Dennis Swing Greene
International fiscal consultant,
The entry: compliance obligations
RESIDENTS IN Portugal are required to submit a tax return, with the exception of those whose sole earnings are from Social Security pensions falling below the national minimum wage. Submitting your income tax declaration in Portugal, commonly referred to as IRS – Imposto sobre o Rendimento das Pessoas Singulares is the first step towards achieving fiscal residency. The process cannot get off the ground without it.
Your IRS declaration
Residents are taxed on worldwide income, regardless of where, what currency, or whether or not it comes into Portugal. All tax returns must be submitted by the following deadlines, following the tax year, in order to avoid penalties:
• February 1 to March 15: Only salaried and/or pension income.
• March 16 to April 30: All other cases.
In the past, late returns incurred only a token fine. However, the law has changed and the fines now start at 50 euros and can be as high as 5,000 euros.
Remember that the fiscal year in Portugal corresponds to the calendar year (January 1 to December 31). British nationals need to be especially careful since their UK April-to-April P60 will not correspond to the Portuguese fiscal year.
Submitting your return
Declarations may be submitted in person at the local tax office (Finanças), by post or over the internet at http://www.e-financas.gov.pt. More and more services are becoming available online, such as checking the newly updated rateable value (Valor Patrimonial) of your home. Some business related submissions can only be submitted over the internet. Getting a password for the internet site takes at least a week, so should not be left to the last minute.
Single, widowed and divorced taxpayers submit an individual return. Couples must file a joint declaration.
Separated couples, who are not divorced, may file separately. This is usually advisable, since both spouses are responsible for meeting all fiscal obligations under a joint return. All unmarried couples living together for more than two years, whether of opposite or the same sex, may also file a joint return.
While unmarried couples are treated the same as married couples for IRS income tax purposes, there is no carryover of this equality to other forms of taxation. This is especially important in Estate Planning. Unmarried couples generally have no succession rights, with marital and/or blood relations taking full precedence. While Estate Planning is advisable for almost everyone, it is imperative in the case of unmarried couples.
Tax forms are in Portuguese bureaucratise only, and frequently change from year to year. The central form, Modelo 3, is an information cover sheet about the taxpayer(s). Different categories of Portuguese sourced income are reported on the appropriate corresponding annexes.
• Foreign income is reported exclusively on Modelo J.
• Any expenses eligible for tax credits are reported on Annex H.
Net taxable income is calculated by reducing taxable income by personal deductions and tax credits. Certain types of income benefit from specific tax incentives. Tax liability is computed according to tax rate tables, reduced by applicable tax credits. Marginal rates range between 10.5 per cent and 42 per cent.
If you are still non-resident, you are taxable only on income arising in Portugal. In this instance, withholding tax represents a final payment and no further declaration is required. However, any other income arising in Portugal, such as rent or capital gains on Portuguese real estate, must be reported.
Your first obligation is to report the income and pay the tax in the country where it arises (in this case, Portugal), then report again in your home jurisdiction to claim the international double taxation credit.
Paying your income tax
Based upon your submission, Finanças will calculate what you owe, and later send a demand, usually within three to six months. Income tax is due within 30 days of the issue of an assessment by the tax authorities. Late payment will incur monthly interest penalties.
Application for fiscal residency
With your first declaration in the hands of Finanças, it is time to apply for a certificate of fiscal residency. This Portuguese-language-only form (Modelo 2) covers your personal details, start date of tax residency and the source of income.
When the certificate is issued (usually four to six weeks after completion), it should be sent to the International Division of the Tax Authority in your home country where they should proceed to stop withholding at source and refund any taxes that were inappropriately withheld after the date of transition to fiscal residency in Portugal. For UK nationals, there is a special dual language form (XE) in addition to the certificate of fiscal residency. Once approved by Finanças, the form should be sent to the Inland Revenue, where they will authorise income to be paid gross and arrange for refunds.
Dennis Swing Greene is Senior Partner and International Fiscal Consultant for euroFINESCO. Private consultations can be scheduled at our offices in Guia (Albufeira) and Lisbon (Chiado). In the Algarve, call 289 561 333 or in Lisbon, 213 424 210 or e-mail: [email protected]. You can also visit the euroFINESCO site at www.eurofinesco.com.