If you ask most people what’s their favourite thing in the world, most would probably choose their spouses, children, the seaside or romantic sunsets.
These are the sort of things that people like to think about and when people are coming to Portugal, they definitely get a lot of the last two.
One thing people really don’t like to think about is taxes. So they don’t. They don’t think about taxes before they move or they don’t think about them at all. There are some myths and stereotypes about taxation in Portugal and it is just convenient for people to think that they can just continue to pay tax in the countries they left and “deal with it later” or that “Portugal doesn’t tax foreign income” or that “We don’t need to pay in Portugal because we moved at the end of the year” or whatever other myth they heard.
Then comes the first tax return and they have to crush into reality and meet the harsh truth – Portugal wants to tax its residents, it taxes them from day 1 and it’s tax legislation is really complex. Portugal is probably the country with the highest tax rates in Europe for its residents but it can also be one of the countries with the lowest tax rate in Europe for expats. The difference is in planning.
Portugal want talented people to come and bring their income with them. It accepts that some of that income has nothing to do with Portugal and is willing to go along way exempting people from taxation. However, Portugal is not happy for people who are already paying tax in Portugal or should be paying in Portugal to try and avoid it.
Tax planning vs tax avoidance.
Tax Planning involves intelligent planning of reducing the tax liability by claiming all the eligible deductions, rebates & exemptions as per law. It is generally considered to wise, advisable and morally correct for people to plan their taxes, taking advantage of benefits and deduction. Tax avoidance is deliberately indulging in the practice of adjusting financial affairs to the extent that the tax liability is minimised. It is generally considered unwise, not advisable and morally wrong. Tax authorities accept tax planning but do not appreciate tax avoidance. People who avoid taxation could be fined and in extreme cases could be prosecuted. The difference between tax planning and tax avoidance could, in many cases, come to timing and consistency.
People who are coming to Portugal with a certain business structure and continue to use the same structure would very rarely be second guessed by the authorities, whereas people who arrive in Portugal, report their income in a certain way and then realise they could have perhaps achieved a tax saving and change their structure would almost certainly raise red flags and could be on the hook.
Specific examples
John is a hypothetical British person who is a teacher in an online British private academy. He receives a salary from the UK school. John arrived in Portugal 3 years ago and obtained NHR status. He continued to receive his income as a salary in the UK and has been taxed in the UK. In an audit, the Portuguese tax authorities identified that he works from Portugal and taxed his entire employment income at full rate since he is not on a high value profession, sending him to apply for a refund from HMRC, the UK tax authorities. Had John planned ahead, he would have formed a company in the UK together with his UK-based colleague offering the same services, before moving to Portugal. He could have taken money out of the company by paying himself dividends and would have suffered no tax in Portugal for that income, with the only tax being UK corporation tax of 19%.
Janice is an American SEO advisor working with a partner in Norway, each as independent contractor. Janice is a borderline IT specialist and may pay 20% tax in Portugal but is more likely to be taxed at full rate. However, had Janice formed an American LLC ahead of her move together with her partner, she may have been full exempt from Portuguese taxation. Should Janice do that when she is already in Portugal, she is fairly likely to be audited, pay full tax and fined.
