Taking up fiscal residency in Portugal – frequently asked questions
Contributed by DENNIS SWING GREENE
OVER THE previous months, we have discussed the nature of fiscal residency, how to extricate oneself from the home jurisdiction, as well as the correct steps to become compliant in Portugal. The following questions commonly arise during the fiscal residency transition process. The answers should be helpful to you in getting off to a good start.
Q: I have lived in Portugal for years and have never filed an IRS return. Why should I start now?
A: Only a small number of those on Social Security pensions, with no other form of income, are exempt from filing. This means that not filing a tax return automatically puts you on the wrong side of the law and vulnerable to undesired consequences. Fines range from 50 euros to 5,000 euros for late submissions and assessments may increase by 10 to 200 per cent. Voluntary declarations will assure substantial reductions in any penalties.
Q: Do I need to declare my income
A: Yes. Unlike the “good old days” (pre-1989), residents are taxable on their worldwide income. On the IRS declaration, there is a special annex for this purpose, Anexo J, where you should summarise your different sources of income, as well as the source countries. In fact, all residents, both foreign or national, are required to declare their global income, regardless of whether they bring it into Portugal or not.
Q: I already pay tax in my home country. Do I need to declare in Portugal?
A: Yes. Just because you have already paid tax does not mean that you have done so correctly. The relevant Double Taxation Treaty sorts out such conflicts between two jurisdictions: the country where the income arises and the one where the taxpayer is resident. All forms of personal income are considered in the many articles of this accord. This pact determines which jurisdiction gets to tax which sources of income. The treaty protects you from being taxed twice and takes precedence over local tax codes. However, it is crucial that you follow the rules.
Q: My home jurisdiction has always deducted tax from my pension. Can I avoid tax from being withheld at source?
A: Yes, depending on the conditions of the treaty in force and the type of pension that you receive. The first step is to declare yourself as resident for tax purposes in Portugal. There are special forms for this purpose. Once accepted and processed, you should receive a full refund from your country of origin for any tax withheld after the commencement date of your residency in Portugal. From then on, you should receive your income gross. You will, of course, need to declare this income in Portugal.
Q: Who is exempt from submitting a Portuguese income tax return?
A: All those earning income in the tax year (January to December) are required to submit a tax declaration with the following exceptions:
• Those who only have earnings subject to final withholding tax (except dividends) and accept the tax paid as final.
• Those only receiving compulsory state social security pensions falling below the national minimum wage.
Q: Are non-residents required to declare income arising in Portugal, such as rental income?
A: Yes. Your first obligation is to settle up with the tax authority in the country where the income is generated. As such, non-residents are taxable on income arising in Portugal and are also required to have a fiscal representative. As of 2005, there is a new tax rate of 15 per cent for rental income for non-residents. Once declared and paid in Portugal, this tax should be eligible for a tax credit in your home jurisdiction, thus eliminating any double taxation.
Q: My old age pension falls below the Portuguese minimum wage. But I also had a small amount of interest income from my bank in my home country. Do I still have to submit a tax return?
A: Yes. The true purpose of this reporting waiver on pensions referred to above is to exempt the large number of Portuguese pensioners, who would only clog up the system, without bringing in any income to the State’s coffers. All others must file. In addition to the standard Modelo 3, any investment income from abroad must be reported on Anexo J.
Q: Even though I am resident here, my pension is paid into the bank at home. Do I still have to declare?
A: Yes. Where your income is paid is irrelevant. What matters is that it is available to you. That’s what makes it taxable to you.
Q: My bank interest is paid in pound sterling. How do I report income in another currency?
A: All income and expenses must be reported in euros, regardless of the original currency of the transaction. The equivalent in euros of another currency will be determined by the following rules:
• The exchange rate received at the time of transfer from abroad.
• The exchange rate on the day that income was brought into Portugal.
• The prevailing exchange rate on the day that income became available.
• For expenses, the first will apply.
If the above mentioned rates cannot be confirmed, the prevailing exchange rate on December 31 of the tax year should be used.
Dennis Swing Greene is an International Fiscal Consultant for euroFINESCO.