If you have moved or are moving to Portugal, tax planning should be high on your priorities. Otherwise you could easily end up paying more tax than necessary, or even pay tax in the wrong country.
Some expatriates incorrectly assume they do not need to pay tax in Portugal when they are, in fact, tax residents here. Even if you do not live here full-time, you could still meet the criteria to be 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 even find yourself subject to a tax investigation.
And, of course, with Brexit in the picture, tax residency now plays an important role in establishing that you are settled and have a right to stay in Portugal in the future.
Residency options and taxation
If you are a resident, you are liable for Portuguese taxes on your worldwide income and some capital gains. Income tax rates range from 14.5% to 48%, and while investment income is taxable at 28%, Portugal offers highly tax-efficient opportunities for capital investments. Residents are also subject to taxes on property rental, the transfer of real estate, vehicle sales and stamp duty.
If you have not been resident in Portugal within the last five years, you could qualify for highly attractive tax benefits through the ‘non-habitual resident’ regime. This allows you to receive most foreign source income tax-free for your first 10 years here, and a special 20% tax rate on eligible Portuguese employment income.
This year, new tax incentives for lapsed Portuguese residents were introduced. If you were resident up to December 31, 2015 but have not been resident since, you could receive a 50% reduction in employment/self-employment income tax for five years on your return to Portugal.
Non-residents only face taxes on Portuguese income and certain capital gains on Portuguese assets, plus ‘wealth tax’ on Portuguese property valued over €600,000 (per individual owner). However, they remain liable for taxation in their country of residence.
Identifying your tax residency
While this may seem straightforward, the rules can be complex and the answer is not always clear.
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 resident. The clock starts from the date you arrived in Portugal with the intention of staying permanently, so you could actually be deemed tax resident from the day you relocate.
If you spend less than 183 days a year here but own Portuguese property, you could still be seen as tax resident if there is evidence that the property is your home (‘habitual residence’).
If you do meet Portuguese residency criteria, it is your responsibility to declare yourself to the authorities and submit an accurate tax return each year.
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.
The finanças can recognise different residency types within the same household. So if one person is resident, their spouse could be deemed non-resident if, for example, there is proof that their main economic activities are outside Portugal.
Remember, with Brexit on the horizon, it is sensible to establish residency now to ensure your family can stay in Portugal and continue accessing today’s benefits, whatever happens.
Get expertise to get it right
Taxation anywhere is complicated. As an expatriate, not only do you have to deal with a foreign tax system, you need to understand how these rules interact with UK taxation. Without expertise it is easy to get it wrong; and with today’s global tax transparency, it is easier than ever for the authorities to find out if you do.
For the best results, take personalised, cross-border advice to ensure you meet your obligations in the most tax-efficient way for your family’s unique circumstances and goals.
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; individuals should seek personalised advice.
By Dan Henderson
Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.