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Portugal – Taxation

The Taxation System in Portugal

The taxation system in Portugal is regulated by the Portuguese Tax Code, which defines the types of taxes that must be paid by individuals and businesses. The system is divided into two categories: direct taxes and indirect taxes. Direct taxes are paid on income and wealth, while indirect taxes are paid on the sale of goods and services.

Individuals who are employed in Portugal are subject to personal income tax (PIT), which is calculated based on their income. PIT rates range from 14.5% to 48%, with higher rates applied to higher incomes. In addition to PIT, employees also pay social security contributions, which are deducted from their gross salary. The social security contributions are used to fund the Portuguese social security system, which provides benefits such as health insurance, disability benefits, and retirement pensions.

Companies operating in Portugal are subject to corporate income tax (CIT), which is also calculated based on their income. The current CIT rate is 21%, which is lower than the average rate in the European Union. In addition to CIT, companies also pay social security contributions for their employees.

Double Taxation Agreements in Portugal

Portugal has signed double taxation agreements with more than 70 countries around the world. These agreements are designed to prevent individuals and companies from being taxed twice on the same income. They also provide rules for determining which country has the right to tax specific types of income.

For example, if a Portuguese resident is working in another country and earning income there, the double taxation agreement will determine whether the income should be taxed in Portugal, in the country where the work is being performed, or both. In general, the agreement will provide a credit for taxes paid in the other country to avoid double taxation.

Main Taxes Expats Need to Be Aware Of

As an expat working in Portugal, there are several taxes that you need to be aware of. The main ones are:

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  • Personal Income Tax (PIT): As mentioned earlier, PIT is calculated based on your income and ranges from 14.5% to 48%. If you are employed in Portugal, your employer will deduct PIT from your salary and pay it on your behalf.

  • Social Security Contributions: As an employee, you will also be required to pay social security contributions, which are used to fund the Portuguese social security system. The current rate is 11% of your gross salary.

  • Value Added Tax (VAT): If you are running a business in Portugal, you will need to register for VAT and charge it on your goods and services. The current VAT rate is 23%.

  • Corporate Income Tax (CIT): If you are running a company in Portugal, you will be subject to CIT on your income. The current rate is 21%.

There are also several tax breaks that could apply to expats, depending on their specific situation. For example, if you are a non-habitual resident of Portugal, you may be eligible for a special tax regime that offers a reduced tax rate of 20% on certain types of income, such as pension income and income from foreign sources.

Filing a Tax Return in Portugal

As an expat working in Portugal, you may be required to file a tax return each year. If you are an employee, your employer will deduct taxes from your salary and pay them on your behalf. However, if you have additional income or deductions, you may need to file a tax return to report them.

The deadline for filing a tax return in Portugal is typically April 30th of the following year. If you are filing a tax return for the first time, you will need to register with the tax authorities and obtain a tax identification number.

Tax Exit Procedures for LeavingPortugal

If you are planning to leave Portugal and move abroad, there are certain tax exit procedures that you need to follow. The first step is to notify the tax authorities of your departure by submitting a form called a “Modelo 3 – IRS.” This form should be submitted at least 8 days before your departure.

Once you have submitted the Modelo 3 – IRS form, the tax authorities will calculate your final tax liability and issue a tax clearance certificate. This certificate confirms that you have no outstanding tax liabilities in Portugal and can be used to prove your tax status to the authorities in your new country of residence.

It is important to note that if you own any property in Portugal, you will still be subject to property taxes even if you are no longer a resident. You will also need to continue to file tax returns in Portugal if you have any income from Portuguese sources.

The taxation system in Portugal is similar to other European countries, with personal and corporate income taxes, social security contributions, and value-added tax. Expats working in Portugal should be aware of their tax obligations and potential tax breaks. When leaving Portugal, it is important to follow the tax exit procedures to avoid any potential tax liabilities.