Portugal continues to appeal to Britons looking for an affordable place in the sun that’s not too far away from home. It can also be very attractive from a tax point of view. We outline the tax rates and rules for 2018 that are most likely to affect expatriates.
Portugal has always had a progressive approach to its tax system, often going against the EU norm in terms of rates and allowances. Here we will look at the current tax landscape in Portugal.
Income tax and surcharges
The minimum and maximum income tax rates for 2018 remain the same as the year before, and have in fact been unchanged since 2013, but two new income tax bands were introduced. Tax now starts being levied on income over €7,091 (previously €7,000) and the 48% top rate applies to income over €80,641 (previously €80,000).
| 0 – 7,091
| 7,092 – 10,700
| 10,701 – 20,261
| 20,262 – 25,000
| 25,001 – 36,856
| 36,857 – 80,640
While we finally saw the end of the surtax that was introduced under austerity measures, the ‘solidarity tax’ is currently still in place.
As last year, interest and investment income is taxed at a flat rate of 28%. Portuguese residents can choose to be taxed at the scale rates above instead if this more beneficial.
Note that if the bank account or investment is in a jurisdiction on Portugal’s list of ‘tax havens’, income is taxed at a higher rate of 35%. Gibraltar remains on this blacklist. The Isle of Man, Jersey and Uruguay were removed in 2017, but have been reinstated as their removal did not follow the correct legal procedure.
Non-Habitual Residents (NHR) regime
Portugal’s NHR regime remains in place – with no changes – continuing to provide new residents with very attractive tax benefits for their first 10 years.
Following comments from the Portuguese Finance Minister in September 2017, it was widely speculated that the tax benefits could be watered-down for expatriates settling in Portugal. In particular, many expected a 5-10% tax would start to be applied to foreign pension income.
However, there was no mention of this or of other NHR reforms in the 2018 budget, so Britons with non-habitual residency can continue to receive most UK pension income or lump sums without attracting tax for their first ten years in Portugal. Rental income, certain capital gains, interest and dividends can also be exempt, with any UK tax deducted reclaimable. The key exceptions are UK government service pensions and UK rental income, which always remain taxable in the UK.
2017 saw the introduction of a so-called ‘wealth tax’ on property, which is still in place. Known as the ‘Adicional Imposto Municipal Sobre Imóveis (AIMI)’ this only affects those with higher valued Portuguese property. Regardless of residency, rates are 0.4% for properties held by companies, 0.7% for individuals and 1% for those owning property valued over €1 million.
Relief comes via a €600,000 allowance per person, deducted from the value of all Portuguese properties. So if a couple jointly own one Portuguese home, the property will only attract AIMI if it is worth over €1.2 million, and then only on the value above this. Alternatively, someone owning three properties worth €500,000 would be liable for tax on €900,000 – the combined value minus the allowance.
The €600,000 allowance is available for individuals and estates, except for those whose tax affairs are not in order. Some companies (mainly those based in tax havens) are not eligible.
There are no changes to this tax in 2018, other than the ability to be taxed on a joint basis.
Capital gains tax
With effect from 1st January 2018, non-residents who own shares in a non-trading company that owns Portuguese real estate will be subject to capital gains tax when they dispose of the shares.
There are no changes this year to the tax treatment of trusts in Portugal. Since January 2015, Portugal taxes distributions from fiduciary structures such as trusts and foundations made to individuals resident in Portugal.
There can still be good value in a trust and they remain very effective for estate planning purposes. However, if and how you should use a trust – and how you combine it with investment arrangements for an income and gains perspective – depends on your specific circumstances and objectives.
UK nationals moving to Portugal should review their estate, tax and investment planning on a holistic basis. They should have a tax informed investment strategy, based on a thorough understanding of the tax landscape. There are many opportunities available in Portugal to protect one’s wealth in the long-term.
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 are advised to seek personalised advice.