As a high-income earner in Portugal, you face the unique challenge of navigating a complex tax landscape to ensure you maximise the tax deductions for high-income earners. This comprehensive guide will delve into Portugal’s intricate world of personal income tax (PIT). We will explore the various tax credits, allowances, and special regimes that can help minimise tax liability and keep more of your hard-earned income.
Resident Income Tax Rates in Portugal
Portugal employs a progressive income tax system, with rates ranging from 13.25% to 48% for resident taxpayers in 2024. The taxable income is divided by two for married taxpayers and those in de facto marriages who opt for joint taxation, potentially resulting in a lower effective rate.
An additional 2.5% to 5% solidarity rate applies to taxpayers with taxable income exceeding EUR 80,000 and EUR 250,000, respectively. Understanding these nuances is crucial for high-income individuals to plan their tax strategy effectively.
Tax Credits and Incentives for Residents
Portugal offers a comprehensive suite of tax credits and incentives that can significantly reduce the tax burden for high-income earners. Some of the key deductions and credits include:
Dependents and Ascendants
Residents can claim a fixed amount of EUR 600 and EUR 525 per dependant and ascendant living in the same household, respectively, provided they do not receive income higher than the minimum pension. These amounts are further increased for dependants under three years of age and in cases of single-parent households.
Household Expenses
Residents can deduct 35% of household expenses, up to a limit of EUR 250 per taxpayer (EUR 500 for joint returns), for services or goods acquired in various sectors. This limit is increased to 45% for single-parent households, with a global limit of EUR 335.
Health Expenses
Residents can claim a 15% tax credit on non-reimbursed health expenses exempt from VAT or subject to a 6% VAT rate up to a limit of EUR 1,000.
VAT on Specific Expenses
Residents can claim a 15% tax credit on VAT incurred for services in sectors such as vehicle maintenance, accommodation, restaurants, hairdressers, and veterinary expenses (with a 35% credit for veterinary medicines). A 30% credit is available for sports and recreational activities.
Public Transportation and Subscriptions
Residents can claim a 100% tax credit on VAT incurred for monthly public transportation passes, tickets, and subscriptions to periodical publications, including digital ones.
Alimony and Donations
Residents can claim a 20% tax credit on alimony payments and a 25% credit on donations to certain entities, subject to applicable limits.
Education Expenses
Residents can claim a 30% tax credit on education expenses, up to a limit of EUR 800 per household member aged 25 or under attending a recognised educational institution more than 50 km from the permanent residence.
Real Estate Expenses
Residents can claim a 15% tax credit on interest from loans taken out before 31 December 2011 and on rents for urban buildings and autonomous fractions used as permanent residences, subject to applicable limits.
Retirement Home Expenses
Residents can claim a 25% tax credit on expenses incurred with retirement homes up to a global limit of EUR 403.75.
Retirement Savings Plans
Residents can claim a 20% tax credit on contributions to individual retirement savings plans (Plano Poupança Reforma – PPR), subject to age-based limits.
Disability Deduction
Individuals with disabilities can claim a deduction ranging from 2 to 0.5 times the amount of the social support index (IAS) during the four years following the review or reassessment of their disability, provided they had benefited from the disability deduction for at least five years and maintain a disability equal to or higher than 20%.
Domestic Worker Expenses
Residents can claim a 5% tax credit on the annual expenses incurred for the remuneration of domestic workers, up to a maximum of EUR 200, subject to certain conditions.
Limit to the Sum of Credits
The total sum of tax credits that can be claimed is subject to a limit, which varies based on the taxpayer’s taxable income bracket. For households with three or more dependants, this limit is increased by 5% for each dependant not subject to PIT.
Non-Habitual Residents (NHR) Regime and tax deductions for high-income earners
The Non-Habitual Residents (NHR) regime, which offers favourable tax treatment for individuals who become tax residents in Portugal, was recently revoked, effective January 1, 2024. However, the regime still applies to those already registered as NHR on January 1, 2024, or who met the registration conditions by December 31, 2023. The regime may also be available for individuals who become tax residents in Portugal until December 31, 2024, subject to certain conditions.
Under the NHR regime, non-habitual residents are taxed at a flat rate of 20% on employment income (Category A) and self-employment income (Category B) from high-value-added activities of a scientific, artistic, or technical nature. A tax exemption (with progression) applies to foreign-source income, such as property income, interest, and dividends, provided specific criteria are met. A flat tax rate of 10% applies to pensions from foreign sources and other payments from pension funds and similar retirement schemes.
However, the above tax deductions do not apply to NHR status holders.
Tax Incentive Scheme for Scientific Research and Innovation (IFICI) – NHR 2.0
The 2024 State Budget introduced a new tax incentive scheme for research and innovation, the Tax Incentive Scheme for Scientific Research and Innovation (IFICI). This regime applies to individuals who become Portuguese tax residents in a specific year, have not qualified as tax residents in Portugal in the previous five years, and do not benefit or have benefited from the NHR regime or the former resident regime. Eligible individuals can benefit from a special 20% tax rate on net employment income (Category A) and business and professional income (Category B) from the activities identified in the applicable legislation, as well as an exemption on foreign-sourced employment income, business and professional income, investment income, rental income, and capital gains.
However, it is still impossible to apply for the regime, given the lack of ministerial ordinances.
Conclusion on tax deductions for high-income earners
As a high-income earner in Portugal, navigating the complex tax landscape can be daunting. However, by leveraging the various tax credits, allowances, and special regimes available, you can effectively minimise your tax liability and retain more of your hard-earned wealth. By staying informed and proactively planning your tax strategy, you can unlock significant tax savings and ensure your financial well-being in Portugal.
The information in this article on “tax deductions for high-income earners” is for general informational purposes only and is not intended to constitute legal advice. While every effort has been made to ensure the accuracy of the content, laws and legal procedures can change, and the specifics of each case can vary widely. Therefore, readers are advised to consult a qualified professional or attorney in Portugal for advice tailored to their circumstances before taking action. This article does not create an attorney-client relationship between the reader, the authors, or the publishers. The authors and publishers are not liable for any actions taken or not taken based on the content of this article.
Laurinda holds a Diploma in Business Administration from the South African Institute of Administration and Commerce… Read more
