Thinking Beyond Borders for Portugal
Thinking Beyond Borders for Portugal
A person's liability to Portuguese tax is determined by the residence status and the source of income received by the individual.
Portuguese residents are subject to tax on their worldwide income at progressive marginal tax rates and certain types of income are taxed at flat tax rates (between 10 and 28 percent), and non-residents are subject to Portuguese tax on their Portuguese-sourced income at the applicable rates (between 10 and 28 percent), depending on the type of income received. A double taxation treaty may provide a variation to these rules.
Under the regime of non-habitual tax residents, the individuals who qualify as tax residents may be subject to tax on Portuguese-sourced employment income at a special 20 percent rate provided that the related activity performed is duly recognized as a “high-value added” one; a tax exemption may apply to the foreign-sourced income received by the individual (if certain conditions are met, namely, if the referred income is subject to tax in its country/jurisdiction source or if it can be subject to tax according to the rules of the applicable DTT (even if it is not actually taxed), depending on the type of income).
Liability for income tax
An individual will be regarded as resident in Portugal for tax purposes, in the year or part of the year, to which the income relates to, in case the individual:
- spends more than 183 days – continuously or not - in the country/jurisdiction within a 12-month period, or
- spent less than 183 days herein, they have, at any time of the referred 12-month period, accommodation available in the country/jurisdiction in conditions where it can be assumed that it is their intention to use it as a place of habitual residence or abode.
In case the above criteria are met, an individual will be regarded as resident since the first day of their presence in the country/jurisdiction until their departure.
There are, however, some situations foreseen where the tax residency status will still apply for the entire tax year.
If none of the above conditions are met, the person is considered to be a non-resident. Tax liability will occur only with regards to the individual’s Portuguese-sourced income (in case of employment income, Portuguese-sourced income would include compensation derived from activities performed in Portugal, as well as compensation paid by a Portuguese entity).
The special regime for non-habitual tax residents (valid for a 10 year period) will apply, provided that the individual:
- has not qualified as tax resident in Portugal in the previous 5 years
- qualifies as tax resident in Portugal under the domestic rules in each year of that 10-year period
- is registered as a non-habitual tax resident with the Portuguese tax authorities
An application must be filed up to 31 March of the year following the one in which the individual qualifies as a tax resident in Portugal.
Another special regime is also foreseen for “former tax residents” (for a period of 5 years). This regime applies to individuals who:
- have been deemed as tax residents in Portugal before 31 December 2015
- returned to Portugal in 2019 or 2020 and meet the criteria to qualify as tax residents herein under the applicable tax residency rules
- have not been deemed as resident in the previous 3 years
- have not applied for the non-habitual resident (NHR) tax status
This regime is supposed to be extended (it was granted a legislative authorization to prorogate the regime to arrivals until 2023), however, at the moment the related legislation was not published yet.
To benefit from the former residents’ tax regime, no formal application needs to be completed.
Tax trigger points for employment income
There is no minimum threshold/number of days that exempts the employee from the requirements to file and pay tax in Portugal regarding Portuguese working days. However, the application of a double tax treaty may determine that the employee does not have a filing obligation, provided that the individual spends less than 183 days in Portugal and that the individual’s income is not paid by, or recharged to, a Portuguese entity
Furthermore, some special provisions may apply with regards to the employment income received in Portugal:
- Under the former residents’ tax regime, a tax exemption applies over 50 percent of the employment and self-employment income received in Portugal
- A new regime was also introduced by the 2020 State Budget Law, applicable to employment income received by individuals aged between 18 and 26 years old (not deemed as dependents for tax purposes).
In such cases, a partial exemption can apply over the employment income received in the 3 years following to the conclusion of the cycle of studies (if the first year where the income is received is 2020 or following years), as follows:
- First year: exemption over 30 percent of the employment income received
- Second year: exemption over 20 percent of the employment income received
- Third year: exemption over 10 percent of the employment income received.
Types of taxable income
For extended business travelers, the types of income that are generally subject to tax are employment income, as well as any other Portuguese-sourced income, and gains from taxable Portuguese assets (such as real estate). The definition of employment income is broad and tends to include all benefits-in-kind.
Net taxable income earned by a resident is taxed at progressive marginal tax rates from 14.5 percent up to 48 percent.
An additional solidarity surcharge also applies (2.5 percent on the taxable income between EUR80,000 and EUR250,000 and 5 percent on the taxable income exceeding EUR250,000).
Some flat rates may apply (for example, interest and dividends are taxed at a flat rate of 28 percent and rental income is taxed at a flat tax rate between 10 and 28 percent).
For non-residents, the tax rate depends on the type of income received, as follows:
- employment income is taxed at a 25 percent flat tax rate
- rental income is taxed between 10 and 28 percent special tax rate
- interest is taxed at a 28 percent flat rate
- dividends are taxed at a 28 percent flat rate
- capital gains arising from immovable property located in Portugal are subject to a 28 percent autonomous tax rate.
Under the non-habitual tax residents’ special regime, where the activity performed by the individual in Portugal is deemed to be a ‘high-value-added’ activity, the employment income derived from such activity is taxed at a 20 percent special rate.
Otherwise, if the activity that the individual performs is not deemed to be ’high-value-added’, the employment income received will be taxed at marginal tax rates up to 48 percent, plus 2.5 and 5 percent solidarity surcharge due as previously described.
This regime also allows for a tax exemption on the foreign-sourced income received by the individual. For example, with regards to foreign source employment income, an exemption applies provided that one of the following conditions is met:
- such income is subject to tax in the country/jurisdiction of its source under the provisions of a double tax treaty
- Such income is subject to tax in the country/jurisdiction of its source under the provisions of the Organisation for Economic Co-operation and Development (OECD) model tax convention, provided that it does not relate to any activity performed in Portugal.
Liability for social security
Individuals working in Portugal are liable for social security contributions at a rate of 11 percent on their gross remuneration (9.3 percent for board members who are not “Administradores” or “Gerentes”).
Employers are liable for social security contributions at a rate of 23.75 percent on the same gross remuneration (20.3 percent for members of the board who are not “Administradores” or “Gerentes”).
The social security contributions due are not capped.
In general terms, an exception for social security contributions can apply if a foreign employee is assigned to work in Portugal for an expected period of less than 1 year and continues to pay social security contributions in their home country/jurisdiction. Such a period of exemption may be extended for an additional 12 months.
Based on the European Union (EU) regulations, as well as on social security bilateral agreements, an exemption may apply on social security contributions for extended business travelers.
Employees’ compliance obligations
Employers reporting and withholding requirements
If the income is paid by a Portuguese company, the employer is required to withhold tax on a monthly basis at:
- progressive marginal rates, if the individual qualifies as a resident
- A 20 percent flat rate, if the individual simultaneously (i) qualifies as a tax resident, (ii) benefits from the NHR regime and (iii) performs and activity that is deemed as being a “high-value added” one
- a 25 percent flat rate, if the individual qualifies as a non-resident.
The employer is also required to report the income paid and tax withheld to the employee and to the tax authorities within specific deadlines.
Work permit/visa requirements
Double taxation treaties
In addition to Portuguese domestic arrangements that provide relief from international double taxation, Portugal has entered into double taxation treaties with more than 70 countries/jurisdictions to prevent double taxation and allow cooperation between Portugal and overseas tax authorities in enforcing their respective tax laws.
Permanent establishment implications
There is the potential risk that a permanent establishment could be created as a result of extended business travel, but this would be dependent on the type of services performed and the level of authority the employee.
Value-added tax (VAT) may be required in Portugal on the following:
- supply of goods and rendering of services carried out in the Portuguese territory
- imports of goods
- intra-community acquisition of goods.
There are three different VAT rates (for the transactions deemed to have been supplied in the Portuguese Mainland):
- Reduced: 6 percent (applied in general to basic food products, pharmaceutical products, etc.)
- Intermediate: 13 percent (applied in general to wine, flowers, etc.)
- Normal: 23 percent (applied to the remaining goods and services not subject to the above rates).
Portugal has a transfer pricing regime. A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but is performing services for the benefit of the entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.
Local data privacy requirements
Portugal has data privacy laws.
Portugal does not restrict the flow of Portuguese or foreign currency into or out of the country/jurisdiction. However, certain reporting obligations are imposed to control tax evasion and money laundering.
All information contained in this publication is summarized by KPMG & Associados - Sociedade de Revisores Oficiais de Contas, S.A., the Portuguese member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the Portuguese Tax Code of 1989 and subsequent amendments, the Web site of the Portuguese fiscal administration, the Social Security Code of 2009 and subsequent amendments, the Web site of the Social Security administration.