Taxation in Portugal

                                                                                                  

 

 

 

Tax Year:

The tax year runs from January 1^st. till December 31^st.

 

What kind of taxes you may come across?

When you purchase or settle in Portugal you will have to deal with the following taxes:

1.      Property transfer tax or called I.M.T.

2.     Tax rates on property or called I.M.I.

3.     Income tax as an individual or company tax if you run a business. They are called or known as IRS and IRC.

4.     Inheritance tax an/or gift tax with is called Imposto Succesório / Doação

 

Who is considered to be tax resident?

One is considered a tax resident of Portugal in the following cases:

• If one is a resident in Portugal
• If one is physically present in Portugal for more than 183 days in a calendar year
• If the tax authorities could assume that on the 31st. of December you have established residence in Portugal.
• If you own a property in Portugal and the authorities may assume this is your usual residence.

 

Filing Dates or when applicable:

1. I.M.T.  has to be paid prior to the escritura (title deed) with the local tax department (Finançes) where the property is situated.
2. Depending on the amount to be paid this will be in 2 installments to be paid in April and September. If the amount is relatively low you will have to pay the total amount in April.
3. Tax returns have to be submitted between February 1^st. and March 15^th. if you are employed or have a pension. Between March 16^th and April 30^th. in all other cases.
4. After the heirs or their legal representative have declared the relatório de bens and habilitição de herdeiros in the local tax department.

 

These 4 taxes a little bit more in details:

1.      For more info on this subject see my article “Buying and Selling”

2.    Rates or property tax is a local tax and is calculated on the basis of the assessed tax value or ratable value (V.T. = Valor Tributável or V.P. = Valor Patrimonial). On what we call rustic properties this tax is 0, 8% of the value. If the property is urban the tax may vary between 0, 5% and 0, 8% of the V.T. (this is the old scheme). For tax changes see my other articles on this subject. As it is a local tax it depends on the local Municipality what the percentage is. In case the property is called misto (= mixed) the tax will be split in 2 parts on the invoice. If you own more than one property it will be all added to the same invoice as they invoice is done by tax number (= Número de Contribuinte or N.I.F.) In certain cases and below certain values people who are resident can apply to be exempted of paying this tax for a period between 3 to 6 years. This has to be applied for and the time starts running after you have paid the I.M.T tax.  If the tax is very low it will be waved.

3.    I.R.S. can be filled in the following ways:

• In person to local tax office
• By mail
• By internet at www.dgci.min-finances.pt. This can be done with a password to be obtained in advance.

 

Once established as a tax resident of Portugal one is supposed to pay tax on their world wide income.

One has to submit a Modelo 3 + annexes if applicable.

 

Income can be derived from some of the following sources:

1. Income achieved in or outside Portugal from employment
2. Income from having a company in Portugal or being registered as an individual enterpriser = Impresario em nome individual.
3. Income from interest ( if earned in Portugal this will be taxed at source by a withholding tax),  bonds or shares
4. Income from property
5. Capital gains tax
6. Income from a pension.

 

The latter may apply to many people taking up early retirement in Portugal. First of all one has to establish what type of pensions one is receiving. This could be:

1. A civil service pension for example from government, military etc.
2. Social security pension, for example old age, disability, etc.
3. Private pension which could be paid by a pension fund or insurance company.

 

It leads to far to detail all in- and outs on income tax as this article is basically meant to let you have an idea of taxes involved when you own property in Portugal. If you want to know more about taxation from income from property please see my article “Tax on Rental income”. This tax applies also for people who are not tax resident in Portugal.

 

Capital gains Tax

Portugal does not know a capital wealth tax but we have a capital gains tax or called mais valía.

If we only concentrate on the capital gains derived from buying and selling properties we can say the following:

To calculate the value applicable one takes the difference between the purchase price and the selling price. The purchase price can be increased with expenses made to purchase like Sisa or I.M.T. , Notary, Registration and legal fees and the selling price can be decreased with expenses made to sell. In this case the highest expense could/will be agent fees if you sell through an agent. It only can be used of course if you have proof of official receipts which normally will include VAT or here called IVA.

 

What to pay:

Here we have to make a distinction between residents and non-residents.  For resident and therefore tax payers in Portugal the tax will be levied only on 50% of the gain and it will only be applicable if the property was purchased after the 1th. of January 1989. At that date the first new tax reform in Portugal came into effect and all purchased made prior to that were exempt.

 

For non-residents the tax will be a flat 25% over the difference between purchase and sales price.

 

What if you bought a plot of land and had a house build.

In this case the intrinsic value of the land is known as you bought it and paid Sisa or I.M.T. This value can be increased with the value of the construction cost and please note again that only official receipts with VAT will be acceptable to the tax department. The fact that you transferred money to Portugal or can proof that you paid for example the builder by showing a copy of the cheque or bank statement is no proof!!

 

If you invest money on your property for example by adding a pool or making a garden please be wise enough to keep the official invoices and receipts as they can be used one day to decrease the capital gains tax.

 

Also the initial purchase price will be multiplied by an Inflation Adjustment Coefficient according to the following table:

Year	Coefficient
1989	2,21
1990	1,97
1991	1,75
1992	1,61
1993	1,49
1994	1,42
1995	1,37
1996	1,33
1997	1,31
1998	1,20
1999	1,18
2000	1,15
2001	1,09
2002	1,05
2003	1,02
2004	1,00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How much tax you will have to pay depends if you are a tax resident or not. In the first case it should be added to your IRS (Income tax), in the latter one should declare the gain and respect the same dates as mentioned above. Your fiscal Representative will be hold responsible and liable to act on your behalf.

 

However you will not always pay capital gains tax. If you decide to reinvest all or part of the monies again in a property in Portugal you have to declare this at the Finançes. You will be exempted in paying the tax if you have purchased another property 1 year prior to the sale of your old property or within 2 years after the sale. And you will only be entitled to use his scheme if the urban property you are selling was your permanent Residence and the new to buy property will be also. Please note that you wil be only exempted for the part reinvested. If you reinvest less than the sales price, the capital gains on the balance remains.

 

We have just talked about all income but of course Portugal will allow you as well to deduct a lot of expensive like:

• Medical expenses
• Rates
• Education
• Mortgage costs (see my article on mortgages)
• And more.

                    

The following income tax rates for 2004 are applicable in Euros after you have established your income:

 

Tax Rate	Taxable Income       Between    &       And		Tax Band Adjustments	Average % to pay
12%	Under	Î 4.266,00	0	12,00%
14%	Î 4.266,00	Î 6.452,00	Î 85,32	12,6777%
24%	Î 6.452,00	Î 15.997,00	Î 730,52	19,4333%
34%	Î 15.997,00	Î 36.792,00	Î 2.330,22	27,6667%
38%	Î 36.792,00	Î 53.322,00	Î 3.801,90	30,87000%
40%	Above	Î 53.322,00	Î 4.868,34	-

 

 

However if the non-resident is receiving income or liable to capital gain tax on Portuguese realestate he is obliged to file a return. 

Non-residents are sometimes subject to withholding tax that is considered a final payment.

 

Payment dates:

Tax is payable within 1 month of receiving notification by the tax authorities. This will normally be done by registered letter.

 

4. We have not discussed yet the tax mentioned in the beginning under number 4. “Estate duty or inheritance and gift tax “

Not nice to talk about but we are all mortal and one day we or our heirs have to face the fact:

After the death of the owner, properties and other assets like cars and bank accounts are subject to Portuguese estate duty.

 

However with the latest tax reform in 2003 inheritance tax was abolished for heirs in the first line, all other people will pay a kind of stamp duty of 10%

 

 

To give you an idea of the tax burden for inheritance tax as it was before 2003 I attach the following spread sheet:

Capital or Assets to be tax
From	To	First Line	Second line
Below	Î 3491,59	0%	7%
Î 3491,59	Î 13.716,94	6%	10%
Î 13.716,94	Î 34.915,85	9%	13%
Î 34.915,85	Î 68.584,71	12%	16%
Î 68.584,71	Î 172.085,27	16%	21%
Î 172.085,27	Î 341.676,56	20%	26%
Î 341.676,56