Personal income tax ( Imposto sobre o Rendimento das Pessoas Singulares/IRS) in Portugal is below the EU average, although it has increased considerably in recent years, and when social security taxes are included it’s comparable with that in most other EU countries.
Belgians, Dutch and Scandinavians will find Portuguese income tax low, while most other western Europeans will pay around the same or a little more. Paying Portuguese income tax can be advantageous, as there are more allowances for some people than there are in other countries. If you’re able to choose the country where you’re taxed, you should obtain advice from an international tax expert.
Portugal has a pay-as-you-earn (PAYE) system of income tax, whereby employees’ tax is withheld at source by their employers, and they aren’t responsible for paying their own income tax. Non-resident employees are subject to withholding tax on Portuguese income at a flat rate of 25 per cent.
A husband and wife and their dependent children are taxed jointly as a family and a single tax return is submitted. For tax purposes, dependants include all children under 18 years of age; children aged from 18 to 24 who don’t receive an income above the minimum wage, provided that in the year in question they’ve been registered in the 11th year of school; children unable to work; and minors under 18 years of age provided that they don’t receive any income.
Moving to Portugal (or another country) often offers opportunities for legal ‘favourable tax planning’. To make the most of your situation, it’s best to obtain income tax advice before moving to Portugal, as there are usually a number of things you can do in advance to reduce your tax liability, both in Portugal and abroad.
Be sure to consult a tax adviser who’s familiar with both the Portuguese tax system and that of your present country of residence. For example, you may be able to avoid paying tax on a business abroad if you establish both residency and domicile in Portugal before you sell. On the other hand, if you sell a foreign home after establishing your principal residence in Portugal, it becomes a second home and you may then be liable to capital gains tax abroad (this is a complicated subject and you will need expert advice). You should inform the tax authorities in your former country of residence that you’re going to live permanently in Portugal.
Tax evasion is illegal and a criminal offence in Portugal, for which offenders can be heavily fined or even receive a prison sentence. On the other hand, tax avoidance, i.e. legally paying as little tax as possible (if necessary by finding and exploiting loopholes in the tax laws) is a different matter altogether.
Although Portuguese tax inspectors make a relatively small number of inspections, they target those among whom tax fraud is most prevalent, such as the self-employed. Note that new legislation has been introduced to tackle fraud and it’s now more difficult for ‘fiscal nomads’ to avoid Portuguese taxation in future. Offshore companies have been particularly targeted and it’s now more difficult for them to avoid taxation.
The Portuguese tax system was updated in 1989, prior to which taxes were relatively low and many people avoided paying taxes altogether. In the past, tax offices ( finanças) tended to ignore foreigners in Portugal, although times have changed and in recent years they have become prime tax targets.
The tax authorities may investigate foreign bank accounts held by EU residents in Portugal and abroad, and share tax information with other EU governments. Note that the Portuguese tax system is currently under reform and the information in this section was correct at the time of writing (mid-2002). It’s therefore recommended to check updated information with an expert before taking any financial decisions regarding taxation.
Information about the Portuguese tax system is available from tax offices in main towns and cities, and from the Ministry of Finance website, which includes downloadable documents and tax returns (www.dgci.min-finanzas.pt). You can also file your tax return online. Note that information on the website in English is limited.