IRS 2009 Income Nº 3 – INCOME FROM CAPITAL – bank interest

By DENNIS SWING GREENE [email protected]

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 – Bank Interest,

4. Income from Capital – Dividends,

5. Rental Income,

6. Capital Gains on Investment Portfolios,

7. Capital Gains on Real Estate

Taxation of bank interest changed with the introduction of the EU Savings Directive in 2005. The following situations reveal which tax options exist and the implications of each scenario.

Q: I bank in Portugal. How am I taxed?

I. Banking in Portugal

1. Withholding at source – flat rate of 20%:  tax is final: no further reporting necessary;   or

2. Aggregate Assessment – reporting interest together with other income taxed at marginal rates (englobamento) – (0 – 42%). Withholding acts as a tax credit applied to final assessment.

(Important Note: if option nº 2 is chosen, all bank accounts must be reported and made available to Finanças, not on a selective basis)

Q: I bank in another EU country. How will I be assessed?

II. Banking in the EU

1. EU Savings Directive dictates Information Sharing between countries;

2. Tax Withheld at source:

a) assessment at source limited by Double Tax Conventions (DTC);

b) balance of withholding to be refunded as per DTC procedures;

3. Reporting Interest Income – 2 options

a) aggregate assessment (englobamento) – assessed with other income at taxed at marginal rates.

(Note: all bank accounts must be reported and made available to Finanças)

or b) autonomous assessment: flat rate of 20%  

+ c) application of international tax credit may apply as per DTC.

Q: I have an offshore bank account.  What choices do I have?

III. Banking Offshore and in EU Exemption Countries

(Offshore + Austria, Belgium and Luxembourg)

1. Withholding at source

Interest paid net (20% in 2009-2010; 35% after 2011):

¼ of withholding goes to Source Country; ¾ goes to Country of Residence (Portugal). or

2. Information Sharing: Interest paid gross

    Declaration with tax paid in country of residence (Portugal).

3. Reporting for final assessment in country of residence (Portugal)

a) Autonomous Assessment (não-englobamento): taxed independently at a flat rate of 20%. or

b) Aggregate Assessment (Englobamento) – Interest declared with other income and taxed at marginal rates (0 – 42%).

c) International Tax Credit

For the non-EU jurisdictions within Europe (Liechtenstein, Switzerland, Andorra, Monaco and San Marino) as well as the following offshore jurisdictions (Jersey, Guernsey and the Isle of Man, the Turks and Caicos Islands, the British Virgin Islands and the Dutch Antilles as well as the Cayman Islands, Antigua, Montserrat and Aruba), tax credits for withholding at source are eligible for an International Tax Credit, up to the tax due in Portugal. Any withholding beyond tax due in Portugal should be refunded at source.

Q:  I bank outside the EU.  How will I be treated?

IV. Banking in other countries around the world

1. Reporting Income: with other income at marginal rates (0-42%)

2. DTC rules and subsequent international tax credit may apply.

Next:  Dividends

Dennis Swing Greene is Chairman and International Fiscal Consultant for euroFINESCO s.a. Consultations can be scheduled in Guia (Albufeira) 289561333, Lisbon (Chiado) 21342421 and in Funchal (Sé), Madeira 291221095.