If you have recently moved or are moving to Portugal, tax planning should be a key part of your arrangements. Without a personalised, effective strategy you could easily end up paying more tax than necessary. You could even pay tax in the wrong country.
Some expatriates wrongly assume they do not need to pay tax in Portugal when they are in fact tax residents here. Even if they do not live here full-time they could still meet the criteria to be tax resident. For others the opposite applies and they should still be paying tax in the UK.
It is vital to understand where you should be paying tax and fulfil your obligations under local – and international – rules. If you get it wrong, you could pay much more than you need to or, alternatively, land yourself in hot water.
How residency affects your taxes
It is important to understand the tax implications of being resident in Portugal.
If you are a resident, you are liable to pay Portuguese tax on all your worldwide income and some capital gains. You could also pay taxes on property rental, the transfer of real estate, vehicle sales and stamp duty. You may, however, be eligible for special rates and exemptions under the ‘Non-Habitual Resident’ regime, which offers very attractive tax incentives to foreigners relocating to Portugal.
If you are not a resident, you will only pay tax on Portuguese income and certain capital gains on Portuguese assets. You will, however, remain fully liable for taxation in the UK or your country of residence.
Establishing your tax residency
Identifying whether you are a tax resident in Portugal may seem straightforward, but the rules can be quite complex and the answer is not always clear cut.
The simplest rule concerns how long you spend in Portugal. If you are here for a total of 183 days or more within 12 months, the Portuguese tax authorities (Finanças) will consider you a resident.
Before 2015, the 12 months counted as the calendar year, but now it starts from the date you arrived in Portugal with the intention of staying permanently. As a result, you could now be recognised as a tax resident from the day you relocate.
Even if you spend less than 183 days a year here, you could still be seen as a tax resident if you own Portuguese property. This will be the case if there are signs that you intend to keep and occupy the property as your ‘permanent home’ as at December 31.
If you do meet Portuguese residency criteria, it is your responsibility to declare yourself to the authorities and submit a tax return each year. Fail to do this and you could face a tax investigation.
Disputing your residency
If you disagree with the Portuguese authorities on whether you are a tax resident, the burden of proof falls on you. It is up to you to prove that you do not meet any of the residence criteria.
Where your tax status is unclear because you meet the residency criteria for both Portugal and the UK, your residency is determined by the double tax treaty between the countries. This sets out ‘tie-breaker’ rules, such as the location of your permanent home, where your finances are based and where you normally live. If your residency still cannot be decided, it comes down to your nationality or mutual agreement between the two countries.
Residency for your family
If you do fulfil Portugal’s residency rules, your dependent relatives will also be considered residents. However, this might not be the case for other family members.
Recently the Portuguese tax authorities started recognising different residency types within the same household. Now, if one person is resident, their spouse could claim non-residency if, for example, they can prove their main economic activities are outside Portugal. If this happens, each spouse files their own tax return – the resident spouse for worldwide income (including their share of any joint worldwide income), the non-resident spouse for Portuguese source income.
Get expertise to get it right
Taxation anywhere is complicated. As an expatriate, not only do you have to deal with a foreign and complex tax system, you also need to understand how these rules interact with UK taxation. Without expertise it is easy to get it wrong.
Wherever your liabilities lie, a tax planning review could let you take advantage of legitimate arrangements to reduce your tax bill. Make sure you take specialist advice to meet your obligations in the most tax-efficient way for your personal situation.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com