Expats in Portugal face paying more tax this year as the government is aiming to increase tax revenues by 30% in 2013 as part of its national austerity programme. The new charges mean that Portugal’s tax burden is now higher than in the UK, France, Spain, Germany and Italy. Expats resident in Portugal are required to pay tax on their worldwide income.
The rise is quite considerable. In 2012 the tax on income up to €4,898 was 11.5%, from €4,898 to €7,410 it was 14%, 24.5% from €7410 to €18,375, from €18,375 to €42,259 it was 35.5%, 38% from €42,259 to €61,244, from €66,045 to €153,300 it was 43.5% and over €153,300 it was 46.5%. For 2013 the rate is 14.5% on income up to €7,000, 28.5% for €7,000 to €20,000, 37% for €40,000 to €80,000 and 48% for income over €80,000. In 2012 a 2.5% surtax was charged on income over €153,300. This year it is charged on income over €80,000, and increases to 5% for income over €250,000.
Professional advisors Blevins Franks also points out that an extraordinary tax of 3.5% is also being applied this year to the aggregate income on the annual income tax return, to taxable income over €6,790. It will be deducted at source for employment and Portuguese state pension income. For all other income, including from abroad, the tax will be calculated based on the tax return submission.
When you add the two surtaxes onto the income tax rates, Portugal’s top rate of tax in 2013 is 56.5%. The changes mean that someone with an annual income of €40,000 in 2012 would have paid €11,278 in tax (without taking deductions into account) but that will rise to €13,282 in 2013. Similarly for income of €80,000 it rises from €27,357 to €32,682.
Also the limits on deductions you can claim on expenses related to health, education, real estate, elderly care and alimony have been reduced. On income up to €7,000 there is no limit on deductions, from €7,000 to €20,000 it is €1,250, from €20,000 to €40,000 it is €1,000, from €40,000 to €80,000 it is €500 and it is zero for income over €80,000.
Blevins Franks says that couples who are married, or living together for two years, may be able to avoid the higher rates of tax, since in Portugal they are taxable on the aggregate income of husband, wife and dependent children. ‘Your total income is divided by two and the tax rates applied to the half share. The resulting tax liability is then multiplied back up by two to determine the total income tax payable for the household. This equalises the income between husband and wife and avoids the higher tax rates,’ said a spokesman.
Portugal is also imposing an extraordinary contribution of solidarity on monthly pension income above €1,350. Monthly pension income of €1,350 to €1,800 will be liable to a payment of 3.5%, from €1,800 to €3,750 it is between 3.5% and 10%. Above €3,750 it is 10% of total pension received plus 15% on the amount between €5,030 and €7,546 plus 40% on the amount exceeding €7,546.
Quote from ExpatForum.com : “I am rather confused by this could someone give me a basic guidance. Self Employed working on the internet. What taxes are we likely to face for a modest income of around €22,000 a year.”
In 2010, the first €6,000 of pension income per person was exempt from tax. Now the maximum deduction is €4,104. For pensions above €22,500, this reduced by 20% for the difference between the pension earned and €22,500. Retired expats may also be affected by the higher rate of tax imposed on investment income. The fixed rate charged on worldwide bank interest, capital gains on the disposal of shares, securities and bonds, dividends, etc has increased from 20% in 2011 to 28%. The firm says this means paying 40% more tax than two years ago.
The firm also points out that income generated from assets held in certain countries such as the Isle of Man, Channel Islands and Gibraltar is taxed at a higher fixed rate of 35%. The 3.5% extraordinary tax would also apply. ‘It is not all bad news. Tax efficient investment structures are available in Portugal which provide gross roll up of income, tax free capital withdrawals and tax reductions after five years, the spokesman added.