Last updated on 7 de April de 2023
Portugal has gained in popularity over the past few years. A great food culture, climate, people, beaches, and cities. The country has a lot to offer. Let us carry out an in-depth analysis about another topic: taxes in Portugal.
Content
- Introduction
- Taxes on earned income
- Special conditions for non-habitual residents (NHR)
- Capital income taxes
- Corporation Tax
- VAT
- Inheritance and gift taxes
- State of Portuguese public finances
- Conclusion
Introduction
Portugal has often been in the shadow of Spain, being the smaller country on the Iberian Peninsula. But it has a lot going on for it, and not only as a tourist destination. Also, as a place to live.
Portugal has historically been one of the favorite countries for many foreign retirees, particularly British and Germans. But it did not attract many expats.
However, the sovereign debt crisis that took place in the euro zone during 2010-2013, which led to the official bailout of Portugal’s government, led its politicians to rethink many things and carry out deep reforms in its tax system and long-term strategy as a country.
Because of those changes, there are many reasons to be optimistic about the future of Portugal and its economy.
Regarding the cost of living in Portugal, according to WorldData.info, prices in Portugal are about 25% lower than in the United States. It is one of the cheaper countries in Europe.
Next we will analyze Portugal’s taxes in detail.
Work income taxes
Let us kick off our analysis by looking at how labor income is taxed.
Social security
For most people working in Portugal, social security contributions will represent the largest cost in terms of taxes.
Social security contributions finance important things like pensions, health and unemployment benefits. And both the employee and the employer are required to make contributions to it.
When it comes to workers, they must pay 11% of their gross salary to social security.
Regarding employers, the rate is 23.75% of the employee’s gross salary.
Thus, the combined rate for social security contributions is a significant 34.75%. However, it should be highlighted that there is a maximum gross salary on which these contributions are paid. Anything above that figure is not subject to social security payments.
In 2023, social security contributions are capped for salaries above €5,760 per month. This corresponds to €69,120 per year. If the employee’s gross salary is higher than that amount, social security contributions will be calculated using that maximum base.
The following table summarizes the most important figures related to Portugal’s social security contributions:
The maximum salary used for social security contributions is set by the IAS (Indexante dos Apoios Sociais), a concept that is used to determine the amount of most social benefits in the country. This is highly correlated to both inflation and GDP growth.
In 2023, the IAS is €480 per month. Social security contributions are capped for salaries that are 12 times or more than that amount.
Income tax
In addition to social security contributions, employees in Portugal must also pay income tax. And these can be quite complicated to understand, due to the many deductions and tax credits available.
Taxes payable are calculated based on taxable income. In order to determine taxable income, we must start with the gross salary and subtract both social security payments and a universal deduction of €4,104.
Taxable income is then taxed at the following progressive rates:
- 0 to €7.112: 14.5%
- €7.112 to €10.732: 23%
- €10.732 to €20.322: 28.5%
- €20.322 to €25.075: 35%
- €25.075 to €36.967: 37%
- €36.967 to €80.882: 45%
- More than €80.882: 48%
It should be noted that, for those who are married, there are important tax benefits. In that case, instead of calculating the amount payable separately for each individual, the combined taxable income is taken into account. Consequently, the amount of tax due for a married couple is always lower than what two single people would have to pay.
This is because if one individual earns €100,000 and the other €20,000, taxes will be calculated as if they were two people earning €60,000 each. This is especially advantageous for those couples in which one of the members has a high income, and the other either has a low income or does not work.
Once we have calculated taxable income and the amount of tax due, we need to subtract a few tax credits.
Tax credits are various items that directly reduce the amount of tax payable to the Portuguese tax authorities. Some of the most important tax credits are as the following:
- 35% of a family’s general expenses, with a maximum of €250
- 15% of health-relatex expenses, with a maximum of €1,000
- 30% of educational expenses, with a maximum of €800
- 15% rental costs, with a maximum of €502
- 15% of VAT paid in restaurants, repair shops and hairdressers, with a maximum of €250
It should be noted that, if we want to benefit from these credits, we must make sure to keep all receipts.
Total tax burden based on a person’s gross salary
Now that we have seen how much is due in both social security contributions and income tax, let us take a look at the total tax burden on labor income.
In order to calculate this we will take into account social security contributions paid by the employer, and the total amount payable by the employee. This will allow us to see the percentage of direct labor costs that end up in the government’s coffers and the percentage ultimately received by the employee.
We will base our calculations on a single individual without children, who does not take advantage of any of the optional tax credits. Let us look at the calculations for different salary levels:
Something that stands out when we look at those figures is that, as a whole, the system is not very progressive. Pretty much everyone pays the same percentage of their income to the government. And taxes are very high for everyone.
Low incomes bear a total tax burden of almost 40%, although this could be significantly reduced if we account for tax credits. For their part, people on high income levels suffer a tax burden very close to 50%.
Luckily, taxes for some foreigners may be more attractive, as we will see in the next section.
Special conditions for non-habitual residents (NHR)
In 2009 Portugal introduced the non-habitual tax resident (NHR) program, with the goal of attracting foreign professionals with high salaries, and people with significant financial resources.
The non-habitual tax resident program allows you to benefit from favorable tax rates for a period of 10 years.
Under this program, the effective rates that we would have to pay in Portugal would be the following:
- 0% on income generated and received from outside Portugal, such as investments in other countries
- 10% on the money taken out of a pension plan
- 20% on the income received from our investments in Portugal, or from our salary if we are employees, as long as our profession is one of those considered of “high added value” by the Portuguese government
Some of the professions in this category include investors, managers, doctors, computer scientists, artists, university professors, designers or consultants.
You will find the complete list of professions considered of high added value in the following link.
Capital income taxes
Leaving aside those individuals who can benefit from the program of non-habitual tax residents in Portugal, the rest must pay taxes on the income they get from their capital and savings.
As a general rule, those who receive income from their assets may choose between paying a fixed rate, or opting for the progressive tranches seen above.
If our capital income is substantial, it is usually best to pay a fixed rate of 28%. This will be paid on dividends received, interest, real estate rental income, and capital gains.
If capital income is rather modest, we can also choose to pay taxes at the progressive rates that apply to labor income. But note that a rate of 28.5% applies to everything that exceeds €10,732, so it will rarely be worth taking advantage of this option.
Corporation Tax
Corporate profits in Portugal, as in most other countries, are also taxes. The Portuguese corporate tax has 3 different levels: federal, state and municipal.
The federal tranche is 21% and set by the central government. For small businesses with profits of up to €25,000 in a year, the overall bracket is 17%. And in the Azores Islands, the federal rate for all companies is 16.8%, regardless of how much profit they make.
As for the municipal rate, this is set by the city or town in which our company is headquartered. The municipal rate ranges between 0 and 1.5% of the gross profit.
Finally, regarding the state rate, that is dependent on the amount of profit, since it follows a progressive structure:
- 0% for profits of less than 1.5 million euros
- 3% for profits between 1.5 and 7.5 million euros
- 5% for profits between 7.5 and 35 million euros
- 7% for profits above 35 million euros
If we take into account all existing rates, leaving aside the companies based in the Azores, we end up with a total corporate tax rate that ranges from 17 to 29.5% for companies based out of Portugal.
VAT
VAT in Portugal is levied on the consumption of goods and services. There are four different rates, applicable to different types of products and services.
The general VAT rate in Portugal is 23%. It is applicable to most products and services, specifically those that are not subject any of the reduced tax rates. The 23% rate has been in place since 2011, when it was increased from 21% in order to increase tax revenue.
A reduced rate of 13% applies to some foods, restaurants and bars, as well as cultural events.
Another reduced VAT rate of only 6% is used for quite a few products and services. Some examples include some foods, hotels, pharmaceutical products, health services, newspapers and books, including those in electronic format, domestic transportation, as well as housing, and housing renovation services.
Finally, international transport is not subject to any VAT.
Inheritance and gift taxes
A very positive aspect about taxation in Portugal is how inheritances and gifts are taxed. Or, to be more precise, how they are not taxed in most situations.
Inheritance and gift tax does not exist in Portugal. It was abolished in 2004. And it is certainly something we must consider when planning how we to transfer wealth to other people. Whether in the form of donation or inheritance.
In the case of assets transferred to children or a spouse, no payment will have to be made. That is, an effective rate of 0% applies.
If the recipients of such assets are not the donor’s children or spouse, a transfer tax of 10 per cent must be paid on those assets. Note that it is a transfer tax and not an inheritance or gift tax.
At the same time, we should highlight the fact that Portugal has no wealth tax either.
State of Portuguese public finances
In this last section we will take a quick look at the state of Portugal’s finances.
As many of you know, the Portuguese government was bailed out by the Troika in 2010, and had to implement some important tax increases and spending cuts. Such measures were not pleasant, but their population accepted them, knowing they were necessary for the country’s long term sustainability.
In the chart below we can see how public debt has evolved in Portugal. This will give us information about its indebtedness and the trend it has taken throughout history.
Public debt peaked in 2013, standing at 133% of GDP. Since then it began to decline, reaching 117% in 2019, a reduction of 16 percentage points, at the same time that many other countries in the euro zone continued to go deeper into debt.
Obviously, the trend changed in early 2020. But many things make us think that Portugal will return to a positive path sooner rather than later.
Conclusion
Portugal is one of those countries we think we know quite well, but that may not necessarily be true And this is especially the case when we talk about its fiscal system.
As we have seen throughout this post, taxes in Portugal are not low for most people. Most people working in Portugal pay a lot. So do consumers. And large companies pay relatively high rates as well.
However, there are some people for which Portugal may be one of the best countries in the world from a tax and lifestyle perspective.
The program for non-habitual residents is incredibly appealing. It makes it possible to benefit from very attractive tax rates. From 0% for international investors, 10% for foreign pensioners, and 20% for professionals with a job considered of high added value.
At the same time, the fact that Portugal almost completely scrapped inheritance and gift taxes, as well as wealth taxes, makes it an ideal jurisdiction for those who want to protect their assets.
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And if you would like to learn about taxes in another southern European country, simply click on the following link:
Taxes in Italy – A Complete Guide
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