The Portuguese tax system consists of state and local taxes, which are generally calculated based on income, expenditure, and property ownership. Foreigners living in Portugal must register as taxpayers before they can start earning money. The Portuguese tax year runs alongside the calendar year (1 January to 31 December). There are different types if taxes:
Federal taxes include income tax on earnings for employed and self-employed workers, corporate tax and VAT for businesses, capital gains tax on sales of property and other assets and inheritance taxes on estates.
Local taxes: There are some taxes levied at a local level. The most significant is IMI (Imposto Municipal sobre Imóveis) – Portugal’s equivalent of council tax. IMI is charged by your municipality based on the value of your home and the perceived wealth of the area in which you live. IMI is only applicable to homeowners, so tenants are exempt. Residents with homes valued at more than €600,000 need to pay IMI at an additional level. This is known as AIMI – what many consider to be Portugal’s equivalent of a wealth tax.
Who has to pay tax in Portugal?
Your tax liability as a foreigner depends on your residency status, which is defined by how much time you spend living and working in Portugal each year: If you reside in Portugal for 183 days or more in a calendar year, you’ll be considered a resident and will need to pay income tax on your worldwide income. If you live in Portugal for fewer than 183 days, you’ll only need to pay on income earned within Portugal.
Income tax rates for residents in Portugal are progressive, meaning you pay more tax the more you earn. Non-residents are taxed at a flat rate of 25% of income.
The Non-Habitual Residency (NHR) tax regime
Some foreigners living in Portugal can take advantage of the Non-Habitual Residency (NHR) tax regime, which provides substantial exemptions for the first 10 years of residence. NHR status is available for workers in qualifying professions and has two main benefits:
Firstly, you can live as a Portuguese resident but not pay tax on your earnings elsewhere in the world (including employment and capital gains), effectively giving you non-resident status.
Secondly, you’ll pay income tax on Portuguese earnings at a flat rate of 20%, rather than the standard progressive rates of up to 48%.
Income tax rates in Portugal
Portuguese residents must pay personal income tax on their earnings. Most workers are taxed automatically through their payslips, but everyone must still complete an annual tax return. Married couples in Portugal must submit a joint return. To calculate the relevant tax rate, the couple’s collective income is divided in two. Portugal’s rates for individuals for 2020’s tax return (to be filed in 2021) are the following:
Portuguese income taxes apply to earnings in the following six categories:
A: Employment income
B: Self-employment income
E: Investment income
F: Rental income from properties let in Portugal
G: Capital gains from selling properties, assets, or shares
H: Pensions in Portugal, including private pension plans
How to file your income tax return in Portugal
The Portuguese tax year runs from 1 January to 31 December, with returns submitted the following spring. Returns can be completed online or via a paper form. Penalties for late returns can be anywhere from €200 to €2,500. The current window for completing your tax return for 2022 is from 1 April to 30 June 2023.