Expat Tax In Portugal – Ultimate Tips You Need To Know
Expat Tax In Portugal – Expat Living In Portugal
Portugal is a developed and high-income country where residents enjoy a high quality of life generally. Read on to discover essential tips on U.S. Expat Tax In Portugal.
It is a country located on the Iberian Peninsula in southwestern Europe. Within the country, borders are the Atlantic archipelagos of the Azores and Madeira and the mainland peninsula. Long a country of emigration, it has now become a country of net immigration. In recent years, the Portuguese economy suffered from a recession and caused unemployment rates to rise.
Below is our top 8 list of areas to live in Portugal for expats (in no particular order):
- Ponta Delgada
Portugal is in the Iberian peninsula with a border to the west and south by the Atlantic Ocean. And, to the north and east by Spain. Portuguese is the official language of Portugal.
Portugal has a population with a mixture of Brazilians, Indians, Africans, and Asians, to name a few key cultures. Portuguese cuisine is of great variety. A popular food is a dry cod (bacalhau in Portuguese) that is in many traditional recipes. There are two distinct languages among its people other than Portuguese: English and Mirandese.
The GDP per capita was 77% of the EU28 average in 2017 and a HDI of 0.850 (the 40th highest) in 2018.
Portugal’s climate is dry summers and mild, wet winters. The Portuguese legal system is part of the civil law legal system, also called the continental family legal system.
Portuguese is also the official language of 9 other countries. These include Brazil, Cape Verde, Angola, Guinea Bissau, Mozambique, Principe, Sao Tome, and Equatorial Guinea. The language is also common in Goa in India, Macao on the south coast of China, and East Timor in Southeast Asia.
Guide To U.S. Expat Tax In Portugal
The Tax Samaritan country guide to U.S. ex-pat tax in Portugal provides a general review of the tax environment of Portugal. And, how that will impact your U.S. expatriate tax return as a U.S. Expat In Portugal.
As a U.S. taxpayer, all worldwide income is subject to taxation and reporting. For most taxpayers, you have a requirement to file a U.S. tax return on an annual basis on April 15 each year. June 15 if you are residing overseas on the April 15 deadline. The tax treatment for different classes of income can vary significantly from Portugal and the U.S.
For example, certain benefits are tax-free in Portugal. However, for U.S. tax purposes, these benefits likely are subject to inclusion as gross income. As such, there are several considerations related to US expat tax in Portugal. This brief article will address a few of those considerations.
Portugal Expat Income Taxes
Who Is Liable For Income Taxes In Portugal
Residents of Portugal are subject to tax on their worldwide income. Nonresidents are subject to personal income tax on income arising in Portugal. An individual is a resident in Portugal if, among other conditions, he or she meets either of the following conditions (1) He or she stays in Portugal for more than 183 days in any 12 months, beginning or ending in the fiscal year concerned. (2) He or she has a dwelling in Portugal on any day of the abovementioned period, which may imply his or her intention to use it as his or her habitual residence.
Tax Year In Portugal And Tax Filing And Payment Rules
Employment income and business or professional income from high value-added activities of a scientific, artistic, or technical nature are subject to taxation at a flat rate of 20% on net income. Taxable capital gains that are not specifically exempt or taxed separately have taxation at the ordinary rates: (1) Real estate and associated rights (2) A taxpayer’s property transferred to the taxpayer’s business (however, this gain may be deferred).
The tax year in Portugal is the calendar year. However, it is possible to split the year for tax purposes. Residents and nonresidents who have filing obligations must file their income tax returns between April 1 and June 30 of the following year. Any balance of tax due or excess tax paid is payable or refundable when the Portuguese tax authorities issue the individual tax assessment.
Portugal Tax Relief
Losses from business or professional activities have a carry forward and offset against profits from activities of the same type in the following 12 years. Losses have no carry back.
Expat Tax Withholding
A withholding tax of 28% is imposed on interest income derived from public company bonds and state bonds. And, bank interest. Dividends paid by resident companies are subject to a 28% final withholding tax. Withholding taxes are final with respect to the following (1) Dividends (2) Bank interest, (3) Interest on shareholders’ loans, (4) Interest from public company bonds, bills, or other paper (5) Interest on public debt.
Social security contributions are payable on salaries, wages, bonuses, and other regular income, excluding lunch subsidies. Foreigners who work temporarily (generally up to two years) in Portugal and contribute to a compulsory social security scheme in their country of origin may not be subject to Portuguese social security contributions.
Most of Portugal’s tax treaties provide double tax relief through the exemption-with-progression method. Portugal has entered into double tax treaties with the United States.
These treaties (commonly known as Avoidance of Double Taxation Agreements or DTAs) have been written to protect ex-pats from taxation of the same income by Portugal and the expat’s home country. Even though Portugal has a tax treaty with the United States, most ex-pats should have their US and Portugal-source income carefully reviewed by an international tax specialist like Tax Samaritan.
What You Need To Know About U.S. Income Taxes
When dealing with US expat tax in Portugal, many preferential expat tax treatments may benefit your U.S. expatriate tax return. In fact, for many U.S. expats, the Foreign Earned Income Exclusion (IRS Form 2555) and other deductions will reduce your U.S. tax liability to zero.
Some of these preferential tax treatments or benefits for U.S. expat tax in Portugal include:
- If you are a U.S. citizen or a resident alien of the United States and live in Portugal, your US expat tax in Portugal is based on your worldwide income. As such, you must file a U.S. return for all the years that you are residing in Portugal. However, as a U.S. expat, you may qualify to reduce your U.S. taxable income up to an amount of your foreign earnings that have an annual adjustment for inflation ($107,600 for 2020). Also, you can exclude or deduct certain foreign housing amounts. This is known as the Foreign Earned Income Exclusion and foreign housing exclusion.
- When it comes to your US ex-pat tax in Portugal, most US expatriates worry about “double taxation.” Paying taxes to two different countries – the U.S. and Portugal. A U.S. taxpayer working overseas in Portugal may reduce U.S. taxable income and “double taxation” by claiming the Foreign Tax Credit on Form 1116. Should any foreign income not be fully offset by the foreign earned income exclusion, housing exclusion, or housing deduction, the foreign tax credit paid or accrued may be used as a deduction or credit on the U.S. tax return. Taxpayers can elect to either deduct the taxes as an itemized deduction or claim as a credit. It is to your advantage to take foreign income taxes paid as a tax credit in most cases.
Don’t Make This Mistake
A common but dangerous mistake is the assumption that there is no US expat tax filing requirement if there are zero taxes when claiming these tax benefits.
That is not true.
If you are working overseas, it is likely that you meet the filing requirements to file a tax return and must do so. It is important to note that the preferential tax treatments, such as the foreign earned income exclusion and foreign tax credit, are not automatically granted until an accurate return is filed correctly.
When faced with US expat tax in Portugal there are many tax items to consider.
But the above are by far the most common preferential tax benefits.
With top-notch experience and knowledgeable ex-pat tax preparation from Tax Samaritan, you have assurance that you are paying the minimal amount of U.S. taxes that you have a legal obligation for.
Portugal Foreign Bank Account Reporting – The FBAR (FinCen Form 114)
Another vital tax deadline that frequently applies to US expat tax in Portugal is the disclosure of foreign assets on the FBAR (Foreign Bank Account Report – Form 114).
The FBAR filing deadline is April 15th (or the preceding business day if April 15th falls on a weekend). Unfortunately, requesting an extension on your return does not extend the FBAR due date. There is no extension available for the FBAR deadline. Any reports filed after this date are considered a delinquent FBAR. However, in recent years, an automatic extension till October 15th is applicable.
The FBAR must be filed with the Treasury Department (it is not filed with your federal income tax return) whenever you meet the FBAR filing requirements, which in a nutshell is whenever a U.S. person has a financial interest in, or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust or other types of foreign financial account (including an insurance policy with a cash value such as a whole life insurance policy) maintained with a financial institution, with an aggregate value of over $10,000 at any time during the calendar year based on the highest value of each foreign account during the tax year.
If you have bank accounts at Caixa Geral de Depósitos, Banco Santander Totta S.A., Banco Comercial Portugues, Banco Internacional do Funchal, Banco Popular Portugal or at another bank in Portugal or any other foreign country; you may meet the filing requirement to disclose your foreign accounts on the FBAR.
Please don’t hesitate to contact Tax Samaritan to learn more about your filing requirements.
U.S. – Portugal Social Security Totalization Agreement
The United States has entered into agreements, called Totalization Agreements, with several nations to avoid double taxation of income for social security taxes. As of this time, Portugal has a Totalization Agreement with the United States. This agreement helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings. The agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability, and survivors insurance benefits.
These agreements must be taken into account when determining whether an alien is subject to the U.S. Social Security/Medicare tax or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country.
Under the agreement, if you work as an employee in the United States, you will typically have coverage by the United States. You and your employer will pay Social Security taxes only to the United States. If you work as an employee in Portugal, you usually will have coverage by Portugal, and you and your employer pay Social Security taxes only to Portugal.
Self-employed individuals living and working in Portugal have coverage by the Portuguese system and should obtain a certificate of coverage to claim the benefits of the totalization agreement. You must attach a photocopy of this certificate to your U.S. individual tax return to exempt yourself from U.S. self-employment tax properly. Tax Samaritan can help guide you through this process if unsure of how to proceed.
U.S.- Portugal Tax Treaty And Tax Relief For U.S. Expat Tax In Portugal
The United States has a separate, comprehensive tax treaty with Portugal. Many articles apply to non-resident aliens for U.S. tax purposes and extend certain benefits to U.S. citizens, residents, and green card holders (limited by the ‘Savings Clause’). It is essential to understand if you qualify for these benefits. We recommend discussing with a tax professional to determine if you are eligible for benefits in the treaty.
Tax Samaritan Takeaways For U.S. Expats In Portugal
Please click on the hyperlinks below for additional takeaways for your expat tax in Portugal:
Tax Samaritan Expat Tax Services
IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad
Autoridade Tributária e Aduaneira (for tax schedules and other resources)
Major Banks in Portugal (for important contact numbers)
Ministério dos Negócios Estrangeiros (Portugal Ministry of Foreign Affairs) (for important contact numbers)
All About Randall Brody
Randall is the Founder of Tax Samaritan, a boutique firm specializing in the preparation of taxes and the resolution of tax problems for Americans living abroad, as well as the other unique tax issues that apply to taxpayers. Here, they help taxpayers save money on their tax returns.