Portugal’s finance minister Mário Centeno has announced his proposed budget for 2017. The key reform that could affect expatriates living here is the introduction of a “wealth tax” on property.
It will now be debated in parliament and, once approved, it will come into effect on January 1, 2017. There may be changes before the budget is finalised.
Income tax and surtax
There are no significant changes to personal income tax. There will be some changes to the deductibility of some expenses.
The government introduced a solidarity tax and a surtax some years ago as part of austerity measures.
The surtax applies to all the income received by Portuguese tax residents included in their tax returns. It, therefore, also applies to capital gains. Last year we thought that 2016 would be the last year for this tax, but it continues into 2017. The budget confirms, however, that it will be phased out over the year.
Individuals who pay tax under the PAYE (pay as you earn) system will cease to pay surtax at different stages in the year, depending on their level of income, as follows:
Income that is not subject to PAYE will continue to be liable for the surtax, at the rates above, until the end of 2017. You will, therefore, continue to pay this tax on your UK pension income and investment income for another year.
The additional solidarity tax applied to individuals with higher income (2.5% on income over €80,000 and 5% in income over €250,000) continues to apply.
New wealth tax
The government announced plans to introduce an annual “wealth tax” from next year. This is actually (thankfully!) quite different from the wealth tax imposed in Spain and France.
This new wealth tax is actually an extension of the Imposto Municipal Sobre Imóveis (IMI), which is an annual tax charge similar to UK council tax.
It will only apply to Portuguese properties worth more than €600,000, at a rate of 0.3%. It is payable by the owner of the property regardless of where they are resident.
Each individual owner receives a €600,000 allowance. Married couple or civil partners who own a property in joint names, therefore, have a combined allowance of €1.2 million. This allowance is also available for companies and estates (which often continue for many years after the death of the owner). Note that if a couple own a property through a company, they will only receive one €600,000 allowance.
If, however, a taxpayer’s tax affairs are not in order (so if they are the subject of a tax inspection, a court case or similar) they will not be entitled to the allowance and 0.3% would be charged on the entire value of the property.
The €600,000 is available for individuals, companies incorporated in any jurisdiction that own Portuguese property, or estates (which very often continue for many years after the death of the owner).
The value of the property will be based on the ‘catastral’ value as at January 1 each year. (The ‘catastral’ value is the taxable value of the property which is presumably the same as that used for IMI).
Property used in tourism, such as hotels and guesthouses, or used for commercial, industrial or agricultural purposes will not be subject to this additional tax. All property outside Portugal is exempt.
If you own a rental property in Portugal, you will be able to offset against any income tax payable from that property. However, to be eligible for the credit you will have to pay tax at the progressive rates and not at the 28% flat rate. It can also be offset against a company’s corporation tax liability on rental income, again on the same property as is subject to wealth tax.
This wealth tax is expected to raise an additional €160 million in revenue for the government each year.
Although this new tax will not be welcomed by property owners, it compares very well to the wealth tax taxpayers in Spain and France have to pay. There the tax is payable on worldwide assets (not only property) and at higher rates (though allowances are higher too).
Overall, Portugal remains an attractive country to live in from a tax point of view, particularly if you take professional advice.
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
