Taxes in Portugal: VAT, Property Taxes, and Income Tax as a Resident

The hardest thing in the world to understand is income taxes. —Albert Einstein

Einstein might have said the same about all taxes in Portugal. They are no different from anywhere else: multilayered, sometimes confusing, sometimes apparently unfair, and, in the words of taxpayers, “always too much.” It is advisable to seek competent accounting and legal advice about your specific financial position and obligation to your home country as well as your newly adopted home. That said, let’s take a look at taxes in Portugal.

IVA or VAT in Portugal

As in many other countries, Portugal has a value-added tax. This tax is “affectionately” known as IVA, pronounced “Eva.” The amount charged on your purchases—basically any money you spend on anything in Portugal— varies along category lines.

The highest rate charged for any category is 23%. Look at the bright side: While high, it is not the highest in Europe. That prize goes to Hungary, at 27%, with the Nordic countries for the most part coming in next, at 25%. A good source for current tax and economic information can be found here: https://www.tradingeconomics.com/portugal/indicators.

The categories are: General at 23%, Intermediate at 13%, and Reduced at 6%. The rates are slightly lower in the Azores and Madeira.

• General: Items here include prepared food and most nonessential products and services. It is interesting that Portugal considers legal representatives such as lawyers as well as electricity and fire prevention nonessential services.

• Intermediate: This rate is charged on bottled water, tickets for entertainment events, and certain household services.

• Reduced: Assessed on non-processed food (including packaged food), as well as lodging.

Knowing these categories is interesting, but for all intents and purposes totally irrelevant to your day-to-day activities. The appropriate rate is included in the price shown for each purchased item or service and automatically assessed and spelled out on any receipts you will receive, if that is of interest to you. (When making a purchase, one will almost always be given a fatura, or receipt.)

Property Taxes

Buying property in Portugal can be very rewarding because of both the inexpensive real estate available to the careful shopper and the built-to-last homes that are frequently on the market. As in all countries, however, Portugal has its own set of complex transfer taxes, transfer stamps, sales taxes, property taxes, and capital gains taxes.

Just as you relied on the expertise of professionals like real estate agents, lawyers, and government officials to assist you when buying property in your home country in the past, you should do the same here. It’s important to carefully vet and select experts who can acquaint you with the intricacies of the tax code and purchase procedure. The following will provide a bird’s-eye view of the property tax situation in Portugal.

• Property is taxed annually by the municipality in which it is located. Each municipality assigns a patrimonial value and assesses a rate that generally ranges from 0.5% to 1.0%.

• Rural properties frequently have a higher percentage of assessment but a lower value than urban properties.

• You can expect to pay much less in property tax annually than you would in the U.S., Canada, or the U.K.

• If it is a rental property, though, there is an income tax assessed on the revenues derived from that property. Usually this is 28% after expenses, if the owner lives in Portugal.

• Rental properties are treated as businesses, so it is advisable before purchasing a rental property to discuss your total tax situation with your personal tax advisor.

Purchasing property in Portugal comes with its own set of tax consequences:

• There is a tax on the purchase price, generally around 5%, depending on the location and type of property. This tax is usually paid by the seller.

• There is a stamp tax to officially register the sale. This can be as much as another 1% and is usually paid by the buyer.

• There are other ancillary fees associated with the transaction involving lawyers, notaries, and sales agents. If the property is to be mortgaged, the bank will insist on filing its own documents, which will come with their own expenses that the buyer may have to pay.

• Generally, purchasing a property through a bank will require 30% or more as a down payment. At the time of selling the property there will be a capital gains tax assessed of up to 28% on the profits, depending on the tax situation of the owner and the type of property being sold.

The only other tax consideration with respect to property ownership relates to inheritance taxes. If you’re a tax resident of Portugal and have ordered your affairs properly, your immediate family members are entitled to receive the property tax-free.

Income Taxes as a Resident

Portugal considers you a tax resident if you spend more than 183 days in the country per year. When you apply for a visa the first time, you must select the type of visa for which you are applying. The only visas that are tax-advantaged are the student visa and the non-habitual resident visa. If you qualify for the non-habitual resident visa, your income tax in Portugal will be 20% or 0%, depending on your type of income.

As a tax resident of Portugal, you have the obligation to file the necessary forms every year prior to April 30 unless you are an employee of a company in Portugal. In that case, you must file by March 15.

The Portuguese tax department is known as the IRS, easy for Americans to remember. Your taxable income is based on:

• Income from a job

• Business and professional income

• Investment

• Interest income

• Capital gains

• Retirement income

There are deductions that apply to each type of income and that are taken from the total, leaving the taxable amount. If one or both taxpayers in a married filing are retired and receive pension income, that income is taxed differently from non-retirement income. The system is progressive, starting at 14.5% for adjusted income under €7,000 ($8,676) up to 48% for income over €80,000 ($99,122). Depending on the tax rate into which the taxpayer falls, capital gains taxes will be 28% or possibly lower, if added to general income and the tax bracket is still under 28% for the total amount.

Being an expat and a tax resident of one country while still a citizen of another country—especially the United States—brings a specific set of conditions and burdens. All citizens of the U.S., no matter where they live, are required to file tax forms every year. There are special forms that apply specifically to citizens living in foreign countries with foreign bank accounts, and it is critical that citizens of the United States file these forms on time and accurately to avoid serious penalties.

It’s also important before you choose your visa status and tax filing status that you speak with a competent, experienced tax professional. He or she can answer questions and file returns in your country of citizenship as well as your new country of Portugal.