which of the two countries an individual is legally considered resident. Needless to say, if you do have a Residency Permit (Residência), you are deemed to be resident regardless of number of days you are actually present in Portugal.
The Portuguese Tax Authorities
While the tax authorities used to turn a blind eye to foreign residents, the pendulum is now moving in the other direction. Rather than being invisible, expats have become prime targets. Many (legally) tax residents of Portugal have never submitted a tax return, thus likely to be eligible to pay tax owed and back interest as well as hefty penalties. The government has made cracking down on tax fraud one of the cornerstones of economic policies and foreign residents are no exception. If you come forth voluntarily, you are dealt with accordingly. However, once on the “black list” of tax-cheaters, it is difficult to shake that status.
By being compliant, you can take an important step towards peace of mind.
Where you pay your taxes
Unfortunately, you don’t get to choose where you pay your taxes. The law does. Just because you may pay (incorrectly) back home doesn’t mean that you will win any favour with Finanças. Double Taxation Treaties clearly define taxpayer obligations. And Portugal now has tax treaties with all of the EU countries and many others around the world. An additional 10 countries are currently completing the ratification process, another 10 are under negotiation and another 30 are waiting to start the process. In other words, Portugal is rapidly internationalising its fiscal perspective.
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.
In your first year as a fiscal resident in Portugal, you will need to make the transition between one tax system to the other. This does not happen of its own accord. You need to take overt, concrete steps to make this happen. Otherwise, you will continue to pay tax in your home jurisdiction yet accumulate fiscal obligations and, eventually, serious penalties in your new country of residence, Portugal. We, as citizens, are compelled to be compliant with the law. We, as taxpayers, are only required to pay the legal minimum.
By Dennis Swing Greene
Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.