Tag Archives: portugal

Fiscal Residency  

20 Monday Sep 2021

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The vast majority of Foreign Residents share a common trait: most, if not all, of their livelihood comes from outside of Portugal. Great confusion and disinformation abound regarding such income from abroad. Before analysing the different requirements surrounding Individual Income Tax (IRS) in Portugal, it is useful to dispel some of the myths and establish a few of the basics regarding Portuguese taxation and the obligations of the Foreign Resident.  So the first question to consider is: Who is required to become resident for tax purposes in Portugal?


Fiscal Residency
It is important to distinguish between a Residency Permit (Residência) and Fiscal Residency.  The former requires a lengthy bureaucratic process at the Estrangeiros Office.  The latter is circumstantial in nature.
An individual is deemed to be tax resident if :
       • physically present in Portugal for more than 183 days in a calendar year;  or
       • physically present in Portugal for less than 183 days but has established a permanent place of residence at 31 December; or
       • if an individual at the end of a tax year owns a dwelling in Portugal that the tax authorities might reasonably assume to be his or her usual residence, the individual generally is considered resident for that tax year;  or
       • if the head of a family is resident in Portugal for tax purposes, other family members may also considered to be resident, even if living abroad.  
However, if the foreign country has a double tax treaty with Portugal, the treaty contains rules to decide in which of the two countries an individual is legally considered resident. Needless to say, if you do have a Residency Permit (Residência), you are deemed to be resident regardless of number of days you are actually present in Portugal.
The Portuguese Tax Authorities
While the tax authorities used to turn a blind eye to foreign residents, the pendulum is now moving in the other direction.  Rather than being invisible, expats have become prime targets.  Many (legally) tax residents of Portugal have never submitted a tax return, thus likely to be eligible to pay tax owed and back interest as well as hefty penalties. The government has made cracking down on tax fraud one of the cornerstones of economic policies and foreign residents are no exception.  If you come forth voluntarily, you are dealt with accordingly.  However, once on the “Black List” of tax-cheaters, it is difficult to shake that status.  By being compliant, you can take an important step towards peace of mind.
Where you pay your taxes
Unfortunately, you don’t get to choose where you pay your taxes.  The Law does.  Just because you may pay (incorrectly) back home doesn’t mean that you will win any favour with Finanças.  Double Taxation Treaties clearly define taxpayer obligations.  And Portugal now has tax treaties with all of the EU countries and many others around the world.  An additional 10 countries are currently completing the ratification process, another 10 are under negotiation and another 30 waiting to start the process. In other words, Portugal is rapidly internationalising its fiscal perspective.
It may come as a surprise that filing a correct tax return in Portugal can actually save you money.  Submitting a tax return is not synonymous with paying tax. The Portuguese tax code has generous allowances and unexpected exclusions on certain forms of income, broad deductions for numerous types of expenses and liberal tax credits for many common expenditures. Many people find their tax burden in Portugal to be significantly lower than in their country of origin.
Year One
In your first year as a Fiscal Resident in Portugal, you will need to make the transition between one tax system to the other.  This does not happen of its own accord.  You need to take overt, concrete steps to make this happen.  Otherwise, you will continue to pay tax in your home jurisdiction yet accumulate fiscal obligations and, eventually, serious penalties in your new country of Residence, Portugal.  We, as citizens, are compelled to be compliant with the Law. We, as taxpayers, are only required to pay the legal minimum.


Capital Gains Tax

20 Monday Sep 2021

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Options when selling Property in an Offshore Company

Many owners of Offshore Companies, both black and white listed, reach a point where, for any number of reasons, they wish to sell up. Yet most are uncertain of the Capital Gains Tax consequences of such a sale, particularly since there are a number of different ways to structure the transaction. While individual proceedings sometimes present unique circumstances, the following example should prove illustrative of most sales. Respective costs and savings ought to be proportional in most cases.

The Situation:   Non-Resident Owners selling a property held in an Offshore Company

1)   An Offshore Company purchases a property in Portugal for €200,000 (inflation-adjusted price).

      At this point, both the Property and the Company are worth €200,000.

2)   A Non-Resident couple buys the shares of the Company for €300,000.

While the Company has a share value of €300,000, the book value of the Property remains €200,000.

3)   The Company moves its headquarters and effective management (redomiciliation) from Gibraltar to Delaware. No change in respective values is registered.

4)   The Owners wish to sell the Property/Company for €550,000.  This can be done in one of three ways:

a)   the Company sells the Property directly to the Buyers; or

b)   the Owners of the Delaware Company sell their shares to the Buyers; or

c)   the Delaware Company is first moved to Portugal, then Owners of the Portuguese Nominee Company sell their shares to the Buyers.

The Tax Consequences for Buyer and Seller:

a) The Company sells its Property:

The Capital Gain on the sale of the Property is the net difference between purchase price (€200,000) and the sales price (€550,000) minus capital improvements in the previous 12 years minus deductible buying and selling costs. The net gain is then taxed at the rate of 25%.

Example – the final result might look something like this:

€550,000 (sale) – €200,000 (purchase) – €15,000 (improvements) – €5,000 (expenses) =

€230,000 (net gain) X 25% (non-resident tax rate on sale of property) = €57,500 (CGT)

The buyer will also pay the following acquisition taxes:

€33,000 (IMT) + €4,400 (Stamp Duty) = €37,400 (acquisition taxes)

Option nº 1

Seller is taxed €57,500 – Buyer is taxed €37,400

Since it is a Delaware Company that is selling the Property, then the taxable Gain will be to the Company. However, it is more than likely that the distribution of these profits to the shareholders will also incur an assessment to Owners in the home jurisdiction on these “dividends”. 

b)   Sale of the Shares of the Delaware Company

The shares of the Delaware Company are sold to the Buyer.  In accordance with the USA-Portugal Tax Treaty (Article 14), this transaction is treated as a Sale of Property Rights since the US Company, as a resident entity under the Treaty, consisting of more then 50% of immovable property located in Portugal. Therefore, the Gain may be taxed in Portugal in an identical fashion as above

Optionº 2

Seller is taxed €57,500 – Buyer pays no tax

with a net CGT due of €57,500. Since the Sellers are non-residents in Portugal, they will also be taxable on the worldwide income in their home jurisdiction. In this instance, the transaction will no longer be seen as a property rights transfer but merely as a sale of shares (movable assets). After application of any Capital Gains allowances, a second CGT assessment will be due on this gain. Given the deemed natures of the perceived transaction, together with the triangulation of the jurisdictions involved, there is no way to eliminate double taxation.

Option nº 3:   Sale of Portuguese Nominee Company

When the Portuguese Company is sold, the Gain is calculated as follows:

First, the Delaware Company must move to Portugal.  As part of this Redomiciliation, an appraisal is performed of the Property, determining that the Company’s sole asset is valued at €530,000. 

Therefore, at the time of the move to Portugal, the Company is worth €530,000 and the now Portuguese Company’s shares reflect this value.

The Shares are then sold as follows:

€550,000 (sales price of shares) – €530,000 (value of shares upon Redomiciliation to Portugal)  =

€20,000 X 10% (tax rates on sale of shares)  =  €2,000 (CGT)

           The buyers will also pay €25 (Stamp Duty on Share Transfer Deed)                                             

Optionº 3:

Seller is taxed  €2,000 – Buyer is taxed  €25

As the Sellers are Non-Resident, they may also be liable for CGT in their home jurisdiction. In this case, the tax paid in Portugal will normally serve as an international tax credit, reducing or eliminating any eventual CGT assessment. Needless to say, while the rate may be different, the basis should be the same.

Conclusion:

As you can see, there is considerable difference both for Buyers and Sellers when redomiciling to Portugal. By selling the Portuguese Nominee Company, rather than the Company selling the Property or the shares of the Delaware Company, both sellers and buyers save appreciably.  In comparison, the costs of Redomiciliation and the subsequent share transfer should prove only a minor inconvenience.

In addition, due to Portuguese fiscal transparency rules, owners of Nominee Companies are free from any possible double taxation in Portugal since liability for potentially chargeable events is transposed out of the Company directly to the Shareholders and is never be assessed to both.

UK “green” travel list is “gold” for Portugal

26 Wednesday May 2021

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British operators anticipate up to a 600% increase in reservations for the Algarve and Madeira. During the upcoming summer tourist season, Turismo de Portugal expects to resume 700 weekly air routes with the United Kingdom that existed before the spread of Covid19. In the Algarve, Easyjet announced another 175 thousand seats for the coming months. British Airways is proposing new routes to Newcastle, Manchester and Edinburgh in addition to online agencies that are growing bookings in triple digits since the UK announcement.

Opening and Closing a Business Activity

22 Monday Feb 2021

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Whether for profit or pleasure, the truth is that there are many people who choose to be sole traders as a way to make a living. More than one out of five Portuguese workers are self-employed, a percentage that places Portugal within the highest level of entrepreneurs in the EU. For a person to operate as a sole trader, there are some preliminary requirements that must be met with Tax Authority and Social Security Administration before starting up a business operation.

Opening a business activity

If you want to do business as a sole trader, the first step is to communicate your intentions to the Tax Authorities (“A.T.”), even before you launch your business. This is done by registering the Opening of Business Activity Declaration (“Declaração de Início de Actividade”). This step can be done in person at a Finanças office or in a Citizens’ Centre (“Loja de Cidadão”). In these cases, a civil servant guides you through the process to complete the necessary forms and enroll you directly into the system.

Taxpayers should also choose between being assessed in the Simplified Regime or under Standard Accounting procedures. Portuguese tax residents can also open their business activity on the Internet through the Finanças website. To submit a declaration, you must first have a Portuguese Tax Identification Number (“NIF”)as well as your Finanças password (“senha”). Proceed as follows:

Home ➾ Services ➾ Submit ➾ Activity Declarations ➾ Opening of Business Activity

An important note: Once you have completed these steps, you can start your business or professional activity after receiving confirmation by post in the form of a “dependability code” that will be sent to your registered address.

Another important point: If you intend to perform a one-off “Isolated Act” rather than exercise an on-going business activity, you are excused from the requirement of submitting an Opening of Business Activity Declaration.

Social Security

Registration for Social Security happens automatically and does not require you to complete any additional forms. If this is your initial registration, you are eligible for a first year exemption from Social Security contributions. Likewise, until your taxable sole trader income surpasses €2,515.32, you will also be exempt. In situations where you accumulate an independent business activity with salaried work or are in receipt a Social Security Old Age pension, you are also excused from Social Security contributions. Standard contributions for Sole traders are at the rate of 29.6%. 

Closing your business activity

It is not at all uncommon for sole traders to cease their business activity yet fail to notify the Tax Authority of the fact. It should not come as a surprise that as far as Finanças is concerned, the activity remains open until reported closed. To wind up your self employment, you should go to an “AT” office, a Citizens’ Centre or to the Finanças website. To close your activity online, proceed to the “AT” website and go though the following steps:

Home ➾ Services ➾ Submit ➾ Activity Declarations ➾ Closing a Business Activity

On your next IRS tax return, you must refer to the cessation of activity in Annex B. As happens with the opening of a sole trader activity, the cessation will be reported automatically to Social Security by Finanças and no further declaration is necessary on your part. Failure to close your business with result in ongoing assessment based on previous activity.

Dual Citizenship in Portugal

22 Monday Feb 2021

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Those who are contemplating taking on Portuguese citizenship often wish to retain their nationality of origin. Fortunately, Portugal recognises and permits dual nationality. There can be a variety of reasons for taking on Portuguese citizenship:

  • Lifelong access to state healthcare;
  • For British nationals, certainty regarding their status in the EU after “Brexit”;
  • The ability to move freely around Europe and enjoy the benefits of being an EU citizen;
  • Being able to vote in national elections.

Any foreign citizen aged 18 or over may apply for naturalisation once having formally resided for six or more years in the country. As EU nationals, this requires having held temporary residency in Portugal for a period of 5 years, then taking permanent residency through the local SEF office (Serviço de Estrangeiros e Fronteiras).

Naturalisation

Central to the naturalisation process is a notarised and translated copy of the Birth Certificate issued in the country of origin.

A criminal record certificate, translated and apostilled, is also required from Portugal, from the country of origin and from any other country of residence. In Portugal, the certificate is issued at the local Tribunal. For UK nationals, application can be made online:

https://www.acro.police.uk/police_certificates.aspx

Then choose the ‘Police Certificates’ tab.

The Process

Citizenship application is handled by the IRN (Instituto dos Registos e do Notariado) through the local Conservatória. Depending on the nature of one’s situation, there are appropriate forms available in Portuguese only on the IRN website:

http://www.irn.mj.pt/sections/irn/a_registral/servicos-externos-docs/impressos/nacion alidade/impressos-nacionalidade

Language Test

Applicants must pass a Portuguese language proficiencytest, known as CIPLE – A2, except for those who have been married to a Portuguese national for more than 3 years.

Application for the test should be made online at least one month in advance. To help prepare, there is a book of model tests available from the following link:

http://www.lidel.pt/pt/catalogo/portugues-europeu-lingua-estrangeira/avaliac ao-certificacao/

CIPLE measures the basic ability to interact in a limited number of predictable daily communication situations. The exam consists of three parts:

  • Reading comprehension and written interactions
  • Oral comprehension
  • Oral production and interactions
Citizenship by marriage

If married to a Portuguese national, citizenship may be obtained after 3 years of residency. In this case, the language test is usually waived.

If you are in a cohabiting relationship with a Portuguese citizen but not married (commonly referred to as “união de facto”), it is still possible to obtain Portuguese citizenship once the union has been officially recognised. While there is no formal process for registration for cohabiting couples, the status must still be proven. The couple should request a declaration from the local parish council, stating that they have lived together for at least two years. Two local witnesses are necessary. Translated copies of the birth certificate will also be necessary. In this case, no minimum required period of residency exists prior to applying for citizenship. However, authorities may require a Portuguese language proficiencytest as well as documented links which demonstrate integration into Portuguese society.

Application

All foreign language documents should be translated into Portuguese and certified. Once all of the paperwork has been assembled and checked, application should be hand delivered or sent by post via registered mail to:

Conservatória dos Registos Centrais

Rua Rodrigo da Fonseca, 200 1099-003 Lisboa

or visit the local “Conservatórias do Registo Civil”. The process usually takes around 3-6 months.

Aggregate vs Autonomous Reporting Options

19 Tuesday Jan 2021

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When assessing Company profits, taxation occurs in a two-stage process: first, the Company pays Corporate Income Tax on its profits, then Shareholders pay Individual Income Tax on these distributed profits (now called dividends). This assessment procedure is called “economic” double taxation. Almost all countries in the EU have adopted one of several methods to eliminate “economic” double taxation-some via the Company, some via the Individual. Regardless of the method, the end result should be the same: dividends reported by the Individual should be after the elimination of any “economic” double taxation.

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State Budget 2021 – tax havens

29 Tuesday Dec 2020

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The imposition of IMI and IMT for companies directly or indirectly based in so-called tax havens, approved in the State Budget, does not distinguish between the jurisdictions with which Portugal has double taxation (ADT) and information exchange (ATI) agreements from those in which complete opacity prevails in capital movements. Sovereign funds and other investors from Oman, the United Arab Emirates or Qatar as well as investors based in Hong Kong – all included in the list of tax havens but with ADT with Portugal – will be some of the hardest hit. The same happens with the Cayman Islands, Jersey, Guernsey, Isle of Mann or Panama, where the funds are established, which aggregate a large part of institutional investors worldwide.

Residency Registration for British Nationals

14 Monday Dec 2020

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Even in the year of the pandemic, many British nationals continue to seek out Portugal as a popular destination. The UK government has multiplied notices to UK citizens who reside in Portugal to have their documentation in order by 31 December. Currently, there are more than 50,000 British nationals residing in Portugal, ranking Portugal in sixth place behind Spain, Ireland, France, Germany and Italy. Official data in 2019 from the Portuguese Immigration and Borders Service (SEF) indicated there were 34,358 UK citizens officially residents in Portugal. SEF officials explain that from January to October 2020, a further 6,469 new Residency Permits were issued to UK nationals for a total of 40,827 current residents. Since 2016, the year of the Brexit referendum, 19,384 Britons registered in Portugal. Up until last October, the increase reached 111%.

The British embassy in Lisbon recognises that there are, in fact, many more Britons living in Portugal than the official figures would indicate. By the end of the year, many more are expected to register officially with SEF. What is certain is that now all will have to deal with the new bureaucracy necessary to remain in the country in January 2021 and beyond. At this point, the embassy also does not have definitive record of the number of British nationals who have already completed all the necessary steps.

Portuguese bureaucracy

At the top of the concerns of the British in Portugal are upcoming changes. One of the reasons for the aggressive advertising campaign to ask British citizens to take care of all necessary documentation is also due to Portuguese bureaucracy. There may be delays in scheduling services as well as problems in accessing services due to the pandemic. The embassy clarifies that Portugal does not oblige UK nationals to apply for a new residency status according to the current agreement. However, as there are many who are still unregistered, it is important that everyone needs to become compliant to protect their rights after the transition period at the end of December. In October, the embassy, in partnership with SEF, launched a joint campaign asking the British living in Portugal to register where they reside by the end of the year.

Driving licences 

You can drive in Portugal with a UK driving licence until it expires. You must register your address in Portugal with IMT services within 60 days of settling in Portugal. The IMT online (Instituto da Mobilidade e dos Transportes – IMT) allows for the exchange of a UK licence for a Portuguese one. Even if you are unable to affect the exchange immediately, British citizens have 90 days after 1 January, so no road test should be necessary.

Healthcare

Another concern is access to the Portuguese National Health System. Coverage may be dependent on your residency status. If British nationals are registered as residents in Portugal, they should have full access to the  Portuguese National Health Service (Serviço Nacional de Saúde, SNS).

Passports

British embassies are no longer involved if a passport expires. Renewal is now carried out online. The embassy warns that British citizens living in Portugal that they must have a valid passport after 1 January 2021.

Implementation

The British Government has posted a dedicated website called “Living in Portugal” (gov.uk/livinginportugal or sef.pt/en). The embassy indicates that the Portuguese Government is responsible for implementing the Exit Agreement. British citizens are accountable for ensuring that they have their documentation in order before the end of the transition period.

The State Budget 2021: what we know so far

23 Monday Nov 2020

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The proposed 2021 state budget, fashioned with strong socialist leanings, has been delivered to the National Assembly for debate and approval before the end of 2020. After three months of negotiations between political parties on the Left, the document focuses on strengthening support for the unemployed, single-parent families, the self-employed and informal domestic workers. In other words, the upcoming  budget will focus on  the groups hardest hit by the Covit-19 pandemic.

Debt forgiveness

Among several measures meeting the left wing coalition demands, the Government has decided to writeoff old debts to Social Security and recover furloughed railway workers. In addition, the government promises to hire 3,000 non-teaching assistants for schools. Here is an initial preview of some of the key points in the State Budget for 2021.

Social support: facing the pandemic

New extraordinary social support measures are expected to confront the drop in household income. It will be a benefit that will cover employees and domestic workers for one year and sole traders for six months.

Social Security: Farewell to 20-year-old debts

The oldest and smallest debts to Social Security may be forgiven starting next year. If passed, the Government is authorized to forgive amounts when there is a debt for contributions and  benefits that are 20 years old or more or that are less than €50 and more than 10 years old.

Unemployment: Benefit to €505

The reference value of installments is €501.16 and the minimum amount is €50. The lower limit for unemployment benefits will increase from the current €438.81 to €505. It is also foreseen that public daycare centres will be free of charge for students in the 2nd income bracket.

Health: Repeated hiring

The Government announced the plan to recruit 4,200 professionals for the National Health Service (SNS). By the end of the first quarter of 2021, the needs for medical professionals will be assessed to determine who may benefit from a risk subsidy of €219.40 payable every other month. Also there will be an investment of €90 million for the sector to improve facilities and equipment in health centres and family health units.

School support staffing

The Government pledges to hire 3,000 professionals, promising a revision of the criteria for calculating non-teaching staffing in schools.

Security forces: €10 million allocated to housing for police

The Government intends to guarantee basic living conditions for police and other security forces who are displaced by their job placement. The plan is to launch an investments of €10 million in housing for police in 2021.

Tourism: Credits for those who spend in hotels

According to the proposal, visitors will accumulate credits during one quarter, amounting to the total VAT incurred in consumption in the sectors of hospitality, culture and restaurants. Subsequently, holiday makers can use this value during the following quarter in consumption in those same sectors.