Does Portugal Tax Foreign Income? What You Need to Know for 2023

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Does Portugal Tax Foreign Income? What You Need to Know for 2023

by | Wednesday, 1 February 2023 | Corporate Income Tax, Personal Income Tax

portugal tax foreign income

Does Portugal Tax Foreign Income? Yes, Portugal taxes foreign income received by Portuguese tax residents. Foreign income is included in the individual’s taxable income in Portugal and is subject to the same tax rates as domestic income. Nevertheless, double taxation agreements (DTAs) are signed between Portugal and several jurisdictions where foreign income was generated.

The purpose of DTAs is to prevent or reduce the double taxation of the same income. Therefore, typical DTAs stipulate which country has the authority to tax particular categories of income and the extent to which the other country can tax the same income. For instance, a DTA may stipulate that specific income categories, such as dividends or capital gains, can only be taxed by the taxpayer’s country of residency. Other types of income, such as wages, can be taxed by both nations.

As such, DTAs frequently include a tax credit system, whereby the taxpayer can claim a credit in their home country for taxes paid in the other country. This credit eliminates double taxation by preventing taxpayers from being taxed twice on the same income.

That is why DTAs serve a crucial role in mitigating the detrimental effects of double taxation on persons and enterprises operating in numerous nations.

Therefore, the most appropriate answer to the question above is that taxation on foreign income is either null or mitigated under the applicable tax laws.

Taxation of income under the NHR scheme.

The non-habitual resident (NHR) scheme in Portugal provides tax benefits for individuals who become tax residents in Portugal but have not been tax residents in Portugal in the previous five years. Under this scheme, qualifying individuals can benefit from a special tax regime for ten years. During this time, they are taxed in Portugal on their Portuguese-source income at a flat rate of 20% (freelancer income and salaries from high-added-value jobs). This rate may also apply to freelancer income from foreign sources that is not subject to taxation at source and is related to a high-added-value job.

Foreign-source income under the NHR scheme is exempt from Portuguese taxes, provided that it is not considered earned in Portugal and is (or may be) subject to taxes in the country where it was generated, as covered by the DTA between Portugal and the jurisdiction where the income was generated.

It is important to note that the NHR scheme is subject to specific conditions and requirements, and not all individuals will be eligible for the scheme’s benefits. It would be best for you to consult with a tax professional for more information and determine if the NHR scheme applies in a particular case.

Taxation on income from blacklisted jurisdictions?

Portugal has a list of tax havens (also known blacklisted jurisdictions). This list also includes jurisdictions that have signed a tax treaty with Portugal.

Generally speaking, payment of capital income (e.g., interest) to a jurisdiction on the list of tax havens should be taxed at an aggravated withholding tax rate of 35% (since the Corporate Income Tax Code provides for the application of an aggravated withholding tax rate for payments of capital income to entities resident in tax havens). Similarly, interests and dividends received from a blacklisted jurisdiction ought to be taxed, under the Personal Income Tax Code, also a 35% rate (even if the taxpayer benefits from the NHR scheme)

Given the above, revenue from these jurisdictions may be subject to special tax laws or higher tax rates. The rules and regulations governing the taxation of foreign income from blacklisted jurisdictions in Portugal may vary. So, it would be best for you to consult a tax expert for additional information. Additionally, Portugal may apply anti-tax avoidance rules to transactions with blacklisted jurisdictions to prevent tax evasion or avoidance.

At MCS, we can assist you with your tax and immigration matters in Portuguese territory. This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind. Should you have any questions, please do not hesitate to contact us.

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