The tax filing season will shortly start.
At Fresh Portugal, we file more tax returns for expats than any other company in Portugal.
Despite our very best efforts to make our own tax return service affordable, some people have told us that they cannot afford our tax filing service priced at 400 Euro. We therefore decided to put together a guide to help people better understand how taxes in Portugal work and how they should file their tax return.
As you will see below, the main issue with filing a tax return is not filling the form. The hard part is classifying the income. It is not always obvious or easy to understand what a certain type of income is and therefore we provide some guidance below.
Those filing themselves or using neighborhood Portuguese accounting firms are welcome to use this guide to review how their income should be classified. Ready? Here we go!
Principles
The NHR scheme is not automatically granted for recent residents in Portugal, there is an administrative deadline to follow, which is March 31st of the following year in which you became a tax resident in Portugal.
You can go into the IRS form – Model 3. You can find the digital form on your Finances Portal. The important thing to know about how to fill the Mod 3 form is that the burden of classifying and matching the income with the existing types provided by Portuguese law is entirely yours.
You can check the types of income provided by the Portuguese tax law on articles 2 to 11 of the IRS Code.
You will see categories A to H income:
A: employment income
B: self-employment income
E: capital income
F: income from property (rental)
G: capital gains
H: pension income
After correctly classifying and matching your types of income to the Portuguese classification, you have to identify whether the income is Portuguese sourced or foreign-sourced.
A lot of people make mistakes at this point, because the decisive criteria here for the most important income types – employment and self-employment income - is not where your clients are, but where you do the work from.
And finally, to access the 20% flat rate for employment and self-employment income, you have to identify if you have a high value activity. Portugal have changed this list over the years according to the professions most needed in the country. We have the current list of high value activities at another post of our blog.
Here are a few mistakes that we see frequently:
Classifying income
The below tables show how we normally classify income and could give a good indication to you and/or your accountant.
Kindly note that we are not responsible to how you choose to classify your income when working with other firms!
Income type | Management / work done | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
LLC (not S-Corp) | Portugal | Portuguese sourced income | PT capital income (28%) | Annex E (4) |
LLC (not s-Corp) | Outside PT | Foreign sourced | Foreign sourced capital income (0%) | Annex J (8) + Annex L (6) |
S-Corp/LLC Scorp election – salary | Work done in PT | Portuguese sourced income | 20% + SS in Portugal | Annex A (4) + Annex L (4) (6) |
S-Corp/LLC Scorp election – salary | Work done outside PT | Foreign sourced income | 0% | Annex J (4) + Annex L (5) (6) |
S-Corp/LLC Scorp election – distributions | Portugal | Portuguese sourced income | PT capital income (28%) | Annex E (4) |
S-Corp/LLC Scorp election – distributions | Outside Portugal | Foreign sourced | Foreign sourced capital income (0%) | Annex J (8) + Annex L (6) |
Income type | Management / work done | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
Salary | Work done in PT | Portuguese sourced income | 20% + SS | Annex A (4) + Annex L (4) (6) |
Salary | Work done outside PT | Foreign sourced | 0% | Annex J (4) + Annex L (5) (6) |
Dividend | Management in PT | Portuguese sourced income | PT capital income (28%) | Annex E (4) |
Dividend | Management outside PT | Foreign sourced income | Foreign sourced capital income (0%) | Annex J (8) + Annex L (6) |
Income type | Work done | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
In Portugal, high value | Work done in PT | Portuguese sourced income | 20% + SS in Portugal | Annex A (4) + Annex L (4) (6) |
In Portugal, not high value | Work done in PT | Portuguese sourced income | Standard rates + SS | Annex A |
From outside Portugal, high value | In Portugal | Portuguese sourced income | 20% + SS in Portugal | Annex A (4) + Annex L (4) (6) |
From outside Portugal, not high value | In Portugal | Portuguese sourced income | Standard rates + SS | Annex A |
From outside Portugal + effective tax | From fixed base + DTT | Foreign sourced income | 0% | Annex J (4) + Annex L (4) (6) |
Income type | Work done | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
In Portugal, high value | Work done in PT | Portuguese sourced income | 20% + SS in Portugal (subject to coefficient) | Annex B + Annex (4) (6) + Annex SS |
In Portugal, not high value | Work done in PT | Portuguese sourced income | Standard rates + SS (subject to coefficient) | Annex B + Annex SS |
From outside Portugal, high value | In Portugal | Portuguese sourced income | 20% + SS in Portugal | Annex B + Annex (4) (6) + Annex SS |
From outside Portugal, not high value | In Portugal | Portuguese sourced income | Standard rates + SS | Annex B + Annex SS |
From outside Portugal + not high value + risk of tax under DTT | From fixed base | Foreign sourced income | Standard rates + SS | Annex B + Annex SS |
From outside Portugal + high value + risk of tax under DTT | From fixed base | Foreign sourced income | 0% | Annex J (6) + Annex L (5) (6) |
Income type | Source | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
Capital income | Portugal | Portuguese sourced income | 28% | Annex E |
Capital income, risk of tax under DTT | From outside Portugal | Foreign sourced | 0% | Annex J (8) + Annex L (6) |
Income type | Source | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
Capital gain | Portugal | Portuguese sourced income | 28% * coefficient | Annex G |
Capital gain, risk of taxation | From outside Portugal | Foreign sourced | 0% | Annex J (9) + Annex L (6) |
AL | Portugal | PT sourced income | 28% * coefficient | Annex B (15) |
Rent | Portugal | PT sourced income | See special rates | Annex F |
Rent, risk of taxation | Outside Portugal | Foreign sourced | Normally 0% | Annex J (7) + Annex L (6) |
Income type | Source | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
Capital gain | Portugal | Portuguese sourced income | 28% | Annex G |
Capital gain | From outside Portugal | Foreign sourced | 28% | Annex J (9) |
Capital gain, American citizens (risk of tax) | From outside Portugal | Foreign sourced | 0% | Annex J (9) + Annex L (6) |
Income type | Source | PT/Foreign sourced | Normal tax treatment | Modelo 3 |
Pension from Portugal | Portugal | Portuguese sourced income | Normal rates | Annex A (4) |
Pension, NHR before 2020 | From outside Portugal | Foreign sourced | 0% | Annex J (5) + Annex L (5) (6) |
Pension, NHR before 2020 | From outside Portugal | Foreign sourced | 10% | Annex J (5) + Annex L (5) (6) |
Government pension | From outside Portugal | Foreign sourced | See the DTT | Annex J (5) + Annex L (5) (6) |
Fresh Portugal created a tax calculator with the most common foreign income types, leaving the classifying work with us.