Understanding tax residency in Portugal

If you have recently moved or are moving to Portugal, you need to understand the tax implications of living here as a British national. Central to this is getting to grips with residency rules and establishing where you should be paying taxes. Not only does this ensure you fulfil your obligations under local and international law, but it can help you avoid paying more tax than you need to.

Are you tax resident in Portugal or the UK?

It is important to understand where you are tax resident as it is your country of residence that has the right to tax you on your worldwide income and capital gains. However, residency rules are different for each country and the answer is not always straightforward. Many expatriates, for example, assume they should continue paying tax in Britain – particularly if they have UK-source income, such as UK pensions – when they are actually tax resident here.

Even if you do not live here full-time, you could still meet the residency criteria. The Portuguese tax authorities (Finanças) will consider you a resident if you spend a total of 183 days or more in Portugal within 12 months. As Portugal splits the year for residency purposes, you could be recognised as a tax resident from the day you arrive in Portugal with the intention of staying permanently.

You could still be seen as a tax resident if you spend less than 183 days a year here and own Portuguese property. This could happen if the Finanças identify that you intend to keep and occupy the property as your ‘permanent home’ as at December 31.

Where your tax status is unclear because you meet the residency criteria for both Portugal and the UK, your residency is determined by the UK/Portugal double tax treaty. This sets out ‘tie-breaker’ rules that look at the location of your permanent home, where your finances are based and where you normally live. If your residency still cannot be decided, it comes down to your nationality or mutual agreement between the two countries.

How residency affects your taxation

Residents of Portugal are liable for Portuguese tax on all worldwide income and capital gains. You could also pay taxes on property rental, the transfer of real estate, vehicle sales and stamp duty.

If you are not yet tax resident in Portugal, and have not been resident in any of the last five tax years, you could take advantage of the Non-Habitual Resident (NHR) regime. This offers new residents special tax benefits for their first 10 years in the country. Besides offering a low 20% income tax rate if you are employed in a high value-added profession, the NHR scheme allows you to receive foreign income – like pensions – tax-free. You could also pay no Portuguese tax on gains you make from UK property.

If you do not qualify for NHR or your 10-year period has ended, Portugal can still be a tax-efficient place to live. While income is taxable at the progressive Portuguese income tax rates up to 48%, under certain conditions it is possible to receive up to 85% of UK pension income tax-free. Also, at a fixed rate of 10% and only applying to Portuguese assets passed on to non-family members, the local version of inheritance tax (stamp duty) is a lot gentler than the UK’s. When it comes to capital investments, Portugal also offers opportunities to enjoy extremely favourable tax treatment.

Non-residents only pay tax on Portuguese income and certain capital gains on Portuguese assets, although they remain fully liable for taxation in their country of residence.

Why you need to get it right

If you do meet Portuguese residency criteria, it is your responsibility to declare yourself to the authorities and submit a tax return each year. Failure to do this, even if unintentional, could invite a tax investigation. Declaring that you have paid tax in the UK on income that is actually taxable in Portugal will not be considered a defence under Portuguese law. If you disagree with the Portuguese authorities on whether you are a tax resident, it is up to you to prove that you do not meet any of the residence criteria.

Cross-border taxation can be very complicated and without expertise it is easy to get it wrong. If you are an expatriate, not only do you have to deal with a foreign tax system, you also need to understand how these rules interact with UK taxation. Wherever your liabilities lie, it is a good idea to explore legitimate opportunities to reduce your tax bill so you can meet your obligations in the most tax-efficient way 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 Dan Henderson
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Dan Henderson, Partner of Blevins Franks, is a highly experienced financial adviser, specialising in retirement, investment and succession planning. He holds the Diploma for Financial Advisers and advanced CII qualifications in pensions and investment planning.