When it comes to financial planning after a move to Portugal, ensuring proper tax management should be a top priority. Doing so will help you to avoid overpaying taxes unnecessarily or paying taxes in the wrong jurisdiction.
Even if your residence in Portugal is not permanent, you may still meet the criteria for tax residency. Conversely, there are cases where individuals should continue fulfilling their tax obligations in the UK.
Residency options and tax efficiency
As a tax resident of Portugal, you are liable for Portuguese taxes on your global income and certain capital gains. The income tax rates in Portugal range from 14.5% to 48%, while investment income is taxed at 28%. However, it’s worth noting that Portugal provides attractive tax-efficient opportunities for capital investments.
Additionally, residents are subject to taxes on property rentals, real estate transfers, vehicle sales, and stamp duty. Portugal also applies a ‘wealth tax’ on Portuguese property valued over €600,000 (per individual owner).
If you have not been a resident in Portugal within the past five years, you may be eligible for highly appealing tax benefits through the ‘non-habitual resident’ regime. This allows you to receive much of your foreign source income tax-free for the first ten years of your residency in Portugal, or, in the case of pensions, at a reduced rate of 10%. Furthermore, eligible Portuguese employment income from a ‘high value activity’ can be taxed at a special 20% rate.
New tax incentives were introduced in 2019 for individuals who were Portuguese residents until 31 December 2015 but had not been resident since. If these individuals returned to Portugal in 2019 or 2020, they could benefit from a generous 50% reduction in employment or self-employment income tax until the end of the 2023 tax year.
Non-residents only need to pay taxes on Portuguese income and specific capital gains from Portuguese assets. They are also subject to the wealth tax imposed on Portuguese properties valued above €600,000. Non-residents also remain liable for taxation in their country of residence, so the relevant tax treaty will determine where you need to declare and pay taxes.
Decoding the complexity of tax residency
One basic rule of tax residency revolves around the duration of your stay in Portugal. If you spend a total of 183 days or more within a 12-month period in the country, the Portuguese tax authorities (finanças) will consider you a tax resident. The clock starts ticking from the day you arrive in Portugal with the intention of remaining.
However, even if you spend less than 183 days in Portugal annually, owning Portuguese property could still lead to being recognised as a tax resident if there is evidence that the property is your primary home, or ‘habitual residence’.
If you meet the tax residency criteria set by Portugal, you must register for tax and diligently file an accurate tax return each year.
In cases where your tax status is ambiguous because you qualify as a resident of both Portugal and the UK, your residency determination is guided by the provisions outlined in the double tax treaty between the two countries. This treaty establishes “tie-breaker” rules, which consider factors such as the location of your permanent home, where your financial affairs are primarily based, and where you typically reside. If a definitive determination cannot be made based on these criteria, your nationality or a mutual agreement between the two countries becomes the deciding factor.
Establishing residency for your family’s future
When it comes to residency in Portugal, it’s essential to consider the implications for your entire family. While dependent relatives will be automatically considered residents if you fulfil Portugal’s residency requirements, the situation may vary for other family members.
The Portuguese tax authorities recognise that different residency statuses can coexist within the same household. This means that if one person is considered a resident, their spouse may be deemed a non-resident if, for instance, there is evidence indicating that their primary economic activities take place outside Portugal.
Unlocking expertise for efficient tax planning
Living in a foreign tax system and comprehending how these rules intersect with UK taxation can be a little daunting. Without the right planning in place, it’s all too easy to make costly mistakes. Furthermore, in today’s heightened global tax transparency era, authorities have enhanced capabilities to uncover any inaccuracies.
Don’t leave your tax planning to chance. Invest in specialised guidance to secure your financial well-being and make the most of the opportunities available within the complex territory of cross-border taxation.
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.
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