I understand!

This website uses cookies to ensure you get the best experience on our websiteLearn More

As you will see below, the main issue with filing a tax return is not the form. The hard part is classifying the income. It is not always obvious or easy to understand what a certain type of income is and therefore we provide some guidance below. image for site

The Definitive Guide to NHR tax returns in Portugal - 2023

The tax filing season will shortly start. 

At Fresh Portugal, we file more tax returns for expats than any other company in Portugal. 

To help you understand the classification of income ahead of the tax season, we are holding a webinar and are also offering this guide.

As you will see below, the main issue with filing a tax return is not the form. The hard part is classifying the income. It is not always obvious or easy to understand what a certain type of income is and therefore we provide some guidance below. 

Those filing themselves or using neighborhood Portuguese accounting firms are welcome to use this guide to review how their income should be classified. Ready? Here we go! 

 

Principles

  • Apply for NHR!

The NHR scheme is not automatically granted for recent residents in Portugal, there is an administrative deadline to follow, which is March 31st of the following year in which you became a tax resident in Portugal. Note that unless you at least started your move to Portugal in 2023, you may no longer be able to apply.

  • Getting familiar with Modelo 3

You can go into the IRS form – Model 3. You can find the digital form on your Finances Portal. The important thing to know about how to fill the Mod 3 form is that the burden of classifying and matching the income with the existing types provided by Portuguese law is entirely yours

You can check the types of income provided by the Portuguese tax law on articles 2 to 11 of the IRS Code. 

You will see categories A to H income: 

A: employment income
B: self-employment income
E: capital income
F: income from property (rental)
G: capital gains
H: pension income 

After correctly classifying and matching your types of income to the Portuguese classification, you have to identify whether the income is Portuguese sourced or foreign-sourced. 

A lot of people make mistakes at this point, because the decisive criteria here for the most important income types – employment and self-employment income - is not where your clients are, but where you do the work from

And finally, to access the 20% flat rate for employment and self-employment income, you have to identify if you have a high value activity. Portugal have changed this list over the years according to the professions most needed in the country. We have the current list of high value activities at another post of our blog. 

  • Common pitfalls:

 Here are a few mistakes that we see frequently: 

  • You don’t have to hold a high value profession to be eligible to the NHR. The only criteria you have to meet is not being a tax resident in Portugal for the last 5 years and inform the country where you were a tax resident before coming to Portugal.

  • Also, if you have been a tax resident just for a portion of the first year, you don’t need to declare the income incurred in the entire year. Also, if you have to file a partial declaration for the year and want to file together with your partner, you have to make sure your tax residence dates match.

  • Portugal has an accrual tax accounting system, different from the American system, so for example, you don’t need to report bonuses when received if it was incurred in the past years (when you were not a tax resident in Portugal).

  • Another typical mistake has to do with profit from a US LLC. Such profits are normally classified as self-employment income in the US, but in Portugal, the only known decision on the matter deals with this income as capital income. However, this is extremely nuanced.

  • As mentioned before, is very common to misunderstand foreign-sourced income with Portuguese income when your client base is outside Portugal or the company you work for is a foreign entity. The place where the work is done from that defines where the income is sourced.

  • Along with the domestic laws and the NHR rules, you always have to analyse the Double Taxation Treaties between Portugal and the country you have business with. The double taxation treaty leads to different outcomes depending on what country the income comes from.

  • Finally, it is important to be consistent between jurisdictions, so that the information you submit on both returns match as much as possible.

 

Classifying income

The below tables show how we normally classify income and could give a good indication to you and/or your accountant.

Kindly note that we are not responsible to how you choose to classify your income when working with other firms!

 

Income typeManagement / work donePT/Foreign sourcedNormal tax treatment Modelo 3
LLC (not S-Corp)PortugalPortuguese sourced incomePT capital income (28%)Annex E (4)
LLC (not s-Corp)Outside PTForeign sourcedForeign sourced capital income (0%)Annex J (8) + Annex L (6)
S-Corp/LLC Scorp election – salaryWork done in PTPortuguese sourced income20% + SS in PortugalAnnex A (4) + Annex L (4) (6)
S-Corp/LLC Scorp election – salaryWork done outside PTForeign sourced income0%Annex J (4) + Annex L (5) (6)
S-Corp/LLC Scorp election – distributionsPortugalPortuguese sourced incomePT capital income (28%)Annex E (4)
S-Corp/LLC Scorp election – distributionsOutside PortugalForeign sourcedForeign sourced capital income (0%)Annex J (8) + Annex L (6)

   

  • Income from other companies (UK, EU, but not black-listed)
Income typeManagement / work donePT/Foreign sourcedNormal tax treatment Modelo 3
SalaryWork done in PTPortuguese sourced income20% + SSAnnex A (4) + Annex L (4) (6)
SalaryWork done outside PTForeign sourced0%Annex J (4) + Annex L (5) (6)
DividendManagement in PTPortuguese sourced incomePT capital income (28%)Annex E (4)
DividendManagement outside PTForeign sourced incomeForeign sourced capital income (0%)Annex J (8) + Annex L (6)
  • Employment income
Income typeWork donePT/Foreign sourcedNormal tax treatment Modelo 3
In Portugal, high valueWork done in PTPortuguese sourced income20% + SS in PortugalAnnex A (4) + Annex L (4) (6)
In Portugal, not high valueWork done in PTPortuguese sourced incomeStandard rates + SSAnnex A
From outside Portugal, high valueIn PortugalPortuguese sourced income20% + SS in PortugalAnnex A (4) + Annex L (4) (6)
From outside Portugal, not high valueIn PortugalPortuguese sourced incomeStandard rates + SSAnnex A
From outside Portugal + effective taxFrom fixed base + DTTForeign sourced income0%Annex J (4) + Annex L (4) (6)
  • Self-employment income
Income typeWork donePT/Foreign sourcedNormal tax treatment Modelo 3 
In Portugal, high valueWork done in PTPortuguese sourced income20% + SS in Portugal (subject to coefficient)Annex B + Annex (4) (6) + Annex SS
In Portugal, not high valueWork done in PTPortuguese sourced incomeStandard rates + SS (subject to coefficient)Annex B + Annex SS
From outside Portugal, high valueIn PortugalPortuguese sourced income20% + SS in PortugalAnnex B + Annex (4) (6) + Annex SS
From outside Portugal, not high valueIn PortugalPortuguese sourced incomeStandard rates + SSAnnex B + Annex SS
From outside Portugal + not high value + risk of tax under DTTFrom fixed baseForeign sourced incomeStandard rates + SSAnnex B + Annex SS
From outside Portugal + high value + risk of tax under DTTFrom fixed baseForeign sourced income0%Annex J (6) + Annex L (5) (6)
  •  
  •  
  •  
  •  
  •  
  • Capital income (dividend, interest)

Income typeSourcePT/Foreign sourcedNormal tax treatment Modelo 3
Capital incomePortugalPortuguese sourced income28%Annex E
Capital income, risk of tax under DTTFrom outside PortugalForeign sourced0%Annex J (8) + Annex L (6)
  • Property income

Income typeSourcePT/Foreign sourcedNormal tax treatment Modelo 3
Capital gainPortugalPortuguese sourced income28% * coefficientAnnex G
Capital gain, risk of taxationFrom outside PortugalForeign sourced0%Annex J (9) + Annex L (6)
ALPortugalPT sourced income28% * coefficientAnnex B (15)
RentPortugalPT sourced incomeSee special ratesAnnex F
Rent, risk of taxationOutside PortugalForeign sourcedNormally 0%Annex J (7) + Annex L (6)

 

  • Capital gains (securities - held more than a year)*

Income typeSourcePT/Foreign sourcedNormal tax treatment Modelo 3
Capital gainPortugalPortuguese sourced income28%Annex G
Capital gainFrom outside PortugalForeign sourced28%Annex J (9)
Capital gain, American citizens (risk of tax)From outside PortugalForeign sourced0%Annex J (9) + Annex L (6)

 

* note a recent change in legislation - from 2023, capital gains from securities held for less than a year is aggregated with your other income and is taxed at progressive rates.

 

 

  • Crypto currency gains

 

Crypto currency gains is exempt from taxation if the currency was held for over a year. If it was held for less than a year (converted to FIAT), it is subject to taxation of 28% or aggregated taxation, whichever you choose.

 

  • Pension (any retirement savings)

Income typeSourcePT/Foreign sourcedNormal tax treatment Modelo 3
Pension from PortugalPortugalPortuguese sourced incomeNormal ratesAnnex A (4)
Pension, NHR before 2020From outside PortugalForeign sourced0%Annex J (5) + Annex L (5) (6)
Pension, NHR before 2020From outside PortugalForeign sourced10%Annex J (5) + Annex L (5) (6)
Government pensionFrom outside PortugalForeign sourcedSee the DTTAnnex J (5) + Annex L (5) (6)

 

  • Using MyTaxes

Fresh Portugal created a tax calculator which we are still updating ahead of the tax season but can give you a pretty good idea how to report your income.

 


Fresh - Expat Lawyers
© 2021-2024 Fresh
image for site