Tax planning is a key step for people moving to or recently arrived in Portugal, particularly for your investment capital, pensions and estate. Without a personalised, effective tax mitigation strategy in place you could easily end up paying more tax than necessary.
Before you can start your tax planning, you need to be aware of Portugal’s domestic rules for tax residency. This also applies for those who have not necessarily moved here, but spend much time or have a home here. You may be liable for Portuguese tax without realising it.
If you fulfil Portugal’s resident rules, you are liable to Portuguese tax on your worldwide income and some capital gains (unless you are exempt from tax on foreign source income under the Non Habitual Residence regime). You are also liable for ancillary taxes such as property rental tax, tax on the transfer of real estate, stamp duty and vehicle sales tax.
Non-residents only pay tax on any Portuguese source income and certain capital gains in respect of assets in Portugal.
Portuguese tax is levied according to de facto (actual physical) residence. This has nothing to do with citizenship, nationality or whether you have a permanent residence visa or work permit.
If you do not believe that you are resident but the tax authorities claim you are, the burden of proof falls on you. It is up to you to prove you did not meet any of the residence criteria.
The 183-Day Rule
If you spend more than 183 days in Portugal in a 12-month period, the Portuguese tax authorities (Finanças) will treat you as being resident for tax purposes. Prior to 2015 the period was a tax year (January 1 to December 31) but this has now changed to be any 12-month period. This is a cumulative rule; the 183 days do not have to be consecutive.
It is now accepted that spouses can have different tax residence statuses, provided the spouse claiming to be non-resident proves they do not have the majority of their economic activities in Portugal. Each spouse files their own tax return; the resident spouse for worldwide income including their share of any joint worldwide income, the non-resident spouse for Portuguese source income.
Alternatively, if you have a ‘permanent home’ available in Portugal as of December 31, you may be deemed to be resident for tax purposes if it appears that you intend to keep and occupy it as your permanent home. This applies even if you spend less than 183 days here.
Split year treatment
Until recently, Portugal did not split its tax year for residency purposes, so if you arrived in the first half of a year you were tax resident from January 1 that year.
However, for those arriving or leaving Portugal from January 1, 2015, the tax year is now ‘split’ into periods of residence and non-residence. Residence is determined over a 12-month period before arrival or departure to establish if this regime will apply (so if you spend less than 183 days in Portugal in a calendar year, but more than that in the 12 months before arrival or after departure this regime will not apply).
So you are now considered tax resident from the day you arrive here on a permanent basis.
Double tax treaties
As a general rule, you can only be treated as tax resident in one country or another. However, it is possible to fulfil the domestic criteria of two countries, in which case your tax residence status is determined by the double tax treaty.
For example, under the UK Statutory Residence Test, residence in the UK is determined not only by the number of days, but also what ‘ties’ you have with the UK that tax year. I will look at this test in a later article, but if you are resident in both Portugal and UK under each domestic rules, then ‘tie breaker’ rules come into effect. If none determine your residence status, it comes down to nationality. British nationals would have to pay income and capital gains taxes in the UK rather than Portugal.
If you meet any of the residence criteria, it is your responsibility to declare yourself to the tax authorities and submit an income tax return each year. If you do not, you risk being the subject of a tax investigation. If in any doubt seek professional advice.
Cross-border taxation can be very complicated. Your tax planning needs to take the rules of all the related countries into account and the interaction between them. Take specialist advice to establish the most tax efficient solutions for your personal situation.
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
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