IRS Tax Returns

In days gone past many foreign residents were exempt from submitting IRS tax forms, but the law has changed significantly and now the vast majority must declare. During the tax year, everyone is required to submit a tax return with the exception of those earning only Social Security pensions falling below the minimum wage level. No tax return can put you on the wrong side of the law and open to investigations which can lead to hefty penalties. If you are from a non-EU country, you will not be able to renew your “Residência” without one, and it is only a matter of time before this will also apply to EU citizens.

Important Dates

All tax returns must be submitted by the following deadlines to avoid penalties,

When filing using conventional paper forms:
1 Feb - 15 Mar: if only salaried and/or pension income.
16 Mar - 30 Apr: in all other cases.

When filing electronically via the Internet:
10 Mar - 15 Apr: if only salaries and/or pension income.
16 Apr - 25 May: in all other cases.

Important: Fines for late returns start at €50 and can be as high as €5,000. Also remember that the fiscal year in Portugal corresponds to the calendar year (1 January to 31 December). British nationals need to be especially careful since their April-to-April “P60’s” will not correspond to the Portuguese fiscal year.

 

When to pay your Tax Bill.

Based on your submission, Finanças will calculate what you owe and send a demand later in the year. Income tax is due within one month of the issue of an assessment by the Tax Authorities. Late payment will incur monthly interest charges.
Filing a tax return in Portugal can often save you money. Just because you file a return does not necessarily mean that you will pay tax, just that you have fulfilled your obligations. The Portuguese tax code has generous allowances and unexpected exclusions on certain forms of income, broad deductions for numerous types of expenses and liberal tax credits for many common expenditures. Many people find their tax burden in Portugal to be significantly lower than their home jurisdiction.

 

 

Questions & Answers

I have a mortgage on my house. How much will my tax credit be?

Interest and amortisation payments for your principal residence have a tax credit up of 30% with a maximum of € 574,00. You will maximise the benefit on an annual mortgage expenses of € 1.913,00.

I want to take out a loan to make Home Improvements. Will this be eligible for a tax credit?

Yes. As long as the property is your principal residence, the interest and capital repayments also qualify for this tax break.

My family gave me a loan to buy our home. Does this type of loan meet the requirements for tax credit?

Yes. This credit is available for loans from diverse sources, not just Portuguese banks. However, you will need to have proper documentation to substantiate the loan, not just a handshake.

How do I declare my mortgage on my IRS return?

As with other credits with upper limits, you report only what you have actually spent. Finanças do all of the calculations for you. If you have a mortgage (“Crédito de Habitação”) from a Portuguese financial institution, they will send you annually a statement (“Declaração”) for tax purposes.

We have a mortgage on our flat but now rent out the apartment. Are we still eligible for this tax credit?

Yes. As long as the property serves as the principal residence for the tenant, you (the landlord) can still claim the tax benefit on the mortgage. There are specific contract requirements for such an arrangement; it must be done in triplicate, with one copy registered in Finanças. In other words, if the property is used for holiday lets, the credit does not apply.

 

Filing Exemptions

Before 1989 the tax code called ‘complementary tax’ was used, which meant that the local finance offices where only interested in income derived in Portugal, and income from abroad was exempt. Those days are long gone and now only a few are exempt from declarations.

To help explain further, here are a few often asked questions:

Who is exempt from submitting a Portuguese income tax return?

All those earning income in 2007 are required to submit a tax declaration with the following exemptions:
a/ Those receiving only pensions falling below the annual pension allowance- National
Minimum Wage – 6,100 euros per individual in 2007.
b/ Those who only have earnings subject to final withholding tax (except dividends) and accept the tax paid as final.

I only received bank interest in 2007, taxed at source (20%). Do I need to declare this income?

If the interest and respective withholding were in Portugal, no declaration is required.
Remember, if your tax rate falls below 20%, you may be entitled to a refund, so it may be worthwhile submitting a return.
If the interest you received came from outside of Portugal and you are resident for tax purposes, this income must be reported regardless of the withholding.
In July 2007 the EU Savings Directive came into force and substantially changed reporting procedures. Make sure you declare correctly under the new law!

My State Pension falls below the Portuguese minimum wage, but I receive a small income from investments abroad. Should I submit a tax return?

Yes. The purpose of the pension reporting waiver, is to keep the large number of Portuguese pensioners off the system, which would clog up the system without bringing in any appreciable income to the state. However, all others must file a return. In addition to the standard Modelo 3, any investment income from abroad must be reported on Annex J (Income from Abroad).

I am a resident in Portugal, but my pension is paid into a bank outside of Portugal. Do I still have to declare?

Yes. Where your income is paid is irrelevant, it matters not where you receive it, where you spend it or the currency in which it is paid, but only that it is available to you.

My bank interest is paid in GB Sterling. How do I report income in another currency?

All income and expenses must be reported in Euros, regardless of the original currency of the transaction.

As a non-resident, I receive rental income in Portugal. Do I declare here or in my home country?

Both. Your first obligation is to Portugal since the property, and therefore the activity, is located here. In accordance with the Double Taxation Treaty, you will subsequently receive foreign tax credit at home before applying local rules.