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.
Income tax brackets
The personal income tax brackets, shown on page 9, are updated by 2.2%, a percentage which exceeds the expected inflation rate for 2011 (1.8%, according to the prediction in the Bank of Portugal’s Winter Bulletin).
Deductions and tax benefits
Two limits on the total expenses deductible by taxpayers have been created, one for tax deductions and another one for tax benefits. These vary according to the income tax bracket, but are not applicable to taxpayers whose taxable income lies in the first two (i.e. lower) income tax brackets.
In the case of tax deductions, the total expenses incurred on health, education, retirement homes and housing are subject to limits between Euros 800 and Euros 1 100.
The value of tax benefits, which include namely those listed below, are subject to limits varying between Euro 0 and Euro 100:
- Contributions to pension funds and Retirement Savings Plans (PPR);
- Contributions to the Public Capitalisation Regime;
- Expenses on renewable energies;
- Health insurance premiums;
- Donations.
The deduction for alimony payments is now limited to 2.5 times the Social Benefits Index (Indexante dos Apoios Sociais – IAS) set at Euro 419.22 for 2010 , per month, per beneficiary (Euro 1 048.05).
The deduction related to life and personal accident insurance premiums is revoked, except for short-duration professions and disabled individuals.
The existing rules on redemption or withdrawal of premiums paid in previous years will continue to apply.
The deduction in respect of contributions made to mutual associations for old-age retirement purposes is limited to Euro 65 per taxpayer. When the contributions are made by a third party, the taxpayer may only avail of the deduction if the contributions are taxed in his hands.
The limits for deductions will no longer be indexed to the National Minimum Wage (NMW) but to the Social Benefits Index (IAS – currently Euro 419.22). For some deductions, the index will be maintained at the NMW (Euro 475) during a transition phase. This situation will continue until the value of the IAS, as a result of its annual updates, reaches Euro 475.
The table on page 10 shows a comparison of the deductions and tax benefits available for 2010 and the proposed values for 2011.
Taxation of pensions
For pensions above the gross annual amount of Euro 22 500, the deductible amount (Euro 6 000) will be reduced by 20% of the difference between the amount of the pension and Euro 22 500. Currently, this reduction is only applicable to pensions above Euro 30 240, with the rate of reduction being 13%.
The mandatory contributions to the Social Security regime and to legal health subsystems will now be deductible against pension income only to the extent they exceed the above deduction (Euro 6 000 or the deduction applicable to pensions above Euro 22 500). Currently, the above contributions are fully deductible.
Rate applicable to foreign investment income
Investment income obtained by Portuguese tax residents and paid by non-resident entities, without the intervention of a paying agent in Portugal, will be taxed at a special rate of 21.5% (currently the rate is 20%).
Carry forward of losses
The period for the carry forward of losses in categories F (rental income), G (capital gains) and B (business and professional income) will be reduced to four years.
Taxation of disabled individuals
The exclusion from personal income tax of 10% of the gross income earned in each of the categories A, B and H by disabled taxpayers was extended for 2011. However, the income excluded from taxation in 2011 may not exceed, for each category of income, the amount of Euro 2 500.
Anti-avoidance measures
A withholding tax rate of 30% will apply in respect of all income subject to flat withholding tax rates, whenever that income is paid or made available to the taxpayer’s accounts by unidentified third parties.
Resident asset management companies are obliged to withhold tax on this income and to comply with related reporting obligations.
Non-discrimination between residents and non-residents
The optional regime applicable to residents in other Member-States of the EU or the EEA is now applicable to broader kinds of income (this regime provides for the possibility of applying for the refund of taxes withheld, whenever those taxes exceed those that would result from the application of the progressive tax rates applicable to Portuguese resident taxpayers).
Reporting obligations in respect of health expenses
Insurance companies, non-profit organisations providing healthcare services and other entities which reimburse health expenses will now have the obligation to disclose to the Portuguese tax authorities the value of non-reimbursed health expenses.
Retirement saving funds and retirement saving plans
Any income paid or refund made is accrued for the purposes of computation of the taxable income subject to Personal Income Tax, except in the case of death or 5 years upon the payment of any amounts, as foreseen in the law. Previously, the amount accrued corresponded to the amount of the tax benefit used, increased by 10%.
Acquisition value of property acquired under leasing contracts
A rule for determining the acquisition value of property acquired under a leasing contract has been established.
Dependants
Taxpayers will be obliged to identify their dependants on the personal income tax return, citing their taxpayer numbers, to be able to avail of the related tax deductions and tax benefits.
Final withholding tax rates
Interest and other forms of remuneration of shareholders’ loans and share capital advances from the shareholder to the company, as well as the interest and other forms of remuneration due to shareholders as a compensation for not having received profit distributions, are now subject to withholding tax at a final rate of 21.5%.
Progressive Tax Rates (2010 and 2011)
Tax Deductions and Tax Benefits for 2010 and 2011
