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Understanding Progressive Tax Rates in Personal Income Tax

January 15, 2025

By Ricardo Chaves

Understanding Progressive Tax Rates in Personal Income Tax

Progressive tax rates are a fundamental aspect of Portugal’s personal income tax system, aiming to ensure that taxpayers contribute to public finances in proportion to their earnings.

The higher your income, the higher the rate you pay, making the tax system more equitable for everyone.

In this guide, we’ll walk you through how these rates work and how they affect your taxable income. You’ll learn how the tax brackets are structured, how tax liability is calculated, and how different types of income are treated under the progressive tax system. Whether you’re an individual taxpayer or self-employed, understanding these rates is crucial for managing your finances and ensuring you meet your tax obligations.

Explaining Progressive Tax Rates:

Progressive tax rates are designed to apply specific tax rates to different ranges of taxable income. In simple terms, the more you earn, the higher the tax rate you pay.

Each tax bracket is associated with a range of taxable income, and within each bracket, there are two key rates: the normal rate and the average rate.

Currently, Portugal uses a system with nine distinct IRS tax brackets, which we will outline below.

Progressive Tax rates for 2025:

Bracket	Taxable Income	Normal Rate	Average Rate
1st	Up to 8,059€	13%	13%
2nd	8,059€ – 12,160€	16.5%	14.180%
3rd	12,160€ – 17,233€	22%	16.482%
4th	17,233€ – 22,306€	25%	18.419%
5th	22,306€ – 28,400€	32%	21.334%
6th	28,400€ – 41,629€	35%	25.835%
7th	41,629€ – 44,987€	43.5%	27.154%
8th	44,987€ – 83,696€	45%	35.408%
9th	Above 83,696€	48%	–

How Do Progressive Tax Rates Work?

When filing your tax return, the Tax Authority (AT) first calculates your total gross income for the previous year, then applies any relevant deductions to determine your taxable income.

This taxable income is then assigned to the appropriate tax bracket, which sets the rate that will be applied to your income.

It’s important to note that not all of your income will be taxed at the same rate. Each tax bracket has both a normal rate and an average rate. Taxpayers with taxable income above 8.059€ (the threshold of the first bracket) will be subject to both rates.

To better understand the calculation method, your taxable income is divided into two parts:

First Part: This is the portion of your income that falls within the highest tax bracket in which your total income is fully included. The average rate of that bracket applies to this portion.
Second Part: Any income that exceeds the upper limit of the first bracket. This excess amount is taxed at the normal rate of the next higher bracket.

Let’s break it down with an example:

Example: Step-by-Step Calculation of IRS Tax:

Imagine that Maria has a taxable income of 25.500€. Here’s how we calculate her tax liability:

First part of income (within the limit of the 5th tax bracket): Maria’s income up to 22.306€ falls within the 4th tax bracket, with an average rate of 18,419%.

22.306€ × 18.419% = 4.104,56€

Second part of income (excess falling into the 5th tax bracket): Now, we calculate the income above the 22.306€ limit, which is 25.500€ – 22.306€ = 3.194€.

The next bracket (5th bracket) applies a normal rate of 21,334%.

3.194€ × 21,334% = 681,44€

Total Tax Due: To find the total tax, we add up both parts:

4.104,56€ (from the first part) + 681,44€ (from the second part) = 4.786,00€

Therefore, Maria’s total tax liability will be 4.786,00€, before any deductions, such as health or family-related expenses.

Based on any tax withholding Maria has already paid, she might either owe more or receive a refund depending on what was already deducted during the year.

Tax Withholding vs. IRS Tax Brackets:

Tax withholding is the process where a portion of an employee’s income is deducted and sent directly to the government by the employer. This amount depends on various factors, including the employee’s income level, marital status, and number of dependents. Withholding helps employees pay their taxes throughout the year, so they don’t need to pay a lump sum at the time of filing the tax return.

While the amount withheld is meant to be an estimate, it doesn’t always match the final tax liability, since numerous factors such as changes in income or expenses can affect the amount due.

Once the IRS return is filed, the tax authority will calculate the total gross income, apply the appropriate tax rates based on the income brackets, deduct any eligible expenses, and compare it with the tax already withheld.

This process determines if the individual owes additional tax or qualifies for a refund.

Non-Habitual Residents Tax Regime:

The Non-Habitual Resident (NHR) status in Portugal was a special tax regime designed to attract foreign residents and returning Portuguese citizens who have lived abroad for more than five years.

This regime offers substantial tax advantages on income from qualified work, pensions, and passive income.

Under the NHR regime, certain types of income are taxed at a flat rate of just 20%, providing a notable benefit compared to Portugal’s progressive tax brackets, as well as tax exemptions or reductions on foreign-sourced income such as pensions, dividends, and interest. This means that those with NHR status do not have to adhere to the standard progressive tax rates applied to other residents.

Important Note: While the NHR regime is no longer available to new applicants, individuals who have already registered under this regime will continue to enjoy its tax benefits for the full duration of the 10-year period, ensuring continued tax exemptions and reductions.

Understanding progressive tax rates is essential for anyone navigating the personal income tax system in Portugal. By applying different tax rates to varying income levels, the progressive tax structure ensures fairness and a gradual increase in tax liability as your earnings grow. It’s important to know how these rates work, how to calculate your tax due, and how your taxable income fits within the different tax brackets.

At AFM, we are committed to helping you understand and manage your taxes more effectively. If you have any questions or need assistance with your tax return, we are here to support you. Our team of experts can guide you through the process, ensuring you comply with the current tax laws and make the most of any eligible deductions.

Feel free to contact us at info@afm.tax or visit our website at www.afm.tax for more information or personalized assistance.

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e-Fatura: A Step-by-Step Guide to Validating Invoices for Your IRS Refund

January 9, 2025

By Ricardo Chaves

e-Fatura: A Step-by-Step Guide to Validating Invoices for Your IRS Refund

Validating your invoices through e-fatura is essential. It ensures you receive the maximum IRS refund you’re entitled to.

With the validation deadline set for February 25, now is the time to confirm your invoices and secure deductions for eligible expenses.

Important Note: If you have NHR status and are tax-exempt or taxed at a flat rate, these deductions will not affect your tax liability. Tax deductions only apply to income taxed at progressive tax rates.

What You’ll Learn in This Guide

Why invoice validation matters
Step-by-step instructions to validate your invoices
What happens if you miss the deadline

Why Should I Validate Invoices?

Validating invoices on e-Fatura ensures you benefit from deductions in key areas like:

Health
Education
Housing
Nursing Homes
General Family Expenses (“Others”)

Additionally, you can recover part of the VAT paid on services such as transportation passes, dining, accommodation, car and motorcycle repairs, beauty salons, and even veterinary services.

While most invoices are automatically validated by the system, some require manual intervention. Missing this step could cost you valuable tax benefits.

What is e-Fatura?

e-Fatura is an online platform introduced in 2015 by the Portuguese government to combat tax evasion. It tracks your expenses tied to your taxpayer number (NIF) and enables you to declare them for tax deductions, potentially lowering your tax bill or increasing your IRS refund.

Bonus Tip: By using e-Fatura, you can also participate in the “Invoice of Luck” lottery, which offers weekly prizes of 35,000€ in treasury certificates!

Step-by-Step: How to Validate Invoices

1. Register on the Tax Portal

If you’re new to the system, register on the Tax Portal and wait for your login credentials (NIF and password) to arrive by mail. Existing users should ensure their credentials are valid.

2. Access e-Fatura: https://faturas.portaldasfinancas.gov.pt/ Or install the e-Fatura App

Log in to the e-Fatura platform and navigate to the “Deductible Expenses for IRS” section. Here, you can monitor your accumulated expenses by category and track progress toward the maximum allowable deductions.

3. Validate Pending Invoices

For invoices flagged for manual validation:

Click “Complete Invoice Information.”
If you don’t recognize a merchant or expense, consult your records or search for the merchant’s details online.
Adjust incorrect sectors by selecting the invoice and clicking “Change.”

4. Associate Medical Prescriptions

Health expenses with a 23% VAT rate require a medical prescription to qualify for deductions. On the portal, click “Associate Prescription” and provide the required details.

5. Manually Enter Invoices

Forgot to request an invoice with your NIF? You can enter it manually:

Go to “Register Invoices.”
Fill in details like the merchant’s NIF, invoice number, date, VAT rate, and taxable amount.

Note: Merchants have until the 20th of the following month to input invoices, so avoid premature manual entries. Some expenses (e.g., tuition fees, mortgage interest) may appear later.

6. Confirm Regularly

Regularly check your e-Fatura account to ensure all invoices are categorized correctly. This habit simplifies the process as IRS deadlines approach.

Special Considerations for Self-Employed Workers

Self-employed professionals (Category B income) must specify if an invoice relates fully or partially to their professional activity:

Full Amount: 100% is deductible.
Partial Amount: Only 25% is considered.

For those in the simplified regime, the Tax Authority assumes 10% of income goes toward professional expenses. Additional deductions must be validated to account for the remaining 15%.

This step is particularly important for incomes exceeding 27,360€, as failure to validate professional expenses could lead to significant financial losses.

Maximizing Your Deductions by Category

By validating your invoices, you unlock deductions across various categories. Here’s a quick overview:

Category	Max Deduction
Health	1,000€
Education	800€
Housing	502€
General Family Expenses	250€ (per family member)

Validating your invoices on e-Fatura doesn’t have to be daunting. With these simple steps, you’ll be well-prepared to make the most of your IRS deductions for 2025.

Deductions by Category:

Sector	Deduction (%)	Maximum Amount (€) per taxpayer	Expenses Included
Health	15%	1,000€	– Purchases of goods and services exempt from VAT or subject to a reduced rate. – Purchases of goods and services with VAT at the standard rate, provided they are accompanied by a medical prescription. – Health insurance premiums or contributions paid to mutual associations or non-profit institutions providing healthcare. For example, if you paid health insurance premiums and covered 85% of the cost by the end of the year, these are deductible. Keep in mind that if you spend over 1,000€ per year, the savings may not be as substantial.
Education	30%	800€	– Nurseries, kindergartens, daycare centers, schools, educational institutions, and other educational services; – School books and materials; – School meals; – Accommodation for students away from home.
Real Estate	15%	502€	– Rent for permanent housing. For households with taxable income up to 30,000€, the deduction limit is 800€.
Real Estate	15%	296€	– Interest on loan payments for mortgage contracts signed before December 31, 2011. For households with taxable income up to 30,000€, the deduction limit is 450€.
Real Estate	30%	500€	– Property rehabilitation.
Nursing Homes	25%	403.75€	– Expenses incurred for nursing homes or residences for elderly or disabled persons under your care.
General Expenses	35%	250€	– Water, electricity, gas, clothing, supermarket purchases, or fuel. For single-parent families, the deduction is 45% up to 335€.
Pension Savings Plans	20%	400€	– Individuals under 35 years old.
Pension Savings Plans	20%	350€	– Individuals between 35 and 50 years old.
Pension Savings Plans	20%	300€	– Individuals over 50 years old.
VAT	15%	250€	– Restaurants, hotels, hairdressers, car and motorcycle repairs.

Conclusion:

Validating your invoices through e-Fatura is a crucial step in maximizing your IRS refund and securing deductions for various expenses. By taking the time to correctly validate and associate your invoices, you ensure that you can fully benefit from deductions in key categories such as health, education, housing, and general family expenses. This process not only reduces your tax bill but can also increase your potential refund.

For self-employed individuals, it’s especially important to accurately report professional expenses to avoid financial losses, particularly for those with higher incomes. By following the outlined steps and regularly reviewing your e-Fatura account, you can confidently manage your deductions and optimize your tax situation.

Remember, the deadline for validation is February 25, so don’t wait until the last minute. Take advantage of this opportunity to lower your taxable income and enhance your financial benefits for the year ahead.

If you need any assistance or have further questions, feel free to contact us at info@afm.tax.

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IRS Personal Income Tax 2024: what you need to know about it this year

January 9, 2025

By Ricardo Chaves

IRS Personal Income Tax 2024: what you need to know about it this year

The IRS delivery time begins on the 1^st of April and will run until the 30^th of June. So now it’s that time of the year when we need to clarify some of your questions concerning this important task.

In which form can I submit my IRS tax return in Portugal?

All IRS tax declarations are exclusively submitted online, so if you don’t yet have a password to access the tax portal, it’s important to request one per taxpayer. As the tax website is only in Portuguese, this may be a difficult task if you don’t understand the language; ask your accountant to get this for you.

When do I need to submit my IRS tax return in Portugal?

All IRS tax returns, independent of the income earned, must be submitted from the 1^st of April until the 30^th of June.

What is the period covered in my Portuguese IRS tax return?

The tax year in Portugal is the same as the civil year, so you declare the income from the 1^st of January 2024 until the 31^st of December 2024.

I arrived in Portugal last year. Do I need to submit a return? I don’t have my residency card yet, and I am still waiting for the appointment with AIMA.

In the first year of residency, you must submit a tax return for the period you were in Portugal (from … to 31-12-2024). The same happens to all those who stopped being Portuguese residents in 2024; they need to submit a tax return from 01-01-2024 until the date they left. However, if you have not yet got your residency permit, you are not yet a tax resident as you can only apply for tax residency, once you have the residency permit.

What happens if I must submit tax returns in more than one country and the information is not ready before the end of June?

If, for any reason, you don’t have all the information required to submit the tax return in Portugal by the end of June, you may submit a request in the tax portal to allow you to submit the tax return until the end of December of the current year.

I need to submit my taxes in the US in April. Where should I file first?

Your Portuguese accountant must give you an estimate of the tax you pay in Portugal, so you can include in your US tax declaration, the amount of tax you will spend in Portugal. Or you can file for an extension for your US taxes, as you are now a non-resident in the US.

Who needs to fill out an IRS tax return in Portugal?

All the tax residents must submit to declare their worldwide income in Portugal. The non-residents who earned income from Portuguese sources must also submit the IRS tax return. There are exceptions for residents who have earned only salaries or pensions from Portuguese sources lower than 8.500€ per year, and when there wasn’t any tax deducted on the source, and in case they received alimony income up to 4.104€. Also, if you earned income from category B (sole trader) from a unique transaction (ato isolado), this income is lower than 1.921,72€.

Do I fill a joint return with my partner or one each?

The general rule is that married couples are taxed separately, and the personal income tax due will be assessed individually. However, both married couples and living-together couples have the option to be taxed jointly. It’s essential to ask your accountant to simulate the two scenarios and see what is more advantageous.

What happens if I forget to file a return or do it incorrectly?

It’s important to be aware that the fines for non-compliance with the dates can be very high. Fines can go from 37.50€ to 112,50€ for a delay of 30 days. However, depending on the type of misconduct, mainly fraud, fines go from 375€ to 22.500€.

I’m a non-resident. Do I need to submit a return?

Are you sure that you are a non-resident? Do you have a fiscal representative? If not, where do you receive your IMI council tax bills? If you receive them at your property in Portugal, then most likely you are a resident for tax purposes in Portugal. If you are a non-resident, you will only submit an IRS return in Portugal if you have income from a Portuguese source (including property rental or property sale, even if you haven’t made a capital gain).

I sold my property in Portugal last year, but I’m a non-resident. Do I need to submit a tax declaration?

All property transactions in Portugal need to be declared, irrespective of your residency or if you made a gain or not.

What are the tax deductions in Portugal?

Tax deductions are the amount that can be “deducted” from the IRS calculated annually for each household. These deductions are made in relation to the dependents of the household and ascendants who live in common housing with the taxpayer and on the collection of invoices related to General family expenses, Health and health insurance expenses, Education and training expenses, and Property charges. Other deductions relate to alimony pensions paid, International double taxation, and disabilities of any of the members of the household.

Although all these categories fall under tax deductions, there are some categories that largely depend on the requirement for an invoice with each taxpayer’s NIF. However, please note that if you are tax-exempt due to the NHR, for instance, or if your income is taxed at a flat rate (also common with the NHR status), these deductions will not be applicable. Most of these are only applicable to incomes that are taxed at progressive tax rates.

When do I need to pay my IRS?

After submitting your tax return, the tax authorities will validate your declaration, and you will receive a tax bill in July or August by post, giving you 30 days to pay. Please note that if you intend to be away during the warmer months and don’t have a fiscal representative to receive your bills, you will incur monthly interest charges and penalties if paying out of date.

Some suggestions to make your IRS this year a stress-free task

We strongly advise our customers to prepare everything with time, to complete this process smoothly:

PASSWORD: Make sure you and your partner have a password to access the Tax Portal. If you do not have one, request a new one immediately;

COPY OF ID AND NIF: for you, your partner, and any dependents you may have;

DECLARATIONS OF INCOME: gather the statements of income and withholding taxes;

BANK ACCOUNT: your IBAN will be necessary to include on your IRS return and will make any tax refund much quicker. This also includes the IBANs from any foreign bank accounts opened in your name.

CGT: if you have sold a property in 2024, make copies of the deeds (for purchase and for sale) and gather invoices for the real estate commission and home improvements in the last 12 years. These can be deducted against any capital gain tax.

Remember if you have a resident status but your income was earned abroad, you have to deliver along with the tax return the ‘J’ Annex which discriminates the values received abroad. There are taxation agreements between Portugal and several countries to avoid double taxation, so the impact this will have on your IRS will depend on several factors. If you are registered as a non-habitual resident, don’t forget you must fill in Annex L and include the IBAN information on all your bank accounts abroad.

And remember, we can assist you with all this bureaucracy and avoid late submission fines.

Feel free to reach out to us at info@afm.tax or +351 281 029 059.

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Tax calendar: dates you need to put in your diary for 2025

January 6, 2025

By Ricardo Chaves

Tax calendar: dates you need to put in your diary for 2025

Please remember that before you submit your Personal Income Tax (IRS), you need to perform some tasks as per the new habits acquired in the previous years: tasks like validating or registering invoices at the tax portal are now procedures that became part of the routine of any taxpayer. Your role is important in determining your IRS deductions, therefore check the tax calendar, to make sure you don’t lose any deduction or pay any fines.

January:

If you have a business activity that was VAT exempt under Article 53, but in 2024 you exceeded the VAT threshold, then you need to change your VAT status by the 31^st of January. Likewise, if you were paying VAT but did not exceed the threshold in 2024 and wish to become exempt, the same deadline applies. For your info, the VAT threshold in 2024 was 14.500€ and this limit will increase in 2025 to 15.000€. The VAT threshold is applicable to your business income, irrespective of how many activities you may have. If in 2024 you were VAT exempt and invoiced a total of 14.999€, although you were over the limit, as this increases in 2025, you are not required to change your status.

If you have a rental contract and are not obliged to issue monthly rental receipts, you have until the 31^st of January to declare the yearly rental income for 2024.

February:

Each taxpayer has until the 25th of February to query, report and verify invoices. To do this you should access the e-Factura portal and access to your personal page, where you should verify if all your invoices have been properly communicated. If you find any failure, or any invoice is not recorded, you can add these invoices to your file. It is also important to check in which category your invoices are recorded and move them into the appropriate section (ie health, education, etc) otherwise the deduction will not be accepted. These procedures need to be performed for each household expenditure holder, including dependants.

It is also important to update or register your household for tax purposes, before 15/02. Please note that this can be very important, not only for tax purposes, but for other related matters, such as inscription at schools, kindergarten, etc and or other tax benefits you may be entitled to.

March:

If you became a resident of Portugal in 2024 and want to apply for the Non-Habitual Residency scheme, you have until the end of March to submit your application at the tax portal. The NHR status is revoked after 2024, but any citizens that started their emigration process before 31-12-2023 or that had an accessible habitation before 07-10-2023, can still register the NHR application, providing they completed their tax residency in Portugal before the end of 2024.

The new Tax Incentive for Scientific Research and Innovation (IFICI+) is also available for anyone that become a tax resident in Portugal in 2024 and was not resident in Portugal in the previous 5 tax years. This scheme will replace NHR, and if you wish to be part of this scheme (instead of the NHR), you must file your application before March 15, 2025. In the following years, the registration will be done by January 15 of each year.

During March, you also need to check your e-fatura page at the tax portal and if you feel the information is incorrect, you can challenge the calculations made by the Tax Authorities. In other words, your tax deductions will be summarized here, under family general expenses, healthcare expenses, training and education expenses, charges with property for permanent residence, invoices VAT and costs with foster homes; if your total invoices is not consistent with the one totals shown in the portal, you have this two weeks window to contest it. Please note that it’s necessary to check this for each taxpayer.

April:

You can submit your IRS (Personal Income Tax) declaration for 2024 from the 1st of April until the end of June. This means that all declarations can be submitted during these three months, irrespective of your income category (employment income, pension income, self-employment income, rentals, etc.)

Please note that all residents, including Non-Habitual Residents, need to submit a tax return, even if they didn’t receive any income or don’t have any tax to pay. If the information on your foreign source income is not yet available before the 30^th of June, you can file for an extension and submit the tax return later at no cost.

All non-residents that have income from Portuguese source (ie property rentals, sale of a property, etc) also need to submit the tax return.

May:

Payment of the first instalment of the IMI council tax. If in your case, the council tax is lower than 100€, this will be the only payment date you need to remember. If is higher, please look for other instalment dates in August and November.

June:

Do not forget to submit the IRS (Personal Income Tax) for 2024 by the end of June. Please remember that if you do not deliver your IRS on time, or if you fail to meet some of the deadlines above, you may lose some or all your tax deductions. Late delivery of your IRS may also cancel your IMI (Council Tax) exemption. If you are waiting for information on your foreign source income, you can file for an extension, but this needs to be requested before the end of June.

July:

If you are entitled to a tax refund, following the submission of the IRS tax return, the settlement must be made by 31^st of July. This is the deadline for the Tax Authorities to pay you.

August:

If you have IRS tax to pay, you should pay no later than the last day of August, provided you have delivered the tax return within the time limits. If the tax return was submitted after the deadline, payment may be made until the 31^st of December (fines and interest will apply).

The second instalment of the IMI council tax is due this month. This applies to all those whose yearly IMI payment is higher than 500€ per taxpayer.

September:

If you have AIMI (additional council tax) to pay, this must be paid by the end of September. Remember that are liable for AIMI payment all properties owned by companies. Individual owners are only exempt from AIMI, in the first 600 thousand Euros worth of property (based on the tax value and not in the commercial value).

November:

Payment of the third and last instalment of the IMI council tax. This applies to all those whose yearly IMI payment is higher than 100€ per taxpayer.

Recurring dates:

Please remember that if you have a business activity, you must issue invoices up to five days after providing the service or receiving the funds. And all the monthly invoices need to be reported to the tax authorities (SAFT file) also by the 5^th of each month. Please be aware that fines can be applicable for late issuance of invoices or late submission of the monthly invoice file. This deadline also includes the invoices related with your rentals (AL).

Each month you also need to issue your monthly rental receipts in case you have a rental contract registered.

The car tax must be paid by the last day of the month when the car was registered. Important note: the car tax is not posted to your tax address; you must get the payment note from the tax portal. It’s advisable to set up a direct debit or to set up electronic notifications, as the fines for late payment can be considerably high in this tax.

If you have a business activity, please remember that each quarter, you need to submit a social security declaration to ascertain how much social security you will pay each month in the following quarter.

If you have any questions, don’t hesitate to reach out. Tax planning is essential, and it’s crucial for both individuals or companies to avoid any surprises.

Contact us to discuss your personal situation and ensure you stay ahead, minimizing the risk of unnecessary fines. You can reach us at info@afm.tax.

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Life in Portugal after the NHR Status Finishes

December 2, 2024

By Ricardo Chaves

Life in Portugal after the NHR Status Finishes

Portugal has long been a favored destination for expatriates, thanks in part to its Non-Habitual Residency (NHR) program. This program, introduced in 2009, offered significant tax benefits to foreign residents for a period of ten years. However, as the NHR status comes to an end, it is crucial to understand the implications and plan accordingly for life in Portugal post-NHR.

Understanding the NHR Program

The NHR program was designed to attract foreign professionals and retirees by offering reduced tax rates on foreign-sourced income, including pensions, dividends, and capital gains. For many, this meant a flat 10% tax on pension income and exemptions on other foreign income sources. The program was a significant draw for those looking to enjoy Portugal’s sunny climate, rich culture, and favorable tax regime.

My NHR is valid until the end of 2027, am I affected by the end of the NHR Program?

If you already have the NHR status, you won’t be affected, and you will be entitled to all your tax benefits until the end of your NHR period. The NHR is being revoked, only as a program available for new residents that become tax resident after the 1^st of January 2025.

We are in Portugal since May, but are waiting for our appointment with AIMA, which is now officially booked for April 2025, did I miss the boat of the NHR?

If you already have an appointment with AIMA booked for 2025, you can register as a tax resident before the end of 2024, based on that appointment. Please make sure that you change your address at the tax office before 31-12-2024, as this is the only way to be ablet to apply for the NHR status before it’s revoked. The deadline to apply for the NHR status will be 31-03-2025, but only for those that became tax resident before 31-12-2024.

What Happens when my NHR Ends?

Once the ten-year NHR period concludes, taxpayers are transitioned to the standard Portuguese tax system. This shift can have substantial financial implications. For instance, the standard tax rate on foreign income, including pensions, will be taxed on the progressive marginal rates that range between 0 to as high as 48%, and capital gains on financial assets may be taxed at a flat rate of 28%. Additionally, if the assets generating capital gains are sourced in ‘Blacklisted Jurisdictions’ Portugal may tax this at 35%.

Financial Planning Post-NHR

To mitigate the impact of these changes, it is essential to revisit and adjust your financial plan well before your NHR status expires. Here are some strategies to consider:

Optimize Pension Withdrawals: Before your NHR status ends, consider maximizing pension withdrawals at the current 10% tax rate. This can significantly reduce your tax burden on pension income.
Reinvest Wisely: After withdrawing your pension, reinvest these funds in tax-efficient accounts or assets that align with the new Portuguese tax regulations. This can help protect your wealth and reduce future tax liabilities.
Consult a Financial Adviser: Given the complexity of tax planning post-NHR, consulting with a cross-border financial adviser is highly recommended. They can help you develop a custom plan to address individual challenges and leverage opportunities to minimize your tax liabilities.

Portuguese taxation of pension income after the NHR expires

If you earn a pension and this was funded partially or totally with your personal pre-taxed contributions, you may qualify for an exemption of 85% of the income received.

This means that even after the NHR status, your pension income would pay an effective tax rate up to a maximum of 7.2%. This is possible because the Portuguese Income Tax Code allows for this 85% exclusion of tax, and your marginal rate will only be levied on 15% of the income received.

Portuguese taxation of life assurance policies (Unit Liked products)

This is another tax efficient investment available, which is not impacted by the NHR end. If you own one of these investment products, you will be taxed only on the growth of capital and not on the full redemption.

Also if the contract is longer than 8 years and 1 day, your effective capital gains tax is only 11.2%, which is very low compared with other jurisdictions and not much different from the current 10% tax paid on the pension income.

New Tax Regime: IFICI+

With the end of the NHR program, Portugal has introduced a new tax regime known as IFICI+ (Tax Incentive for Scientific Research and Innovation). This regime focuses on employment and self-employment income, offering a flat 20% tax rate on eligible activities. However, it does not provide benefits for retirees, making it crucial for those nearing the end of their NHR period to explore other financial planning options.

Living in Portugal Post-NHR

Despite the end of the NHR program, Portugal remains an attractive destination for expatriates. The country offers a high quality of life, excellent healthcare, and a welcoming community. Here are some aspects to consider:

Cost of Living: Portugal continues to offer a relatively low cost of living compared to other Western European countries. This makes it an appealing option for those looking to maintain a comfortable lifestyle without breaking the bank.
Healthcare: Portugal’s healthcare system is highly regarded, with both public and private options available. Expats can access quality medical care, often at a fraction of the cost compared to their home countries.
Community and Culture: Portugal boasts a rich cultural heritage and a vibrant expatriate community. Whether you are interested in exploring historic sites, enjoying local cuisine, or participating in community events, there is always something to do.

Conclusion

While the end of the NHR program marks a significant change for expatriates in Portugal, it does not diminish the country’s appeal. By understanding the implications of the transition and planning accordingly, you can continue to enjoy the many benefits of living in Portugal. Whether through optimizing your financial strategy or embracing the local culture, life in Portugal post-NHR can still be fulfilling and rewarding.

For any inquiries or support with the residency process for businesses or individuals, our team can guide you through the whole moving process.

Feel free to reach out to us at info@afm.tax or call us at +351 281 029 059.

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New Local Lodging Regulations (AL) – Effective from November 1st, 2024

October 30, 2024

By Ricardo Chaves

New Local Lodging Regulations (AL) – Effective from November 1st, 2024

The Local Logding (AL) sector in Portugal is undergoing significant changes with the introduction of new regulations that come into effect on November 1st, 2024.

These changes, aim to address various issues within the sector and provide a more structured framework for short-term rentals.

This new decree changes some of the rules that came into force in October 2023, when the More Housing Law Package (Mais Habitação) started.

Revocation of Previous Measures:

One of the most notable changes is the revocation of Article 19 from the “Mais Habitação” law, which previously restricted new AL registrations.

From November 1, 2024, new AL registrations will be allowed across the country, except in certain Contention Areas. These areas, currently implemented in most of Lisbon and central Ericeira, will continue to have restrictions on new registrations.

We suggest that anyone looking to obtain a AL license to their apartment to act quickly. In fact this law decree attributed new powers to the municipalities, which means that in case the local council wants to restrict the touristic rentals, they may act quickly and determine contention areas within the council.

Transmissibility of AL Licences:

The new regulations also make AL licences transmissible under all circumstances, except in Contention Areas where municipal rules may differ. This change provides greater flexibility for property owners, allowing them to transfer their AL licences more easily. So from now on, it should be possible to transfer the rental license, when you are selling your apartment or villa.

Changes to Operational Limits:

For ALs implemented in primary residences, the previous limit of being open for more than 120 days has been removed.

This means that property owners can now operate their ALs year-round without any restrictions on the number of days they can be open.

Hostel Requirements:

Hostels will still require unanimous approval from the condominium to obtain an AL licence in horizontal property buildings.

This measure ensures that all residents in a building agree to the operation of a hostel, thereby reducing potential conflicts.

Municipal Oversight:

The municipality now has the authority to oppose the registration of ALs within 60 days (90 days in Contention Areas).

Additionally, property owners can request an inspection during the registration process if a licence is not granted. This increased oversight aims to ensure that all ALs comply with local regulations and standards.

Cancellation of AL Licences:

The new regulations also introduce provisions for the cancellation of AL licences. If a condominium votes by a majority (more than 50% of the total owner share) to cancel an AL due to proven and repeated acts of disturbance, the municipality can immediately cancel the licence. However, the licence holder has the right to reply in person, and any cancellation cannot exceed five years.

Capacity Limits and Additional Services:

The maximum capacity for ALs registered as Apartamentos or Estabelecimento de Hospedagem is now set at nine rooms and 27 guests.

Additionally, fold-up or extra beds may be installed as long as their number does not exceed 50% of the “normal” beds. ALs registered as Estabelecimento de Hospedagem may also implement other services such as the provision of food and drink.

Communication and Insurance Requirements:

The person responsible for the AL must communicate their telephone number and email address to the condominium administration.

Furthermore, the municipality may request that the AL licence holder provide the contract of the appropriate AL insurance within three days.

Contention Areas and Areas of Sustainable Growth:

Municipalities have the authority to create Contention Areas and Areas of Sustainable Growth. Contention Areas are defined as those having a surplus of ALs, while Areas of Sustainable Growth are monitored to prevent a surplus of ALs. These measures aim to balance the supply of ALs and ensure sustainable growth within the sector.

Taxation remains the same on operation and sale of the property:

These new Alojamento Local regulations effective from November 1, 2024, bring significant changes to the sector, by revoking previous restrictions, but please note that these changes do not bring any tax alterations. This means that the taxation of your AL operation remains the same as well as the CGT rules on the sale of the property.

If you personally own a property with an AL license and you are conducting the business directly (as a sole trader) the limit of 3 years remains. This means that you need to stop the activity and wait 36 months before selling, to be able to reduce your tax liability to the normal rules. If you sell with the AL or within 36 months of stopping the rental activity, you won’t be able to deduct any expenses to the capital gains liability and the tax will be assessed on 95% of the gain.

As this CGT rule penalises considerably the owners of property with AL, we urge property owners to plan ahead, meeting with us before placing the property in the market. There may be opportunities available to reduce the capital gains liability and we can help you to take advantage of these.

For personalized advice and to ensure compliance with tax regulations, please reach out to AFM at info@afm.tax or visit www.afm.tax.

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Capital Gains: Rent with Purchase Option

October 17, 2024

By Ricardo Chaves

Capital Gains: Rent with Purchase Option

A taxpayer entered into a lease agreement with a purchase option. Can these rents be included in the seller’s capital gains calculation? How?

Rents as Advance Payments

In a non-residential lease agreement with a company, the rents were structured as part of the property’s sale price to the company. The taxpayer received the rents, issued receipts, and reported the amounts on their IRS return.

This year, the taxpayer sold the property to the leasing company. A question arises: Will the sale amount stated in the deed be taxed in full, or can it be reduced by the rents paid? Alternatively, can these amounts be treated as expenses? To clarify, the taxpayer requested a binding ruling from the tax authorities.

Capital Gains: General Rule

Generally, capital gains arise from the sale of real estate rights, unless the gains fall under business, professional, capital, or rental income.

Calculation: For these cases, the capital gain subject to IRS is the difference between the sale price and the acquisition cost. Note: Although the sale price (referred to as the realization value) typically equals the consideration paid, if higher values were used to determine IMT (or what should have been calculated if IMT were applicable), those values prevail.

Charges: The law specifies certain expenses and charges relevant to capital gains calculation, including:

Costs for property improvements incurred within the last 12 years (e.g., renovations);
Necessary and actual expenses related to acquisition and sale (e.g., notary fees);
In certain situations, compensation paid for relinquishing contractual rights related to the property (e.g., position transfer).

Do Rents Paid as Advance Payments Fit These Concepts?

Rents Not Covered: According to the AT, there are no provisions in the relevant norms for deducting received rents.

Total Capital Gains: Therefore, for the AT, the sale value used to calculate capital gains is the amount stated in the deed, and rents cannot be deducted as expenses or charges. This results in double taxation (first as rents and then as part of the sale).

But There’s a Solution!

In the binding ruling, the tax authorities proposed a solution:

Convert Rents into Payments: To include rents as part of the sale price, the AT suggested the taxpayer should appeal the IRS assessment for the past 2 years and initiate administrative litigation. Important: During this process, the taxpayer must prove that the received rents were an advance payment towards the sale price.

From Category F to Category G: If the taxpayer can prove during administrative litigation that the rents were an advance payment for the sale price, they will be reclassified from Category F to Category G in the IRS. In practice, this means the rents will be integrated into the sale price.

Taxpayers with lease agreements featuring a purchase option can request a review of declared rents in the IRS, incorporating them into the sale value.

For personalized advice and to ensure compliance with tax regulations, please reach out to AFM at info@afm.tax or visit www.afm.tax.

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Exemption from Capital Gains: What if Only One Room is Used for local lodging (AL)?

October 15, 2024

By Ricardo Chaves

Exemption from Capital Gains: What if Only One Room is Used for local lodging (AL)?

A property owner seeks to obtain IRS exemption on the capital gains resulting from the sale of their permanent home. However, complications can arise if part of the property, such as the ground floor, is designated for Alojamento Local (AL) — even if it’s just one room.

Monetizing a Portion of the Property:

The surge in tourism and the need for additional income have prompted many homeowners to rent out parts of their permanent residences through local accommodation. But could this create complications?

Ground Floor concerns: A taxpayer expressed uncertainty about the implications of selling their permanent home, particularly regarding the reinvestment of profits into another property. With the ground floor utilized for AL, they wondered if they would have to pay capital gains tax. Therefore, they requested a Binding Information from the Tax Authorities
Single Room for Rent: Another taxpayer faced a similar dilemma, but in this instance, only one room was used for AL activities, accounting for less than 10% of the property’s total gross area. This taxpayer also requested Binding Information.

Capital Gains Tax Exemption Conditions:

In their responses to the Binding Information requests, the Tax Authority (AT) reminded that the exemption from capital gains applies to the onerous transfer of properties that serve as the taxpayer’s or their family’s permanent residence, provided that the following conditions are cumulatively met:

The selling price, minus any loan repayment for acquiring the property, must be reinvested in the purchase of another property, in land for construction, or in the expansion or improvement of another property with the same purpose.
The reinvestment must occur within 24 months before and 36 months after the date of sale.
The taxpayer must express the intention to reinvest, even partially, specifying the amount in the income declaration for the year of sale.
The property sold must have been used as the taxpayer’s or their family’s permanent residence, proven by the respective tax domicile in the 24 months prior to the sale (this period will soon change to 12 months).
Taxpayers cannot have benefited from this exclusion regime in the year they realized the gains and in the three previous years, except in exceptional circumstances.

Important Note: This exemption does not apply if the reinvestment in another property is not intended for the taxpayer’s or their family’s permanent residence within 12 months from the date of reinvestment.

Understanding Permanent Residence:

Permanent residence is defined as the location where the taxpayer organizes their domestic life in a stable and lasting manner, including where they sleep, eat, and receive family and friends. Key characteristics of permanent residence include habituality, stability, and the establishment of the center of domestic life organization. However, challenges arise when this situation intersects with economic activity.

Local Accommodation on the Ground Floor: The AT determined that the fact that part of the property is used for AL indicates that it is not exclusively intended for the taxpayer’s permanent residence (even partially, there is an allocation to the AL activity).
Local Accommodation in the Room: Similarly, the AT considers that if the property is used for AL in the form of “Rooms,” it will also not be exclusively allocated to the taxpayer’s permanent residence since there is a partial allocation.

Responses from the AT:

In both scenarios, the AT determined that the conditions for exemption were not met, resulting in the taxpayer’s ineligibility for capital gains tax exemption.

Important: In practice, this means that the taxpayer loses the right to the exemption provided by law, and the profit from the sale of the property will be subject to the general rules of taxation under the IRS.

Conclusion:

Even allocating just a portion of a house, or a single room, to Alojamento Local can disqualify the property from IRS exemption, regardless of its status as a permanent residence.

Legal Basis: Binding Information nos. 25217 and 26330.

For personalized advice and to ensure compliance with tax regulations, please reach out to AFM at info@afm.tax or visit www.afm.tax.

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Different options of purchasing property in Portugal

August 13, 2024

By Ricardo Chaves

Different options of purchasing property in Portugal

People often contact us to discuss the various options for owning property in Portugal. Our response is typically: it depends. This is because the best approach varies based on several key factors, including your primary purpose for acquiring the property (whether for personal residence or rental income), your long-term investment plans (whether you view the property as a single investment or part of a larger portfolio), and your potential plans for selling the property in the near future.

Below, we provide some insights and options regarding property ownership in Portugal. Please note that this information is intended for general informational purposes only and should not be considered as tax, legal, or accounting advice. We strongly recommend consulting your own tax, legal, and accounting advisors before undertaking any property transactions in Portugal.

a) Direct purchase

Direct purchase is the most common method of acquiring property in Portugal. This approach is particularly sensible if the property is going to be your main residency in the future, is the most sensible choice.

When purchasing directly, it also means that the property will not pay the additional council tax bills (AIMI) in the first 650.000€ of property tax value and pay the ordinary council tax (IMI). However, please note that Portugal’s IMI (council tax) is relatively inexpensive, especially compared with the UK. In Portugal, the yearly council tax varies from 0.3% to 0.45% of the property’s tax value.

When the property is owned directly, the CGT in a future sale is levied on 50% of the gain and taxed at the progressive tax rates. As the maximum IRS tax bracket is 48%, this means an effective rate of 24% of the capital gain in the worst-case scenario.

Also, if the property is the primary residence for more than 12 months at the time of sale, it’s possible to avoid CGT if the sale proceeds are used to purchase another property.

Direct purchase may also be an option if you intend to rent the property. However, if you want to purchase the property for short-term lets, you should look for a villa (not an apartment), as in several locations, the license for short-term lets (AL) is restricted in apartments. If you are a non-resident and looking to invest, please note that you will pay 8.75% of tax on your gross income from your short-term lets; if you are looking to rent long-term, the tax is 25% on the rent after expenses are deducted.

Please note that in the case of short-term lets (AirBnB), the property will be deemed a business, and you will need to stop the activity for 36 months prior to the sale to pay CGT on 50% of the gain; otherwise, CGT will be levied on 95% of the gain.

b) Purchase in the name of a foreign company (registered in Portugal as a Non-Resident entity without permanent establishment)

If you do not intend to live in Portugal but wish to have access to a property here for personal use, this alternative allows you to purchase a property using your company funds rather than personal savings. If the company is registered as a non-resident entity without permanent establishment, it means that it may not have any business activities in Portugal; therefore, there is no need to register any activity for tax purposes.

When purchasing a property in the name of a foreign company, the property will pay council tax bills (IMI) and additional council tax bills (AIMI). When the property is owned through a foreign company, the CGT in a future sale is 25%.

It’s not possible to reinvest to avoid CGT. It may also not be possible to have any business activity unless this was referred to when registering the entity in Portugal.

The company will not file any accounts in Portugal, except when the property is sold. Please note that in this case, the obligation to declare the sale and assess the capital gains tax needs to be performed in the month following the sale.

c) Purchase through a Portuguese limited company (which can be owned directly and or by a foreign entity)

This alternative may still allow the purchase to be made using funds in the foreign entity rather than personal savings if the foreign entity is also a shareholder.

When the property is owned through the Portuguese company, the CGT on a future sale is assessed as the profit. In Portugal, the corporate tax rates are 17% for the first 50.000€ of profit and 21% for profits above 50.000€.

As this is a Portuguese limited company, is mandatory to appoint an accountant and a company director, who should have a salary and pay minimum social security contributions (unless it pays in another company in Portugal or in a foreign country with an agreement with Portugal).

The company will have VAT activity, and quarterly VAT returns will be mandatory. If there are property refurbishments, usually there is a reverse charge clause, which means that the works are done at 0% VAT rate.

Depending on the type of company, it may be possible to reinvest in another property after the sale to lower the CG and the profit. It’s also possible to rent the property and operate a business. The profit will be taxed as above.

The Rental License is only possible if the property is a villa (not an apartment), and this doesn’t change depending on the type of ownership. On the short term lets, the VAT charged to guests is at 6% and the VAT rate on most utilities is at 23%, which may lead to a credit or a low VAT liability.

If the properties are owned through a company, there could be significant tax savings, but these will only make sense depending on the level and length of the investment. If the property is in a company that is owned by a foreign company, through the participation exemption the dividends transferred to the foreign company will not be taxed in Portugal.

In addition to the above, please note that there is no inheritance tax in Portugal, and the spouse and direct descendants of the property owner will only pay 0.8% stamp duty on the transference of the property to them if they own it directly. If the property is owned by the company, the same applies to the shares in the business, they will be transferred to the inheritors who will be liable for 0.8% stamp duty.

For personalized advice and to ensure compliance with tax regulations, please reach out to AFM at info@afm.tax or visit www.afm.tax.

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The End of the NHR Regime and Introduction of the New IFICI+ Regime (Tax Incentive for Scientific Research and Innovation)

August 12, 2024

By Ricardo Chaves

The End of the NHR Regime and Introduction of the New IFICI+ Regime (Tax Incentive for Scientific Research and Innovation)

Overview of the New IFICI+ Regime

As of 2024, Portugal is closing the chapter to its long-standing Non-Habitual Resident (NHR) regime, a program that offered substantial tax benefits to expatriates. In its place, the government has introduced the “Tax Incentive for Scientific Research and Innovation” (IFICI+) regime. This new scheme is designed to attract highly skilled professionals to Portugal, particularly those involved in scientific research and innovation.

The IFICI+ regime offers these professionals a special income tax rate of 20% (in addition to social security contributions) on employment income, whether dependent or independent, for a non-extendable period of 10 consecutive years. This initiative is part of Portugal’s broader strategy to boost its knowledge-based economy and attract global talent in key innovative sectors.

Eligibility Requirements:

To benefit from the IFICI+ regime, expatriates must meet specific criteria:

1. Becoming a Portuguese Tax Resident from 2024:

– The individual must establish tax residency in Portugal, either voluntarily (by securing a residence permit and establishing a permanent address) or automatically (by residing in Portugal for more than 183 days within any 12-month period or establishing a habitual residence in the country).

2. Engagement in Eligible Activities:

The expatriate must engage in one of the following highly qualified activities related to scientific research and innovation, without an interruption exceeding six months:

– Higher Education Teaching and Scientific Research: Employment in scientific research within entities integrated into the national scientific and technological system.

– Technology and Innovation Centers: Employment or participation in organizations recognized as technology and innovation hubs with effective management and facilities in Portugal.

– Entities Benefiting from Investment Incentives: Employment in companies that have signed tax incentive contracts with the Portuguese government for strategic investments.

– Qualified Professions in Specific Sectors: Work in sectors like industry and services, particularly in companies benefiting from the Investment Support Tax Regime (RFAI) or those with substantial export activities.

– Economic Activities Recognized by Public Entities: Involvement in sectors deemed critical for national economic development by public bodies like AICEP or IAPMEI.

– R&D Personnel: Employment in companies that qualify for the R&D tax incentive system (SIFIDE).

– Certified Startups: Employment in startups with less than 10 years of activity, meeting specific criteria like workforce size and revenue.

– Work in the Autonomous Regions: Activities in the Azores and Madeira, pending further regulatory details.

3. No Previous NHR Status:

– Individuals who previously benefited from the NHR regime and have since left and returned to Portugal are ineligible for the IFICI regime.

4. Employer Restrictions:

– The employer cannot be deducting salary expenses under the RFAI regime (tax incentive regime for investment), which needs to be confirmed by the employee with their employer.

Fiscal Benefits

The IFICI+ regime offers several tax advantages:

– Reduced Personal Income Tax (IRS) Rate: A flat 20% rate on employment income, in contrast to the typical progressive rates of 14% to 53%.

– Exemption on Foreign Income: Most foreign-sourced income, such as employment, self-employment, capital gains, and real estate income, is exempt from Portuguese taxation (except from offshore jurisdictions). Notably, foreign pensions are fully taxable under standard rates.

Important Note:

It’s important to note that there is currently no official decree or State of Budget for 2025 regarding the IFICI+ regime, which means the details above may be subject to change.

For any inquiries or support with the residency process for businesses or individuals, our team can guide you through the whole moving process. Feel free to reach out to us at info@afm.tax or call us at +351 281 029 059.

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