Portuguese residents to be hit by new extraordinary tax

By Bill Blevins [email protected]

Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

Taxes have been on the rise across Europe as governments aim to repair their budget deficits after the financial crisis.  After having been forced to accept the €78 billion bailout from the EU and International Monetary Fund, the Portuguese government has no choice but to implement further tax hikes.

The bailout agreement already included a raft of austerity measures designed to increase tax revenues and reduce spending, so the government’s announcement of an additional tax hike would have been an unwelcome surprise for Portuguese taxpayers – but something they may have to get used to.  

The government plans to impose an “extraordinary tax” on all personal income received by Portuguese residents in 2011. Under the proposals it is a one-off surtax to be charged at a fixed rate of 3.5% on all taxable income over €6,700.

The taxable incomes include employment income, business and other professional income, pensions, investment income, rental income, capital gains (including on the sale of shares) and other income subject to a fixed rate of tax.

If you are employed in Portugal or receive income from a Portuguese pension scheme, then a 50% withholding tax will be deducted from the additional half month bonus salary you receive at Christmas. This is after the deduction of the usual withholding tax and social security contributions and is charged on income above the minimum wage of €485.  

The withholding tax is not necessarily the final amount of tax that you owe, but instead is considered as a payment on account.  Your total income tax liability will be assessed when you submit your 2011 income tax return next year, at which point you will either have to pay the difference or receive a reimbursement from the tax office.

This system will help the government collect the tax much faster than if it waited for the 2011 tax returns to be submitted. If you do not receive Portuguese employment or pension income, you will pay this extra 3.5% tax next year on all your income once it has been assessed on your 2011 tax return.

The tax is expected to bring in around €1.25 billion extra in tax revenue for the government, €840 million to be collected this year and €185 million next year.

It was announced by Prime Minister Pedro Passos Coelho during his first appearance since winning the June election, so he appears determined to fix the country’s finances.  He said the tax was necessary in view of recent budget figures on the first quarter of the year which show the budget objectives will not be easily met.  

Under the terms of Portugal’s bailout, the budget deficit needs to be reduced from 9.2% in 2010 to 5.9% this year, 4.5% next year and 3% in 2013.  Over the first quarter of this year, the deficit was 7.7%, so there is still a long way to go.

Besides this 3.5% surtax, the “Memorandum of Understanding On Specific Economic Policy Conditionality” (the EU/IMF bailout agreement) includes a list of tax increases for Portuguese taxpayers over the next couple of years.

VAT has already increased this year but next year goods and services which benefitted from lower rates will be moved to the higher rate of tax. Excise taxes on car sales and tobacco will increase and electricity excise taxes introduced. These two measures are expected to earn the government €660 million next year.

It will earn €150 million in 2012 and €175 million in 2013 from capping and reducing personal income tax benefits and deductions. It will cap the maximum deductible tax allowances according to tax bracket, with lower caps applied to higher incomes and a zero cap for the highest income bracket and phase out the deductibility of mortgage interest payments and ensure convergence of personal income tax deductions applied to pensions and labour income.

Next year changes in property taxation will raise at least €250 million by substantially reducing the temporary exemptions for owner-occupied dwellings. The following year the notional value of property for tax purposes will be updated, a move that will raise €150 million (a time when the property tax rate is scheduled to rise).  

Changes to corporate tax are expected to yield €300 million over 2012 and 2013.

The Memorandum also notes that the Portuguese government will increase efforts to fight tax evasion and fraud , to raise revenue by at least €175 million in 2012.  

Besides the direct impact of the tax changes, the VAT increases will add to the cost of living. Higher inflation reduces the real returns on your savings and investments, as does higher taxation.  Inflation in Portugal has already been higher than the EU average all year.  

Clearly, in the current environment, tax planning has become increasingly important if you wish to shelter your assets from unnecessary taxation. Your wealth management should be designed to protect your wealth in real terms, and you can maximise wealth preservation opportunities by combining effective tax planning and investment strategies.  An experienced wealth management advisory firm like Blevins Franks will help you determine the most effective and suitable way forward for your personal circumstances.  

The tax rates, scope and reliefs may change.  Any statements concerning taxation are based upon our understanding of current and proposed taxation laws and practices which are subject to change.  Tax information has been summarised; an individual must take personalised advice.  

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