2013 saw the biggest tax hikes in modern history come into effect in Portugal, considerably increasing the tax burden for Portuguese residents. The 2014 Budget did not include similar tax rises or any radical tax reforms, but taxes remain high.
You are resident in Portugal if you spend 183 days or more here in a calendar year or have a habitual abode here. As a resident you are liable to Portuguese tax on your worldwide income and gains. Non-residents are taxed on their Portuguese sourced income.
Residents may be able to take steps to lower taxation on their capital investments and pensions, as well as protect themselves from inheritance taxes.
Income tax and surcharges
The progressive tax rates are unchanged from 2013, when tax rates increased, particularly for higher earners, and income bands reduced, pushing income into higher brackets.
The tax rates range from 14.5% (for income under €7,000) to 48% (for income over €80,000).
The surtaxes introduced as a temporary measure a few years ago remain in place for 2014.
You pay an extraordinary tax of 3.5% on all income over €6,790 (the Portuguese minimum annual wage). Besides general income, this also applies to some types of income subject to special rates, such as investment income from blacklisted countries.
On top of this, a solidarity tax of 2.5% is charged for income over €80,000, increasing to 5% for income above €250,000.
This means that the top rate of income tax in Portugal is 56.5%.
Another solidarity contribution of between 2.5% and 50%, this time for pension income, also continues into 2014. This applies to pensions and cash lifetime benefits due for any reason to retirees and pre-retirees.
The flat rate of tax applied to interest, dividends, capital gains etc. is 28%, the same as last year.
Portugal residents can continue to opt for the scale rates of tax instead, but remember, once you choose this for one source of income, it must apply to all sources.
The same applies for rental income. The tax rate is 28%, but residents can have it taxed under the income tax rates.
Income from ‘tax havens’
Portugal publishes a list of ‘blacklisted jurisdictions’ which are countries and territories considered to have favourable tax regimes. This includes the Channel Islands, Isle of Man and Gibraltar.
Income arising from assets held in any of these jurisdictions is taxed at a higher rate of 35%.
Holding investments in such offshore centres is therefore not tax efficient. There are alternative arrangements which are approved in Portugal and provide attractive tax benefits.
Tax on high-end property
With effect from 2013, residential properties valued at €1 million or more are hit by a 1% Stamp Duty.
A much higher rate of 7.5% applies to properties owned by companies resident in a tax haven.
Crackdown on tax evasion
The government is also increasing tax revenue by intensifying efforts to find and clamp down on tax evasion, locally and offshore.
Last October it announced that it would hire another 1,300 tax inspectors (taking the total to 3,000) to further improve its collection of unpaid taxes.
Portugal has signed up to the OECD’s global Common Reporting Standard for automatic exchange of financial information between countries, to apply from the end of 2015.
The authorities can carry out an indirect assessment of an individual’s income tax liability if he fails to make an income tax declaration or where there is a 30% difference between the income declared and the published ‘reference income’ levels. A 60% flat tax rate can be levied if there is an unjustified increase in wealth of over €100,000.
Amounts transferred to or from unreported bank accounts in a tax haven are regarded as an evidence of wealth.
Non-Habitual Residents Scheme
This attractive scheme for new wealthy residents remains in place. It is open to those who have not been tax resident here for any of the previous five years, whether employed or retired. It offers substantial tax exemptions for your first 10 years of residence.
I can only summarise the key tax rates and considerations for this year here, so to find out exactly how they impact you, and what steps you can take to make your assets more tax efficient, you should seek professional, specialist advice.
The world may be changing. Global exchange of financial information starts next year, bringing an end to financial privacy, and taxes remain higher than they used to be – but there are still ways to protect your income and wealth from tax.
The 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 should take 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