Personal Income Tax in Portugal

These are the highlights if you want to know Personal Income Tax in Portugal.  This entry was drafted by Sousa Machado, Ferreira Da Costa. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case Sousa Machado, Ferreira Da Costa is an excellent option in Portugal.

Personal Income Tax

Personal Income is taxed according to the Personal Income Tax Code (Código de Imposto sobre o Rendimento das Pessoas Singulares – “CIRS”).

Taxable persons

Individuals who are residents for tax purposes are taxed on their worldwide income at progressive rates varying from 0% to 48%, for 2017. The CIRS foresees specific criteria for a person to be considered resident in Portugal. The two main criteria are the physical presence test and the habitual residence test. According to the physical presence test, a person is deemed residence if he/she spends more than 183 days in Portuguese territory within any 12 months period. According to the habitual residence test, a person in deemed resident if he/she declares a primary residence (tax domicile) in Portugal.
The CIRS also foresees the possibility for a partial residence if an individual arrives to, or leaves from, Portuguese territory within the course of a taxable year.

Non-residents of Portugal are taxed on their Portuguese source income, in most cases through a withholding at the source.

The taxpayer that has become tax resident in Portugal for a certain year and that has not been taxed as resident in Portugal for any of the previous five years may apply for the special tax regime for non-habitual tax residents. In general terms, non-habitual residents will be taxed at a flat rate of 20% in respect of employment income (Category A) and self-employment income (Category B) arising from high-value activities of a scientific, artistic or technical nature. In addition, income derived abroad may be fully exempt in Portugal provided certain conditions are complied with. The non-habitual resident has the right to be taxed as such during a ten-year period. The application for the non-habitual resident tax regime has to be submitted no later than 31 March of the year following the year in which the taxpayer became tax resident in Portugal.

Rates

Rates for individual tax:

•  Progressive tax rate depending up to 48%
•  Solidarity tax may be applicable at 2.5% or 5%, depending on the taxable income
•  Additional surcharge may apply up to a maximum rate of 3.25%
• The additional surcharge is expected to be eliminated in 2018.

Taxable income

• Employment income, director’s fees (category A) and pensions (category H) – IRS rates applies on the earned income of employed individuals, pensions and directors’ fees.

• Business and professional income (category B) – IRS taxable income includes all earned income of a professional individual, such as commissions and entrepreneurial income (including rental income upon option). Such income may be taxed either in accordance with a simplified regime or based on the taxpayer’s accounts.

• Investment income (category E) – Dividends and interest (bank interest, shareholder loans, from public company bonds, bills or other paper, as well as interest on public debt) are liable to taxation at a flat rate of 28% (either by means of a withholding tax or autonomous rate). However, the taxpayer may elect to include such items in taxable income in the tax return, being taxed at marginal tax rates that vary between 14.50% and 48%, in 2017. Investment income paid by non-resident entities without a permanent establishment in Portugal, but which are domiciled in a blacklisted jurisdiction, are liable to a tax rate of 35%, either by withholding tax or by the autonomous rate.

• Rental income (category F) – Rental income is subject to a 28% flat tax rate, but the taxpayer may opt to add the rents obtained to the respective taxable income in the tax return. If the taxpayer makes such election, the income shall be taxed at the progressive tax rates, with a credit given for the tax withheld. Rental income obtained by non-residents is taxed at a flat rate of 28%.

• Capital Gains income (category G) – capital gains will be subject to tax at a flat rate of 28%. Capital gains earned by non-residents that are not borne by a permanent establishment in Portugal are fully taxable at a flat rate of 28% (with an exception for capital gains on the disposal of shares, which are exempt in certain cases). Fifty percent of capital gains arising from the sale of real estate by tax residents in Portugal is taxed at progressive rates varying from 14.50% to 48%, in 2017.