Understanding tax residency

By Advertiser, in Business, Personal Finance · 01-04-2021 01:00:00 · 0 Comments

A young George Harrison famously had his eyes opened to the world of income tax in the mid-sixties – when the Beatles were in the ascendant, and so were their earnings.

“You are so happy that you’ve finally started earning money – and then you find out about tax.” Welcome to the world George. At least that realisation drove him on to write a great song ‘Taxman’, and no doubt earn himself a lot more in the process. But even if we don’t share the same tax problems as the stars, it’s still a subject that causes worry and confusion in people leaving their home countries for foreign shores. Overwhelmingly in my experience, people are concerned to make sure that they are paying the right amount of tax to the right authorities – nobody wants to receive an unexpected bill.

So, if you have assets both abroad and in Portugal, where should you pay your taxes? This inevitably depends on a number of factors, but most importantly on where you are considered to be tax resident. According to Portuguese tax law in force since January 2015, you are deemed to be resident in Portugal for tax purposes if you meet either of the following conditions. Firstly, if you spend more than 183 days, whether consecutive or not, in Portugal during any 12-month period starting or ending in the fiscal year concerned. Secondly, if you own a property in Portugal that is considered to be your habitual residence, even if you spend less than 183 days of the year there.

If you find that you meet the criteria for both your country of origin and Portugal, then residency will be determined under the two countries’ double taxation treaty – if indeed a treaty exists between them.

Should you find yourself in the position of being tax resident in Portugal, then you will be liable to pay taxes on your worldwide income including any rental income generated by property. Naturally any income earned within Portugal is also subject to tax and will be charged according to a progressive scale – which can be up to 48% if your earnings are over €80,000. This makes it critical that you seek out professional help, in order to determine what the best course of action is for your particular circumstances, and to mitigate what you may need to pay.

For instance, anyone not yet tax resident in Portugal, and who has not been tax resident in the previous 5 years, may be able to take advantage of the ‘non-habitual resident’ tax regime (NHR). This confers special tax privileges whereby you can benefit from several exemptions. For instance – receiving dividends from a foreign source completely tax free, as well as pension income at a flat rate of 10% under NHR.

Along with tax resident status comes the responsibility of having to submit a yearly tax return to the Portuguese authorities. The tax year runs from 1 January until the 31ww December, and the window for completing your return for 2020 runs from April 1st until June 30th. If you fail to submit your tax return or are late in paying, you could be fined and required to pay a percentage of the total tax owed, even if this mistake was purely unintentional. It pays to be informed.

Tax residency can be a bewildering subject if you have multiple assets or income streams both in and outside of Portugal. How to navigate the complexities of double taxation and residency options is an area where it is really best to talk to someone with solid local experience. You could stand to save yourself a lot of money with the right advice, and also secure your wealth to be passed down to your family and relatives.

Here’s to beautiful stress free days in the Portuguese heat, play on Mr Harrison: ‘Here comes the sun…’.

Blacktower Financial Management has been providing expert, localised, wealth management advice in Portugal for the last 20 years. We can help with specialist, independent advice on securing your financial future. Get in touch with us on (+351) 289 355 685 or email us at info@blacktowerfm.com.

The above information was correct at the time of preparation and does not constitute investment advice. You should seek advice from a professional adviser before embarking on any financial planning activity.


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