Tax in Portugal - the complete Guide

This guide is intended to provide general information and is not a substitute for specific and detailed legal advice. Anyone relying on this guide without additional advice does so at their own exclusive risk, and the authors of the guide shall not be liable for any damage that may result from decisions made without individual consultation.

Introduction

Portugal is a popular destination for many expats choosing to emigrate and invest. In recent years, immigration to Portugal from various parts of the world has increased significantly, and concurrently, the infrastructure for immigrant integration in Portugal has greatly improved. In Portugal, there are English-speaking international schools, private healthcare services at some of the lowest prices in Europe, and a high quality of life.

Portugal also offers special tax programs, notably the recently cancelled NHR program for new applicants and its replacement, the TISRI program. It is important to mention that there is a tax treaty between a variety of countries and Portugal, but not always a social security treaty.

This guide focuses primarily on the tax liabilities of expats who choose to migrate to Portugal and become tax residents, covering taxation under various programs.

Moving to Portugal and Tax Residency

These are the principles of the tax system in Portugal:

Tax residency- In Portugal, the legal criterion for tax residency has a bureaucratic aspect. Legally, a tax resident in Portugal is someone who spends more than 182 days there in a year (not necessarily a calendar year) or whose main residence is in Portugal. At the bureaucratic level, tax residency in Portugal is declared by linking a Portuguese address to one's tax number, and authorities rely on the date of attaching the Portuguese address to the tax number and seldom require the legal definition in cases where they have doubts about the timing. In cases where a person is considered a tax resident both in another country and Portugal, the "tie-breaker rules" in the tax treaty should be examined, where a person can only be a tax resident in one of these countries at any given time.
Territoriality principle - The tax system in Portugal is similar to most countries worldwide and is based on the territoriality principle. Tax residents in Portugal are taxed on their worldwide income. Non-residents are taxed only on their income from sources within Portugal.

Double Taxation Treaties- Portugal has a large network of treaties to prevent double taxation. If there is a treaty to prevent double taxation with a particular country, the taxation of income that concerns the two countries is done according to the treaty. In cases where the domestic legislation of one of the countries contradicts the treaty (which happens occasionally), the treaty prevails.
EU Membership - As a member of the European Union, Portugal implements the EU's tax directives. Often, the implementation of the directives is slow, and local lawyers and accountants frequently do not advise well on the directives and their implications.
Mandatory annual reporting - Every tax resident in Portugal is required to file an annual report under any of the following conditions:
(1) They have income from abroad.
(2) They have a bank account abroad.
(3) They are registered as self-employed in Portugal (even if they have no income).

Thus, almost every foreigner living in Portugal must file an annual report, even if they have no taxable income.
The annual report is submitted between April 1 and June 30 each year regarding the preceding year and is filed online in the AT system.

Tax liability arises when income is generated- The system in Portugal is that of "accrual accounting" - income is accrued according to the report and not according to when the money enters the bank account.

The responsibility to classify the income is on the taxpayer- When the annual report is submitted, the filer must enter their various incomes into the system in Portugal. The system does not explain how to enter income, and the responsibility to enter the income correctly is on the taxpayer. Hence, the question of how Portugal taxes certain income has no correct answer, as the answer is, "You will pay according to what you entered, and it is your responsibility to enter correctly. If the authorities disagree with the classification, you will pay the difference, with penalties."

Grey areas- The normative system regulating tax affairs in Portugal includes legislation, court rulings, rulings of the CAAD arbitration tribunal, European treaties, and tax authority opinions (rulings). In matters of international taxation, the authorities do not publish organized guidelines, and many issues have not yet been discussed in legislation, jurisprudence, or other sources. Therefore, there are many cases, especially in international tax matters, where even skilled lawyers cannot be sure of the law as there is more than one possibility. However, it is important to understand that there are cases where there is a grey area, and the taxpayer must exercise discretion, and cases where the law is clear.

Tax Benefits - The NHR and TISRI Programs

Portugal's NHR program, which was recently cancelled but still applies to everyone who already has the status and to people arriving in 2024 who meet certain conditions, is one of the most successful programs in Europe. In fact, the program was cancelled because it "succeeded too much," attracting a large number of high-income individuals and thus leading (according to opponents of the program) to rising real estate prices in Portugal to levels that locals can no longer afford.

There is a lot of information on the internet, and in most cases, it is not accurate about how the program works. In practice, it is a very complex program that applies differently to different people, depending on the type of income they have, their profession, and where they come from. This guide will provide detailed information on how the program works.

The cancellation of the NHR program has put significant pressure on the socialist government in Portugal to offer an alternative, and indeed, the government has created a new program – Tax Incentives for Science, Research and Innovation – whose benefits are very similar to the NHR program (even if not identical), but access to it is open only to certain people, and at this stage, almost no one as operational parts of the program are still not working. This program will also be explained in this guide.

Tax Liabilities without NHR or TISRI

Those who come to Portugal and do not become tax residents with a special tax status will pay the following taxes (2024):
Income from Employment

According to tax brackets, plus a "solidarity tax" of 2.5% on income over 80,000 euros and 5% over 250,000 euros.

In addition to income tax, in Portugal, there is a social security contribution, with a rate of 11% for employees, and also an employer's social security contribution with a rate of 23.75%.

Income from Self-Employment 

The taxation of income from self-employment ("registered business owner/self-employed") is mainly according to tax brackets, but a self-employed status, unlike an employee, has several advantages:

(1) A business owner who earns up to 200,000 euros per year can choose between the regular accounting method (where profit is income minus expenses, and the profit is taxed) and the "simplified accounting" method, where a fixed percentage of business expenses is set by law, assuming that the business has a certain percentage of expenses according to the type of business and only a small part of them needs to be proven (15%). For most service providers, their expenses are assumed to be 25% of total income, hence only 75% of the income is taxed.
(2) In the first year of the business's existence, there is an additional 50% reduction of the aforementioned percentage and in the second year 25%.
(3) In the first year of the business's existence, there is a complete exemption from social security payments.
(4) After the first year, the social security payments are 21%, but for those who benefit from simplified accounting, only 70% of the salary is considered for social security purposes, and the payments are subject to a cap of about 1,200 euros per month. For employees, there is no cap.

The result is that in the first year, for most service providers, only 50% of 75% of the income (about 37.5% of the actual income) is considered taxable income and there are no social security payments. Even afterwards, the situation for self-employed is generally preferable for tax purposes compared to employees.

Income from Capital Gains

Portugal distinguishes between short-term capital gains and long-term capital gains. Short-term capital gains result from buying and selling an asset within less than a year. Long-term capital gains result from holding an asset for more than a year.
Short-term capital gains are aggregated to the income subject to the progressive rates.
For long-term capital gains, the taxpayer can choose between taxation according to tax brackets or a fixed tax rate of 28%. In the case of selling real estate in certain cases, only 50% of the gain is taxed, but always by the progressive rates. 

Income from Dividends
For income derived from dividends, the taxpayer can choose between tax brackets/progressive rates and a fixed tax rate of 28%.

Income from Interest
For income derived from interest, the taxpayer can choose between tax brackets/progressive rates and a fixed tax rate of 28%.

Income from Royalties
The classification of income from royalties in Portugal is not simple. For the original creator of a work, the income is considered as income from a business/self-employment. For someone who has purchased the rights related to a certain work and derives royalties from it, the income is considered capital income (like dividends). It is important to note that royalties depend on granting the right to use the work. The sale of the work is considered as a capital gain or business income, depending on the matter.

Income from Cryptocurrency
Gains derived from cryptocurrency are deemed as capital gains that are accrued at the time of the exchange of the cryptocurrency for fiat money. Income from cryptocurrency held for less than a year is taxed at a flat rate of 28%. Holding cryptocurrency for more than a year is completely exempt from capital gains tax, but only if it comes from a country with which Portugal has a treaty to prevent double taxation. It is important to note that converting cryptocurrency to another cryptocurrency, including stablecoins, is not considered a taxable event.

Income from Rentals
The income from long-term rentals in Portugal is taxed according to the rental period, at a rate that ranges between 25% (for contracts of up to 5 years) and 5% (for contracts of 20 years and more).
The income from short-term rentals with an AL license is taxed as business income, at the marginal tax rate but subject to a reduction of 65% (only 35% of the income is taxed).

Income from Pensions
Income from pensions or pension-like payments (including executive insurance) is also subject to the marginal tax rates.
It is important to note that governmental pensions that are related to work for the government or one of its agencies (including the army, municipalities, etc.) might have a specific treatment in the tax treaties. For example – a government pension from the USA is not taxed in Portugal (unless the taxpayer is a Portuguese citizen) but a government pension from Canada is fully taxed.

Deductions and Credits
In Portugal, there is a system designed to encourage people to register their tax number on purchases through tax reductions. Every time a purchase is made in Portugal, the seller will ask whether to add the tax number to the invoice. The reductions are at the end of the year and are based on categories (general reduction, reduction on health services, education, etc.). The total reductions are not large and can reach up to 2,000 euros. The reductions do not apply to income under the NHR program.

Tax Liabilities for NHR Holders

Income from Employment

The expression "work abroad" causes much confusion for people coming to Portugal who believe they can continue to work at their job with a foreign contract and receive a salary that will be covered by the NHR.
Indeed, the NHR program grants a full exemption from paying tax for work abroad that is taxed abroad, but this situation is largely theoretical.

In practice, according to the tax treaty, "work from abroad" is only work that is in fact, physically, done abroad. That is, a tax resident in Portugal can continue to work for a foreign employer only if all the work is physically done outside of Portugal. This is of course a rare situation that occurs infrequently.

If the work is done in Portugal, the right to tax is that of Portugal. This is true even if tax residency has not been split and even if tax is wrongly deducted at source (in practice) in the source country. Thus, working for a foreign employer being a tax resident in Portugal can lead to a "tax accident" and double taxation, which the treaty aims to prevent.
Thus, in the overwhelming majority of cases, the taxation will occur in Portugal.

The NHR program also grants a benefit on work done in Portugal provided that it is done in "required professions" (High value activities). The list of required professions was last updated in 2020 (actually, it was updated twice in 2020 a few months apart, and both the old and new lists are circulating on the internet). The special tax rate is 20% and you can choose between it and the marginal tax. It is important to remember that the NHR program deals with income tax, and the preferred rate (20%) does not include social security contributions. 

Income from Business (Self-employed, Not a Company)
Income from self-employment outside Portugal is exempt from income tax in Portugal under the NHR under the following conditions: 

(1) If it is in required professions (High Value Activities).
(2) If the country where the work is done has the right to tax the income according to the relevant tax treaty or according to the OECD model treaty if there is no relevant treaty. It’s extremely common that the source country will only have rights over this income if the services have been provided locally in a "permanent establishment." Effective taxation is not required.
(3) The country where the work is done is not on Portugal's "blacklist" for tax havens.
These conditions are rarely met, mainly in cases of "digital nomads" who are tax residents in Portugal but actually work from various places around the world, noting that, even in the case of digital nomads, the condition of a "permanent establishment" must be met.
Income from business in Portugal is taxed at the special tax rate of 20% but only insofar as the work is in a preferred profession/high value activity. In the case where there is income from self-employment, part of which is accrued in Portugal and part outside Portugal, it is possible to divide the time pro-rata.
It is important to note that the exemption from social security for the first year and the coefficient reduction (50% in the first year and 25% in the second) also apply to NHR holders.

Income from Capital Gains
Income derived from capital gains is one of the incomes that the NHR program applies to. Income from capital gains in respect of real estate from a country that has a tax treaty with Portugal (even if it is on the blacklist) or a country that does not have a tax treaty and is not on the blacklist will be exempt from tax in Portugal as the standard clause in treaties grants the right to tax to the country where the property is located.
On the other hand, when it comes to capital gains from other assets, usually the other country does not have the right to tax and therefore there is no exemption under the NHR. Thus, for the sale of shares, an Israeli will pay tax in Portugal.
An interesting issue arises when the expat in Portugal is an American citizen. The USA has the right to tax all types of income of its citizens due to the “saving clause”. Thus, according to the letter of the law, capital gain income of Americans should be exempt from tax under the NHR. In practice, as of the date these lines are written, the tax authorities in Portugal claim they have the right to tax and also actually collect the tax. This is despite the fact that in 2022 they lost in an arbitration court and it was determined that capital income is exempt from tax for Americans under the NHR.

Income from Dividends, Interest, Real Estate, and Royalties for Intellectual Property
Income from dividends, interest, real estate, and royalties coming from a country with which there is a tax treaty (even if it is on the blacklist) or a country that does not have a tax treaty and is not on the blacklist is almost always subject to the right to tax in the country from which the income comes, and therefore it will be exempt from tax in Portugal under the NHR.
It is important to remember that the exemption also applies when the country from which the income comes does not actually collect tax. Thus, for example, income from interest or dividends from the UK is not subject to tax in Portugal. The UK has the right to tax this income but does not actually collect tax.

Income from Cryptocurrency
Income from cryptocurrency is not regulated under the NHR, therefore, it follows the same logic of the income classification they pertain to (capital gain, capital income etc.)

Income from Pension
Income from pensions for those who became tax residents before April 2020 is taxed at a rate of 0%. For those who became tax residents after 2020, the rate is 10% under the NHR.

Tax Liabilities for TISRI Holders

The TISRI program is quite similar to the NHR program but is limited to a very limited number of professions (such as university lecturers and certain research workers with a doctorate) or workers of approved startups, or tax residents in the islands of Portugal according to criteria to be defined later by the islands.

The program is new, and the system for approving startups and the criteria supposed to be defined by the islands are still in the processes, and therefore, it is almost impossible to access the program. It is hoped that the bureaucratic system allowing access to the program will be completed soon.

The main differences between the TISRI program and the NHR program are that under the TISRI program, all types of capital income from abroad from countries not on the blacklist are exempt from tax regardless of the right to tax of the foreign country. Thus, capital gains are also exempt. On the other hand, a pension is not covered by the program and is taxed at full marginal tax rates (except for a government pension under certain circumstances).

Tax Planning

Portugal is fertile ground for tax planning at various levels of creativity. The main tax planning relates to the classification of income, in cases where there is flexibility in classification, and to the timing of withdrawing funds, in cases where there is flexibility regarding the timing of withdrawal.

Thus, when a person has income from employment, there are usually 3 options - employment as an employee, as self-employed, or through a company he owns. Each of these options leads to different tax outcomes.

Among other things, a popular tax plan is working through a foreign company that pays profits as an alternative to working as an employee or self-employed. Since profits from a foreign company are exempt from tax under the NHR, operating a foreign company in a country where the tax rate is low (or zero) and which is not on the blacklist can lead to very low tax.

Such tax planning may sound simple, but in practice, it can lead to higher tax. For example, a foreign company whose effective management is in Portugal may be considered a tax resident company in Portugal through a permanent establishment. The result would be corporate tax in Portugal for the company and dividend tax in Portugal at the individual level.
Tax planning is highly recommended, but it is important to remember that tax planning is a complex matter that should be done with skilled professionals.