Taxation is a complex topic, especially when it comes to international taxes. Portugal is no exception. Foreigners and residents must pay income tax in Portugal, which can be confusing. This guide will provide you with an overview of Portuguese income tax so you can be prepared and compliant.
Introduction to Income Tax in Portugal
Portugal (and Madeira Island) is a beautiful country, and many people choose to relocate there for its rich culture and lifestyle. Whether you are a foreign resident or a Portuguese national, you must pay income tax on your worldwide earnings in Portugal. Income tax in Portugal is based on a progressive tax system, meaning that the rate of taxation increases with the amount of income earned.
In Portugal, personal income tax is known as IRS (Imposto sobre o Rendimento de Pessoas Singulares) and is collected and administered by the Autoridade Tributária e Aduaneira (Portuguese Tax and Customs Authority). The tax year in Portugal is the same as the calendar year, from January 1st to December 31st.
Types of Income Tax
In Portugal, there are three main types of income tax: personal income tax (IRS), corporate income tax (IRC), and non-resident income tax. Personal income tax is the most common and applies to individuals who are residents or non-residents in Portugal. Corporate income tax applies to Portuguese companies, and non-resident income tax applies to individuals who are not residents of Portugal but earn income from Portuguese sources.
Personal income tax is calculated based on the individual’s taxable income and can be divided into two categories: earned income and capital income. Earned income includes wages, salaries, pensions, and other forms of compensation. Capital income includes income from investments, such as dividends, interest, and capital gains.
Taxation Brackets and Rates
The tax brackets and rates in Portugal vary depending on the type of income and the amount earned. The tax brackets and rates range from 14.5% to 48% for personal income tax. For earned income, the tax rate is progressive and increases as the amount of income increases.
Corporate income tax varies depending on where the corporate head seat of the company is located. For capital income, the rate is a flat rate of 28%, provided specific requirements are met. For non-residents, income tax is a flat rate of 25% on employment income.
Expats relocating to Portugal may benefit from a 10-year tax holiday on their foreign income under the NHR scheme.
In order to be compliant with Portuguese income tax laws, individuals must register with the Portuguese Tax and Customs Authority and declare their income each year. This can be done at the Portuguese Tax and Customs Authority’s local office or through Power of Attorney with a tax consultant.
In Portugal, it is also necessary to keep records of all income and expenses for a period of at least five years. This is important for tax compliance and can help individuals to reduce their tax liability.
Tax Returns and Deadlines
In Portugal, income tax returns must be submitted to the Portuguese Tax and Customs Authority by June 30th of each year. This applies to both resident and non-resident individuals with reporting obligations in the country.
In addition, individuals are required to pay any taxes due by August 31st of each year.
Tax Planning in Portugal
Tax planning is an essential aspect of managing your finances in Portugal. There are several tax deductions and credits available that can help to reduce your tax liability.
For example, individuals may be eligible for deductions such as the home office deduction, child care deduction, and pension contributions. There are also credits available for charitable donations and housing expenses.
Payment of Taxes in Portugal
In Portugal, income tax can be paid through a variety of methods. The most common method is direct debit from a Portuguese bank account, although debit or credit cards may also be used if one goes to the tax office to settle said tax.
Other methods of payment include cash, cheque, or bank transfer.
Taxation in Portugal can be a complex topic, but it is crucial to understand the system and be compliant. This guide has provided you with an overview of Portuguese income tax, from types of tax to payment methods.
By understanding the system and taking advantage of tax deductions, credits and benefits, you can take control of your finances and save money.
Start taking control of your finances today! Learn more about taxation in Portugal and Madeira Island by speaking to a tax expert at MCS.
At MCS, we can assist you with your tax and immigration matters in Portuguese territory, especially Madeira Island. 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.