Imagine this scenario: you are a British expatriate living in Portugal, enjoying the lifestyle you have dreamed about. Then you receive a letter from your local tax office claiming you owe them thousands of euros in unpaid taxes, interest and penalties…
While this may not concern you, some expatriates do mistakenly continue to pay tax in the UK. Others may get most of it right but not realise they should be paying tax in the other country on certain assets.
Cross-border taxation is complex, and not something you should only partially get right. You need to ensure you pay the right tax to the right tax authority, or risk potentially serious consequences. Ignorance or arguing that you pay your taxes somewhere else is no defence.
Where are you liable for taxation?
You cannot choose where you pay taxes; if you live in Portugal and meet certain rules, you are likely to be deemed resident here and be subject to domestic taxes.
As with most things tax-related, however, this is not always straightforward. Some income – such as UK rental income – may still be taxable in Britain while also being liable in Portugal. To prevent tax being paid twice, the UK-Portugal double tax treaty determines which country has the taxing rights; you can usually receive a tax credit for tax paid in the other country.
Things get more complicated if you split your time between the UK and Portugal, or you let a property in one country while living in another.
Understanding your tax residency
In Portugal, you are tax resident if you spend more than 183 days here within a 12-month period. Even if you spend less time here, you may be deemed resident for tax purposes if you have a ‘permanent home’ in Portugal as at December 31. Tax residents are liable to Portuguese tax on worldwide income and some capital gains, although those with ‘non-habitual resident’ (NHR) status can receive most foreign income tax-free for their first 10 years in Portugal.
In any case, the responsibility falls on you to make yourself known to the local tax authorities and fully declare all your income and wealth according to the rules.
Conversely, sometimes expatriates assume they are non-UK resident when they actually still are. Spending just 16 days back home could unintentionally trigger UK tax residency, so if you return to the UK for extended periods, take care to understand your liabilities.
If you meet the residency requirements in more than one country, the ‘tie-breaker’ rules within most double tax treaties determine where you should be resident. This can be complex, however, as your interpretation of your situation may differ to the tax authorities, and your circumstances can change which may unexpectedly change your position.
While you do not have a choice – you either are or are not resident under the rules – if you have flexibility, you can be careful with the number of days you spend in each country, and where you have assets and ties.
Beware also that your domicile status – which affects your liability for UK inheritance tax – is different from residence. Shaking off UK domicile is complex and notoriously difficult, so take specialist advice on the best approach for you and your future heirs.
The cost of getting it wrong
If you fail to pay the taxes you owe correctly or do not report relevant income to the tax authorities in the relevant countries, you could risk inviting a potentially large bill of back taxes, interest and penalties. You could even find yourself at the centre of a tax investigation, possibly in a foreign language, and having to pay for advice as well as the tax bill. You will also need to try and recoup the taxes you paid incorrectly in the other country.
With today’s global tax scrutiny, it is more important than ever to ensure you get it right. Under the ‘automatic exchange of information’ regime, over 100 countries – including Portugal and the UK – are now sharing data on residents’ overseas income and assets. The UK has also introduced tougher penalties for undeclared offshore income and gains, including an unlimited fine and up to six months in prison. Remember, in most countries, tax evasion is a criminal offence that can result in prosecution.
Take personalised advice from an adviser with in-depth knowledge of the tax regime of both countries and the interaction between them. Once you are sure you have met your tax obligations, you can focus on securing tax-efficient ways to protect and grow your wealth to continue enjoying your time in Portugal.
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 is a Partner of Blevins Franks in Portugal. A highly experienced financial adviser, he holds the Diploma in Financial Planning and advanced qualifications in pensions and investment planning from the Chartered Insurance Institute (CII). | www.blevinsfranks.com