Portugal has become one of the most popular destinations for expats, at least in a small part due to the extensive tax advantages that it provides. The benefits give rise to the working class, retirees, and high net worth individuals. It is very important to be aware of the harsh penalties the Portuguese authorities can impose if you are not aware of the tax legislation. This legislation changes annually, often making it difficult to keep up to date. We update this page on a regular basis to ensure the information we provide is applicable today. The areas we will cover include:
- Common mistakes that expats in Portugal make
- Defining a Portuguese resident
- Portuguese tax position for residents
- Portuguese tax position for non-residents
- Portuguese best kept secrets
- Non-Habitual Resident scheme
- Portugal’s Golden Visa
- Blacklisted tax havens
- Other taxes including CGT, IHT and gift tax, wealth tax, IVA/VAT, Corporation tax, and social security
- Taxation on UK pensions
- Taxation on QROPS
It is important to note that the information provided on this website is just a guide hence before making any decisions it is always advisable to talk to one of our independent financial advisers, to discuss your personal requirements. CLICK HERE to find out how we could help you.
Common mistakes that expats in Portugal make
- Wrongly continuing to pay tax in their home country
- Never declaring themselves Portuguese tax resident (until caught)
- Assuming previous tax wrappers are tax-efficient in Portugal such as ISA’s or PEP’s
- Not being aware of the new tax advantages
Defining a Portuguese resident
Residency in Portugal can be split into three categories including:
- Portuguese resident
- Non-Habitual Resident (NHR)
It is important to note that the tax year in Portugal runs from the 1st of January until the 31St of December. You are deemed as a tax resident in Portugal if any of the following apply:
- You remain in Portugal for more than 183 days in a calendar year
- You have permanent residence in Portugal from 31st December in that tax year
- You work for a cruise ship/yacht that is owned by a Portuguese company
- You work for the State of Portugal, regardless of which country you are in
- You are married to a Portuguese tax resident
Other factors that may be taken into consideration are:
- If your kids go to school in Portugal
- If your pets live in Portugal
- And many more
Portuguese residents are subject to pay tax on worldwide assets including property and investments such as stock and shares, pensions, bonds etc. Property in the UK is taxable in the UK and Portugal.
2020-21 income tax bands are as follows for annual earnings between:
|€0 – €7,112||14.5%|
|€7,112 – €10,732||23%|
|€10,732 – €20,322||28.5%|
|€20,322 – €25,075||35%|
|€25,075 – €36,967||37%|
|€36,967 – €80,882||45%|
A 3.5% surcharge levy plus a 2.5% solidarity surcharge is applied to incomes above €80,000 which rises to 5% on incomes above €250,000.
Non-resident in Portugal
Non-residents are liable to income tax only on Portuguese-source income, which includes not only that portion of remuneration that can be allocated to the activity carried out in Portugal but also remuneration that is borne by a Portuguese company or permanent establishment (PE).
Non-residents are taxed at a flat rate of 25% on their taxable remuneration in 2020.
Portuguese best kept secrets
Non Habitual Residents (NHR) scheme
The NHR scheme was Introduced in 2009 to encourage wealthy people to move to Portugal. As of March 31st, 2020, changes were made where now a charge of 10% tax will be levied on foreign pension income after the government experienced pressure and criticism from other European countries for ‘discriminatory’ tax benefits.
New arrivals in Portugal may be able to benefit from the Non-Habitual Residents scheme, which offers substantial tax exemptions for your first 10 years of residence. This scheme is open to those in employment, as well as retirees.
On order to be deemed a non-habitual resident, the following criteria need to be met:
- Must not have been resident in Portugal for the previous 5 years.
- Register at the tax office as a tax resident.
- Qualify as tax resident for each year for the 10-year period.
A special tax rate of 20% applies if employed/self-employed income is derived from a ‘high value-added activity’ such as (architects, engineers and similar technicians; fine artists, actors and musicians; auditors; doctors and dentists; professors; psychologists; liberal professions, technicians and similar; investors, and directors and managers.)
The scheme also provides tax exemptions for a foreign source income, provided certain conditions are met. You may find that either all, or a proportion of, your income earned outside Portugal, including pension income, is exempt from Portuguese taxation. This applies so long as none of the below apply:
- Income is not paid by a Portuguese entity.
- The income is taxable in the country where the pension is located.
Income from foreign sources such as dividends, interest, rental income, and capital gains (not from UK shares) will also be exempt from tax in Portugal.
There is also no inheritance tax, gift tax, or wealth tax for non-habitual residents in Portugal.
The golden visa was implemented to fast-track investors to obtain Portuguese residency for non EEA members. The criteria to apply for ‘Golden Visa’ can be split into three categories which are as follows:
- Transfer funds of €1,000,000
- Capitalisation on SME’s of €500,000
- Funding for research activities of €350,000
- Funding for art and culture of €250,000
- Any property purchase in Portugal of €500,000 or more
- Urban renewal of €350,000
- There is no minimum investment amount and can be any type of business in any area.
- Creation of at least 10 jobs
The benefits of the ‘Golden Visa’ are as follows:
- You only need to spend 7 days a year in Portugal in year 1, and 14 days in year 2
- Family members also benefit
- Allows free access to countries within the Schengen area
- Can apply for permanent residency after 5 years
- Can apply for nationality after 6 years
- Quick and easy process
- Access to public services including health care
Portuguese tax penalties
Penalties for failing to submit a Portuguese tax return on time can range from €200 to €2,500. Late payment can also give rise to a 10% penalty on the amount owed but is capped at €55,000.
Blacklisted ‘tax havens’
Bank accounts or investments held in ‘Portuguese blacklisted countries’ such as Isle of Man, Channel Islands, and Gibraltar are subject to a higher fixed tax on interest of 35%.
Stamp tax (no inheritance tax or gift tax applies in Portugal)
Stamp duty is payable at a flat rate of 10% on transfers.
There is no ‘Stamp tax’ between immediate relatives such as children, parents, or spouse. At least 50% of the estate must be passed to the spouse or descendants. There are a number of complex rules that apply to this such as the number of children or if the spouse is still alive.
Unlike the UK, donating property to an individual during an individual’s lifetime is usually subject to tax upon being sold. The reserved rights to spouse/descendants also need to be taken into account.
- Taxed at a flat rate of 28%
Capital gains tax
- Flat rate of 28% for individuals.
- Flat rate of 25% for companies
If the money is re-invested from the sale of the asset, then only 50% of the net taxable gain will be taxed. Other rules apply.
- Flat rate of 21%
- Charities, churches and sports clubs are exempt from corporation tax
- The general rate is 23%
- A special reduced rate of 13% applies to ordinary wine, many types of water and tickets for cultural events
- A further reduced rate of 6% applies to certain foods and services such as vegetables, fruit, meat, cereal, books, newspapers, transport and so on
- Businesses with an annual turnover of less than €10,000 are exempt from VAT
- Employee contributions equal 11% of salary
- Employers contributions equal 32.7% of salary
- Contributions cover pensions, health care and unemployment
Options with your UK pension
- Leave your UK pension where it is
- Transfer to a SIPP
- Transfer to a QROPS
Leave your Pension Where it is
For many people, leaving your pension where it is maybe the best option. Some pensions have very good guarantees before and after retirement as well as on death. Other pensions may have restrictions about how you can access your funds, high fees, limited investment and currency options among other things. Understanding what your pension offers you as well as understanding what your needs and objectives are is important before looking at other options.
SIPPs in Portugal
If you are a British Expat and you are residing in Portugal, it is extremely important to understand your options regarding your UK pension as this can significantly boost your retirement income. If you are resident in Portugal, you have the option of transferring your pension to a SIPP which offers the following benefits:
- Payments from your UK pension will be taxed as ‘earned income’ at source by HMRC. You will also be liable to pay tax in Portugal at your marginal rate of income tax. Many individuals are unaware that UK tax still applies even though they are no longer UK resident, although this can be claimed back under the double taxation treaty
- You will be entitled to a 25% lump sum from the age of 55
- You will be able to withdraw from your pension via drawdown or Flexi-access
- You can withdraw 100% of your pension from age 55, although the first payment will be taxed at an emergency tax rate unless you have an NT tax code
- Much greater investment choice
- Have your pension denominated in any major worldwide currency
- You will be subject to any UK pension legislation changes
- Lifetime allowance of £1,073,100. Anything in excess can be taxed up to 55% depending on how you take your benefits when you retire
- UK pension death tax applies to UK pensions regardless of where you are resident. This means if you die after the age of 75, your pension will be taxed at your beneficiary’s marginal rate on receipt up to 45%. This may also be claimed back from HMRC
If you are a non-habitual resident, you will receive withdrawals from your pension taxed at a flat rate of 10% (previously tax-free before March 2020). Under new rules in a certain jurisdiction, you can withdraw 100% of your pension as a lump sum at a flat rate of 10%, providing you are over 55.
If you are a non-habitual resident, you will receive withdrawals from your pension FREE of tax. Under new rules in a certain jurisdiction, you can withdraw 100% of your pension as a lump sum completely tax-free, providing you are over 55.
*Please note: The information provided is general information based on our understanding of the current Portuguese tax legislation as of January 2021. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.
Problems with QROPS in Portugal
Recent action has been taken in various civil law countries legislating directly against, what is seen as, tax avoidance schemes. As a result of this a lot of standard trust-based plans, such as pensions, have been caught. For example, new legislation in France has created highly complex wealth and inheritance tax rules and the exemptions available for pension trusts are limited, while recent legislation in Spain has resulted in ‘look through’ provisions for trusts.
This creates great uncertainty as to how retirement plans written under the trust will be taxed in many civil law jurisdictions. Unlike trusts, contracts are recognised in both civil and common law countries giving greater certainty as to the tax position.
Some QROPS schemes are contract-based EU plans written under Maltese Pension Law. The Plan is recognised by her Majesty’s Revenue and Customs (HMRC) as a Recognised Overseas Pension Scheme and Trireme Pension Services (Malta) Limited acts as the sole Administrator to the Plan.
Non-Habitual Residents and Pensions
TAXATION OF DISTRIBUTIONS MADE FROM TRUSTS
On 17th December 2014, the Government of Portugal introduced a change to its domestic tax law meaning that, with effect from 1st January 2015, distributions paid from a trust to a Portuguese resident – such as an income payment – will be taxed at 28%. This charge applies regardless of how much of the payment is the original capital and how much is deemed income or gains.
The rules do not provide for a definitive exemption for benefits paid from pension arrangements established under trust and, also, it is unlikely that the NHR Regime will offer an exemption from the 28% tax charge.
Therefore, the previous effect of the NHR Regime is now unlikely to apply in respect of benefits paid from trust-based retirement arrangements. However, Portuguese residents receiving retirement benefits from a contract-based retirement arrangement will still be able to benefit from the NHR Regime meaning that distributions from a Maltese contract pension, can be highly tax-efficient.
It is therefore very important for individuals who anticipate being resident in Portugal and qualifying under the NHR Regime when retirement benefits are taken, to give careful consideration to the legal structure to which they transfer their UK pension.
Transfers affected by the overseas transfer charge
It is important to note that not all QROPS pension transfers will be subject to the new overseas transfer charge.
However, if you request a transfer on or after the 9th March 2017 AND any of the following criteria apply to you, you will be required to pay 25% of the value of the transfer in advance:
- You are not a tax resident in the EEA and the pension transfer is to a QROPS in a country other than your country of residence (i.e. if you are a tax resident in the UAE and your QROPS is in Malta)
- You are a tax resident in the EEA and the pension transfer is to a QROPS outside of the EEA (e.g. you live in France and your QROPS is in Australia)
- You (the member) have not provided all the required information before the transfer is complete
- If you requested your pension transfer before 9th March 2017, but not completed and the funds are then sent to a different QROPS which was not the scheme included in the original request
- When the transfer was requested you were either transferring your pension to a QROPS in your country of residence, or you were a tax resident in the EEA and transferring to a QROPS also in the EEA, however, within five years of the transfer your circumstances change such that you no longer meet the above criteria. For example, if you move outside the EEA or transfer your QROPS funds away from your country of residence
Transfers not affected by the overseas transfer charges
If the following criteria apply to you, you will not be subject to the overseas transfer charge:
- Your pension transfer is to a QROPS in the EEA and you are a tax resident within the EEA (i.e. any country within the EU and also Liechtenstein, Norway and Iceland, and Gibraltar)
- Your pension transfer is to a pension scheme in your country of residence (e.g. if you are a tax resident in Australia and you transfer your pension to an Australian QROPS)
- Transfers which are subject to unauthorised payments because they are not recognised transfers
- You are a former employee of an international organisation that has set up a QROPS specifically to provide benefits for former employees
- You are transferring to a QROPS which is an overseas public service pension scheme you are employed by an organisation participating in that pension scheme
- You are an employee of an organisation sponsoring an occupational pension which qualifies as a QROPS
*Please note: The information provided is general information on the basis of our understanding of the current Portuguese tax legislation as of January 2021. Should any of the information be inaccurate or misleading, we take no responsibility for any reliance placed on it. We recommend that individuals always seek specialist advice before making any decisions.
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