A guide to Portugal’s tax system

Who pays tax in Portugal?

Portugal has a residency-based tax system. You will be considered “tax resident” in Portugal if you reside in the country for 183 days or more per calendar year. If this is the case, you will need to pay tax in Portugal on your worldwide income. If you are not considered tax resident, you will only need to pay tax on income earned in Portugal.

Double taxation agreements in Portugal

If you are tax resident in more than one jurisdiction, how much tax you pay will depend on the Double Taxation Agreement (DTA) in place between Portugal and the second country. These agreements outline who pays tax where and help countries track and prevent tax evasion.

For example, the DTA between South Africa and Portugal states, where someone is tax resident in both jurisdictions, the worldwide tax will only be due:

• Where the individual has a permanent home
• If they have permanent homes in both Portugal and South Africa, then where their economic relations are closer
• If this cannot be determined, then the place where they live for most of the year (habitual abode)
• If this cannot be determined, then it falls to where the individual has nationality
• If the individual has dual nationality, then the states will need to settle the question by mutual agreement

Portugal has similar DTAs with over 70 countries.

NHR – a special tax regime for Non-Habitual Residents (NHR)

Portugal has introduced a tax regime to entice foreign income earners in high value-added professions into the country. You may register for this regime if you are a new tax resident and have not been a Portuguese tax resident in the previous five years. If you qualify for the NHR tax regime, you will receive special tax rates for a period of ten years. Certain foreign-sourced income will not be taxable and pension income will generally be taxed at a flat rate of 10%.

Portugal’s income tax

Portugal has a PAYE (pay as you earn) system for employed workers, where taxes are automatically deducted. Personal Income Tax is known as Imposto sobre o rendimento das pessoas singulares (IRS).

In addition to employment income, Portugal recognises five other categories of income.

The six categories are:

• Employment Income (Category A)
• Business/Professional Income (Category B)
• Investment Income (interest, dividends and royalties) (Category E)
• Rental Income (Category F)
• Capital Gains (Category G)
• Pensions (Category H)

You will need to complete an annual tax return, even if your tax was automatically deducted. If you’re married, you can opt to submit a joint return based on your collective income divided in two.

Residents in Portugal for tax purposes are taxed on their worldwide income at progressive rates varying from 14.5% to 48% for 2023.

Non-residents are liable for income tax only on Portuguese-source income, which includes not only that portion of remuneration that can be allocated to the activity carried out in Portugal but also remuneration that is borne by a Portuguese company or permanent establishment (PE).

2023 resident income tax rate

Property tax in Portugal

The most significant local tax is the Imposto Municipal sobre Imóveis (IMI) – property tax. This is charged to homeowners (not tenants) and is based on the area where you live and how much the home is worth. Homes in wealthier areas will be subject to greater IMI. If your home is valued at more than €600,000, you will need to pay a higher rate (Adicional Imposto Municipal sobre Imóveis (AIMI)).

There are also Stamp Duty and Property Transfer taxes to be aware of if you are buying or selling property in Portugal.

Learn more about buying property in Portugal.

Capital Gains Tax in Portugal

Imposto sobre Mais-Valias is Portugal’s Capital Gains Tax (CGT), and it applies when selling any property bought after 1988, unless you are a Portuguese resident who’s selling their primary home to buy another home in Portugal or another EU or EEA member state. If you are retired or over retirement age (65), you will also receive an exemption if you reinvest the gains into a qualifying insurance contract or pension within six months.

CGT on real estate is calculated based on the selling price, minus costs (which includes acquisition costs, costs incurred during the transfer of ownership and improvement costs incurred within the previous 12 years).

Residents will pay a variable rate based on their income band (as CGT is added to other annual income). Only 50% of the gain is taxable at the marginal rates varying between 14.50% and 48% and inflation relief kicks in after two years of ownership.

The gain may be wholly or partially exempt if the property being sold is the taxpayer's primary residence and the sale proceeds (minus the value of any outstanding loans) are reinvested in another primary residence in Portugal or the European Union within 36 months from the sale or in the period of 24 months prior to the sale.

Non-resident taxpayers will no longer benefit from the flat rate of 28% on capital gains arising from the disposal of property, and such capital gains will be subject to the rules applicable to residents' taxpayers, namely inclusion of 50% of the capital gains and taxation at general and progressive rates (up to 48% plus a single rate of up to 5%).

Dividends and Interest

Dividends and interest are liable to taxation at a flat rate of 28%. However, the taxpayer may opt to be liable to tax on dividends and interest received at the marginal rates varying between 14.50% and 48% (in 2023).

If the dividend is being paid from a tax resident in an EU country, only 50% will be subject to tax, at the progressive tax tables.

Interest income is taxed at 28% for residents. Interest paid by non-resident entities to tax resident individuals is also taxed at a rate of 28%.

If dividend or interest income are derived from a blacklisted jurisdiction, the income will be subject to a punitive tax rate of 35% (2023).

Under the Non-Habitual Tax regime foreign dividends and income are subject to a beneficial tax rate. Read more about the NHR.

Portugal’s corporate tax rate

The standard Corporate Tax (Imposto sobre a rendimento das pessoas colectivas (IRC)) rate is 21% for companies with a permanent establishment, regardless of whether your company is resident or non-resident.

If your company is non-resident and doesn’t have a permanent establishment, the rate goes up to 25%.

If your company earns a taxable profit over €1.5 million, a state surtax of 1% - 9% will apply. Your local council might also levy a surtax of 1.5% in some conditions.

A reduced IRC rate of 17% applies to SMEs on the first EUR 25,000 of taxable income (the standard CIT rate shall apply on the excess). Additionally, SMEs that are located in Portuguese inland regions benefit from a rate of 12.5% on the first EUR 25,000 of the taxable amount, also being subject to the standard CIT rate on the excess. In both cases, reference is made to the concept of micro, small, and medium-sized companies as described in the EU Commission Recommendation 2003/361, concerning the definition of micro, small, and medium-sized enterprises.

Corporate tax is calculated based on your business’s trading income, capital gains and passive income.

Dividends

Dividends paid from a Portuguese entity to a non-resident company is subject to a withholding tax of 25%. If the company has a registered office in a “blacklisted jurisdiction”, this goes up to 35%. However, this may be exempt if the country has a DTA with Portugal or under the EU Parent/Subsidiary Directive.

Other taxes and withholding rates may apply, so it’s a good idea to speak to an expert and receive comprehensive cross-border tax advice before opening a branch or subsidiary in Portugal.

Value Added Tax (VAT) in Portugal

VAT is called Imposto Sobre o Valor Agregado in Portugal (IVA). You will need to pay VAT if you run a business with an annual turnover of more than €10,000 per annum on taxable goods and services. Note: Separate, lower, IVA rates apply on the islands of Madeira and Azores.