As tax advisors since 1995, we have heard our fair share of tales as old as the time of expats relocating to Portuguese territory for immigration and tax purposes, ending up not complying with Portuguese tax law, when it comes to personal income taxation, and therefore facing unpleasant surprises (penalties, interests and additional taxes down the line).
A qualified tax advisor, be it a lawyer or a certified accountant, will guide you through relocation from a Portuguese tax standpoint, providing detailed information on your tax and reporting obligations as residents for immigration and tax purposes in Portuguese territory.
Not a “banana republic”
With the advent of the Non-Habitual Resident (NHR) tax scheme Portugal, and Madeira Island, have been even more sought after by expats. On top of this, the Russian aggression against Ukraine has led to the growth of the Ukrainian population residing on the island, all potential taxpayers who, in principle, ought to benefit from the NHR scheme.
Nevertheless, our team of tax advisors keeps seeing the same mistakes being committed by expats, regardless of the situation that has brought them to the island. Our team has seen it all: from NHR status holders who decide only to submit their Portuguese personal income tax return for worldwide income earned in the first year following their registration to NHR status holders who choose never to submit their Portuguese personal income tax return or even the case of those benefiting from the temporary protection regime who continue to work as self-employed workers in their country of origin when in fact they qualify as residents in the Portuguese territory (having here their legal obligations towards the AT – Portuguese Tax and Customs Authority).
To the situations described above, we can add those in which foreign taxpayers residing in Portugal choose only to partially declare their worldwide income or situations in which foreigners have been residents for tax purposes for more than 20 years and have never submitted a personal income tax return.
All the situations described above are non-compliant with the Portuguese tax law.
A good tax advisor knows your obligations.
Qualifying as a tax resident in Portuguese territory
Generally, a taxpayer is considered a tax resident in Portugal if he remains more than 183 days. This counting refers to any period of 12 months beginning or ending in the year in question.
One is also a resident if they own housing that supposes the intention to maintain and occupy it like a habitual residence within 183 days of 12 months.
In addition to the general rules abovementioned, which coincide with the tax treaties signed by Portugal, if one has a residence permit in Portugal, one shows an intention of becoming a tax resident. Furthermore, specific residence permits (such as those based on the D7 Visa) imply minimum staying requirements in Portuguese territory that will trigger tax residency and registration with the AT.
On the other hand, should one have been granted residency in Portugal under the temporary protection status, that person becomes resident, for immigration and tax purposes, on the date of the grant of said status.
Generally speaking, immigration to Portuguese territory generally implies registration as a tax resident in the country. This will trigger personal income tax liability in Portugal and tax reporting obligations.
In the event of a conflict in the definition of the tax residence, the taxpayer must take into account the criteria for its purpose in the Double Taxation Agreement signed between Portugal and the country of residence and Portuguese tax law on the matter, namely partial residency. When in doubt about your tax residency status, ask a tax advisor.
If one wants NHR status, one must become a resident.
Tax residency is essential for obtaining the Non-Habitual Status (NHR), as one must first be resident toNon-Habitual Status (NHR), as one must first be resident to apply for NHR status and one has until 31st March of the year following that of registration as a resident to obtain said status (failure to do so and one loses the chance to get the NHR benefits for good).
Your legal obligations as a resident
Qualified tax advisors will immediately inform you that your legal obligations will be as follows, should you qualify as a resident for tax purposes in Portuguese territory:
- For a taxpayer who is a tax resident in Portugal, the Personal Income Tax, IRS, will be levied on their worldwide income. The IRS tax rate can go up to 48% unless said taxpayer fulfils the requirements to benefit from the exemptions or flat tax rates foreseen under the NHR status they have applied for.
- Further to the above, a resident taxpayer (including one benefiting from the NHR scheme) is required to annually file their Portuguese personal income tax returns, disclosing their worldwide income earned, corresponding taxes paid, social security contributions made and IBANs of all non-Portuguese bank accounts held at December 31st of the FY being reported.
Failure to comply with the annual tax reporting obligations may incur criminal liability.
Tax Residency and CRS
The Portuguese Tax Code requires all taxpayers who work and reside abroad to communicate the change of their tax address to the AT within 60 days. Other countries will have similar regulations in force. Therefore, it is of the utmost importance that expats check with their home-country tax advisors what needs to be done to relocate to Portuguese territory from a home-country tax perspective.
The above matter has become more “serious” if we consider that banks now collect and report information on bank account balances held by non-resident (for tax purposes) clients to the tax authorities. The opposite also happens: foreign banks will report the accounts held by taxpayers resident in their national territory to their respective tax authorities, who will then communicate this information to the tax authorities of the country of origin.
This exchange of information stems from the implementation of the Common Reporting Standards (“CRS”), created by the OECD and in which Portugal and 93 other jurisdictions are involved. Among the 93 jurisdictions, offshores like the Cayman Islands, the British Virgin Islands, and the Channel Islands are also included.
These commons reporting standards aim to combat tax evasion and money laundering and can impact the tax residency status of thousands of expats. CRSs can then risk expats’ income being taxed in their country of origin and residence if tax residence status is not up to date in all jurisdictions.
Exchange of tax information within the EU
Further to the above, the AT – Portuguese Tax and Customs Authority may very well be aware of the infractions a tax resident incurs if one decides not to report their worldwide income as described above. This is because of the current EU law to prevent personal income tax evasion.
Directive on Administrative Cooperation
The Directive on Administrative Cooperation (DAC) is one of the measures taken by the EU to implement the anti-tax evasion strategy adopted in 2006. Its purpose is to ensure that the OECD standard for exchanging information upon request is uniformly enforced in the EU. A Member State should not be prevented from passing on information concerning a taxpayer to another Member State because the information required can be provided only by a bank or financial institution. The Directive applies to taxes levied by a Member State or territorial or administrative subdivisions of a Member State, including the local authorities. This excludes indirect taxes already covered by Union legislation on administrative cooperation between the Member States.
With effect from 01 January 2015, the Directive provides for the Automatic Information Exchange on five non-financial categories of income and capital based on available information.
- Earnings from gainful activity
- Supervisory board remunerations
- Ownership of and income from immovable property
- Life insurance products
In addition, the European Commission had proposed to expand the Automatic Information Exchange between tax administrations in the EU to strengthen the fight against tax evasion. With the amending Directive 2014/107 of 09 December 2014, a list of financial information now also falls within the scope of the Automatic Information Exchange, from 01 January 2017.
Exchange of information concerning financial accounts
Within the EU (as well as participating third countries), information on financial accounts held by a person resident in another participating country is transferred. The financial institutions (banks, trustees, brokers, certain investment vehicles, and certain insurance companies) are obliged to report such data to the local tax authorities. These data are then forwarded to the relevant tax authorities in the other country.
The following information is to be reported from the cut-off date of 31 December 2016 onwards:
- Data of a person or entity subject to reporting (name, address, country of residence, tax identification number (TIN), date and place of birth for persons, account number)
- Name and the Austrian tax identification number of the reporting financial institution
- Account balance or value (including the cash value or surrender value in the case of redeemable insurance or annuity contracts) at the end of the respective calendar year.
- For custody accounts: Total gross amount of interest/dividends/other earnings and total gross proceeds from the sale or repurchase of financial assets
- For deposit accounts: Total gross interest income
This regulation is intended to avoid that capital yields earned abroad and subject to declaration or taxable in the country of residence are not declared by the taxpayer.
Digital nomads and Freelancers
Should you qualify as a resident, for tax purposes in Portuguese territory, even as a digital nomad, not only are you liable, under law, to the above-mentioned personal income tax reporting obligations (and taxation) but also to a set of other obligations, such as registering as a freelancer, invoicing their clients for the income they receive (as per Portuguese invoicing rules and using a certified invoicing software), Value-Added Tax (VAT) reporting and social security reporting and contributions. Please click here for more information on digital nomads’ specific situations.
Avoid the tales as old a time, follow the tax advisors’ recommendations (bring them with you to the tax office if you wish to learn how to do things yourself) and always tell the whole picture regarding your income structure. However, the most important thing to avoid is hearsay or being lost in translation with tax clerks, as the information provided might not specifically apply to you. When it comes to taxes, even in similar situations, one size usually does not fit all.
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.
Miguel Pinto-Correia holds a Master Degree in International Economics and European Studies from ISEG – Lisbon School of Economics & Management and a Bachelor Degree in Economics from Nova School of Business and Economics. He is a permanent member of the Order of the Economists (Ordem dos Economistas)… Read more