IRS 2014 – Procedures nº1 – Fiscal Residency

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 dis-information 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 make an income tax declaration in Portugal?

Questions and answers

When is a foreigner considered resident for tax purposes?

It is important to distinguish between a Residency Permit (“Residência”) and being resident for tax purposes. The former is a civil status and had new legislation in 2006. The latter is fiscal in nature and is circumstantial in nature.

Individuals are deemed to be resident for tax purposes when they meet any of the following criteria:

An individual is deemed to be tax resident if he is 1) physically present in Portugal for more than 183 days in a calendar year; or 2) physically in Portugal for less than 183 days but has established a permanent place of residence at the year end. If one owns a dwelling in Portugal that the tax authorities might reasonably assume to be his or her usual residence, one can be considered resident for that tax year. If the head of a family is resident in Portugal for tax purposes, other family members are also considered to be resident there, even if actually living abroad.

However, if the foreign country has a tax treaty with Portugal, the treaty contains rules to decide in which of the two countries an individual is resident. Needless to say, if you do have a “Residência”, you are deemed to be resident whether physically present or not in Portugal. In fact, the Estrangeiros office now insists that non-EU residents present IRS tax declarations for Residência renewals.

Are non-residents required to declare income arising in Portugal such as rental income?

Your first obligation is to settle up with the tax authority in the country where the income is generated. As such, non-residents are taxable on income arising in Portugal, usually at the flat rate of 25%. If you are engaged in local lodging, your final tax rate should be less than 4% so compliance is, in fact, quite favourable.

What happens if I don’t file a tax return and get caught?

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. Legally tax resident in Portugal, many have never submitted a return, thus likely to be eligible to pay tax owed, back interest as well as hefty penalties. 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. Look on the bright side: by being compliant, you can take an important step towards peace of mind.

But I already pay tax in my home jurisdiction…

Unfortunately, you don’t get to choose where you pay your taxes. The Law determines the choice for you. 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 over 40 tax treaties with all of the EU countries and many others around the world. Many others are in different stages of the process. In other words, Portugal is rapidly internationalising its fiscal perspective.

Will I pay more in tax in Portugal?

It may come as a surprise that filing a correct tax return in Portugal can actually save you money. Submitting a tax declaration 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. We will try to show you how in the coming weeks.

Next: Submitting your IRS tax declaration

By Dennis Swing Greene
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Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.