Is Portugal Tax Taxing For You?

Anyone living in Portugal, or moving there, needs to understand how all the various aspects of Portuguese tax law impacts them personally.

Anyone living in Portugal, or moving there, needs to understand how all the various aspects of Portuguese tax law impacts them personally.

Tax burden

2013 saw the largest tax hikes in modern history come into effect in Portugal.

Statistics Portugal has since revealed that the national tax burden increased by 8.1% in 2013 compared to the previous year. This includes a 34.3% increase in individual income tax.

The second amending budget for 2014, released in September, shows that the state’s tax take is expected to be €1.1 billion higher than it was in the first 2014 budget, taking it up to almost €37 billion.

Income taxes

If you live here, you are more than likely contributing to this record tax collection, with higher earners paying higher percentages.

Income tax rates range from 14.5% to 48%, with the 48% rate applied to income over €80,000. When you add the temporary surtaxes, the top rate climbs to 56.5%.

The flat rate of tax applied investment income (interest, dividends, capital gains etc) is currently 28%. Residents can opt for the scale rate of tax, but once you chose this for one source of income it must apply to all.

Under the proposals for the 2015 budget published so far, there are a couple of changes that will affect your income tax.

The threshold for submitting a tax return is expected to increase from €4,104 to €8,145. There is also a proposal to allow spouses to opt to be taxed separately, instead of as a household.

Another proposal would see a reduction of tax on savings held for more than five years.

But unless things change, the higher tax rates for both general and investment income remain in place for another year.

Income from ‘tax havens’

With regards your investment income, note that if your investment income is derived from assets held within one of Portugal’s listed “blacklisted jurisdictions”, then it is taxed at the higher rate of 35%.

This official list includes the Channel Islands, Isle of Man and Gibraltar, so these are not tax efficient homes for your capital if you live in Portugal. There are alternative arrangements which are approved in Portugal and provide attractive tax benefits.

Crackdown on tax fraud and evasion

The state’s increased tax revenue has not only come from higher taxes, but also from its efforts to find and clamp down on tax evasion, locally and offshore.

This time last year the government said it would hire another 1,300 tax inspectors, taking the total to 3,000, to further improve its collection of unpaid taxes.

Portugal has signed up to the Organisation for Economic Co-operation and Development’s (OECD) global Common Reporting Standard for automatic exchange of financial information between countries, which will arm it with more information in future.

Then there is the concept of “manifestation of wealth” in Portugal. The tax authorities look for signs of visible wealth and compare this to income declared in the individual’s tax return.

So for example, currently, if you buy a car worth €50,000, the taxman can audit your last tax return. Under a proposal by the Tax Reform Commission, from January the €50,000 value will reduce to €35,000.

This means that tax inspectors will be able to investigate more people, looking for signs of tax evasion. Legislation in 2009 shifted the burden of proof onto the taxpayer, so that if suspected of tax evasion, they have to provide evidence to show that they complied with tax laws.

So while tax planning is important, you need to ensure you get it right and only use arrangements which are fully compliant in Portugal. However, with specialist advice, it is possible to take advantage of legitimate tax planning opportunities to protect your assets from various Portuguese taxes.

Non-Habitual Residents Scheme

We covered this in our article “Can Portugal Be A Tax Haven For You“. If you are a new resident of Portugal you may be able to benefit from this scheme which offers substantial tax exemptions for your first ten years of residence.

In spite of Portugal’s higher tax burden, there are definitely still tax benefits to living here if you have the right advice. Tax efficient solutions are available which provide very favourable tax treatment on capital investments and pension income, as well as giving you peace of mind. Everyone’s situation is different, so taking specialist, personalised advice is essential.

9 October 2014

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.