By getting to grips with Portugal’s tax and residency rules, expatriates can ensure they meet their legal obligations and pay taxes in the right country.
By getting to grips with Portugal’s tax and residency rules, UK expatriates can ensure they meet their legal obligations and pay the right taxes in the right country.
If you have recently relocated or plan to move to Portugal, you need to be aware of the tax implications of living here as a British national. Getting to grips with the residency rules and establishing where you should be paying taxes can help ensure you fulfil all your obligations without paying more tax than you need to.
Establishing tax residency in Portugal is also a key step towards securing the right to remain post-Brexit.
Are you tax resident in Portugal or the UK?
Normally, it is your country of residence that has the right to tax you on your worldwide income and gains. While it is vital to understand where you are deemed tax resident, the answer is not always clear-cut and residency rules differ for each country. Many expatriates assume they should continue paying tax in Britain – particularly if they have UK-source income, like UK pensions – when they are actually tax resident here.
Even if you do not live in Portugal full-time, you could still meet the residency criteria. The Portuguese tax authorities (Finanças) will consider you resident if you spend 183 days or more in the country within a 12-month period. Portugal splits the year for residency purposes, which means you could be recognised as tax resident from the day you arrive with the intention of staying permanently.
If you spend less than 183 days a year here, you could still be seen as tax resident if you own Portuguese property that the Finanças consider to be your ‘permanent home’.
Where your tax status is unclear because you meet the residency criteria for both Portugal and the UK, residency is determined under 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 residency still cannot be decided, it comes down to your nationality or by mutual agreement between the two countries.
See more about UK residency rules
How residency affects taxation
Residents of Portugal are liable for Portuguese tax on all worldwide income and some capital gains. You could also attract taxes on property rental, transfer of real estate and vehicle sales.
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 ten years in the country. Most foreign-source income is not taxable under the scheme, so non-habitual residents will not face Portuguese tax on gains from UK property, for example, and British retirees can generally receive UK pensions tax-free. Those employed in Portugal in a ‘high value-added’ profession could also benefit from a fixed 20% income tax rate under NHR.
Find out more about the benefits of NHR
If you do not qualify for NHR, Portugal can still be a tax-efficient place to live. Income is taxable at the progressive Portuguese income tax rates from 14.5% to 48%, with opportunities to enjoy extremely favourable tax treatment on capital investments. Portugal’s version of inheritance tax (‘stamp duty’) is a lot gentler than the UK’s – it is fixed at 10% and only applies to Portuguese assets passed on to indirect/non-family members.
Owning Portuguese property with a total value over €600,000 (per individual owner) attracts annual wealth taxes, regardless of residency. Otherwise, non-residents only pay taxes here on Portuguese income and certain capital gains on Portuguese assets, but remain 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.
See the latest on global tax transparency
Remember: if you want to stay in Portugal after Brexit, securing tax residency before the cut-off date is one way of demonstrating the ‘settled status’ required.
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.
Read more about Portuguese residency and preparing for Brexit
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 should seek personalised advice.
