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Tax declaration guidelines 2020

23 March 2020

Soon it’s time to file the annual tax return. We know this is a concern for many foreigners living in Portugal, as not only is it a new tax system with distinct rules but also practical procedures are completely different. Due to this, we have asked Sérvulo’ to provide our business community with some guidelines to facilitate this process. 

Consequently, based on Sérvulo’s extensive experience, we outline below some of the most frequent questions that arise when it is time for individuals to file their annual tax returns. Should you have any questions of a more personal and/or specific nature, please feel free to contact Sérvulo’s Scandinavian desk at .

 

- What is the Personal Income Tax?

Personal Income Tax (“IRS”) is a tax levied on individual taxpayer’s annual income.

It is split into the following categories, depending on the type of income a person receives:

  • Category A – Earned employment;
  • Category B – Business and professional income (e.g. self-employed or freelancers);
  • Category E – Capital income;
  • Category F – Rents;
  • Category G – Estate increases, such as capital gains;
  • Category H – Pensions.

This tax has six key features:

  • It is personal, which means that it considers the socio-economic situation of each taxpayer and his/her household, such as marital status, number of dependents, disabilities, etc.;
  • It is progressive, i.e. it is taxed according to the level of income which the taxpayer receives in each year. Thus, the higher the level of income, the higher the applicable rate;
  • It is directly applied to a taxpayer's income;
  • It is annual, i.e. it falls on the income obtained during each calendar year;
  • Taxation is primarily made according to each taxpayer’s declarations on income received on that year;
  • It is applied to the totality of the income obtained by tax residents in Portugal, meaning that income obtained outside the country may also be taxable herein.
     

- I only have a foreign income. I am required to declare it?

Yes, you are. Under Portugal’s tax rules, a Portuguese tax resident is taxable herein on his/her worldwide income. Therefore, all income, irrespective of being foreign or domestic, must be declared.

- I am a Non-Habitual Resident. I am required to file a tax return?

You may be. Even if the income you receive is, ultimately, exempt from taxation, you may still be required to file a tax return, should you fall within one of the situations described below.

- Who is dismissed from filing a tax return?

Taxpayers may be dismissed from filing a tax return if, in the year to which the tax relates, they have only earned, separately or jointly the following types of income:

  • Income subject to definitive withholding tax in relation to which taxpayers did not opt, when legally permitted, for the respective aggregation;
  • Income from earned income or pensions which does not exceed € 8,500 (€ 4,104 for alimony) and was not subject to withholding tax;
  • Subsidies within the scope of the Common Agricultural Policy (CAP) which annual amount does not exceed four times the value of the social support index (Indexante de Apoios Sociais, which, in 2019, amounted to € 1,743.04), provided that simultaneously with this income taxpayers only receive income which falls within the scope of one or both of the previously mentioned paragraphs;
  • Isolated acts (atos isolados) whose annual amount does not exceed the value of the social support index (Indexante de Apoios Sociais, which, in 2019, amounted to € 1,743.04), provided that these taxpayers do not earn other income or, if they receive any income, such income is subject only to definitive withholding tax.

Notwithstanding, even if such obligation is waived, taxpayers may still choose to file the respective tax return.

Moreover, the aforementioned situations will not apply when taxpayers:

  • Opt for joint taxation (please refer to questions below);
  • Receive temporary and lifelong annuities that are not intended for the payment of retirement pensions, old age, disability or survivor's benefits, or benefits payable by insurance companies, pension funds or any other entities due under supplementary social security schemes as a result of employers' contributions;
  • Earn income in kind;
  • Receive alimony which exceeds € 4,104.

 - I am married. Must both myself and my spouse have a separate tax return?

As a rule, married taxpayers file separate tax returns. Nonetheless, married taxpayers may choose to file a joint tax return. The option for joint taxation is valid only for the year in question.

- I became a Portuguese tax resident on 1 July 2019. I am required to file a tax return covering the whole calendar year of 2019?

In the years of arrival and departure, a taxpayer is only considered resident, for tax purposes, in Portugal since the date he/she arrived (partial tax residence). Therefore, the tax return to be filed should only cover the period since the date of arrival (in this example, 1 July 2019) until 31 December 2019.

If during the period the taxpayer at stake was non-resident, for tax purposes, in Portugal, he/she obtained income herein, he/she should then file two separate tax returns: one regarding the income received during the period the taxpayer was deemed a non-resident taxpayer and another covering the partial residence period. 

On the other hand, if during the period the taxpayer at stake was non-resident, for tax purposes, in Portugal, he/she did not obtain income herein, then there is no need to file a tax return with reference to this period.

- Will the Portuguese Tax Authorities send me a letter with a proposed tax return to be filed?

No, they will not. It is each taxpayer’s responsibility to beware of the period during which the tax return must be filed and proceed to do it on his/her own. At most, the Portuguese Tax Authorities may send a reminder by e-mail but which has no legal value.

- Then, where and how do I file the tax return?

The tax return should, as a rule, be filed in the Portuguese Tax Authorities’ website, using your taxpayer number (número de identificação fiscal or NIF) and password (senha de acesso).

- Will the tax return be presented pre-filled for my validation or do I need to fill in by myself?

As a rule, taxpayers must fill in their own tax returns. The tax return is composed of a series of annexes, one for each type of income a taxpayer may have to declare, plus additional ones for foreign income, deductions, Non-Habitual Residents and Social Security.

The pre-filling option only exists for very specific situations which meet the following conditions:

  • The taxpayer was a resident in Portugal all year round;
  • He/she does not hold the Non-Habitual Resident status;
  • He/she only received income from Portuguese sources;
  • Such income was one or more of the following natures:
  • Earned income (Category A), excluding monies received from other sources than the employer;
  • Pensions (Category H), excluding alimony;
  • Income subject to definitive withholding tax and the taxpayer did not for its aggregation if permitted;
  • Did not pay alimony;
  • Are not entitled to deductions (such as for ascendants, disabled persons and international double taxation) or to tax benefits (with the exception of retirement savings plan and/or donations and had their tax situation settled as of 31 December 2019) or, still, due to the Surcharge to the Property Tax (Adicional ao Imposto Municipal sobre Imóveis);
  • Do not have to repay previously received undue tax benefits. 

- When should the tax return be filed?

Between 1 April and 30 June of the year following the one the tax return relates to.

- How does the process work once the tax return is filed?

Immediately after filing, it is possible to obtain a preliminary tax return as evidence of submission. Afterward, there is a preliminary validation from the Tax Authorities which takes a few days. This preliminary validation is intended at verifying the basic personal information and identifying any immediate discrepancy between the information reported and that made available in the Tax Authorities’ database. Once this preliminary validation is complete, it will be possible to obtain the final tax return.

Until 31 July, the Tax Authorities must review the tax returns and issue a tax assessment, indicating whether any tax is due. If tax is payable, such tax assessment will also indicate the respective amount, payment deadline, payment references and means to challenge it in case taxpayers disagree with the same.

If tax is payable, the same should, as a rule, be paid until 31 August.

- How is the tax due computed?

The first aspect to bear in mind is that each category of income has different computation rules to determine the taxable base (that is, the amount based on which tax will be due).

For instance, notwithstanding other aspects, in Category A (earned income), the law foresees the possibility to deduct the full amount of contributions due to Social Security. In case no such contributions were made or if they are below € 4,104, the law grants an automatic deduction of € 4.104.

When it comes to rents (Category F), all documented expenses, effectively paid may be offset, with the exception of expenses of a financial nature, amortizations, furniture, household appliances, and comfort or decoration items.

Specificties apply on what conerns Municpal Property Tax (Imposto Municipal sobre Imóveis), Stamp Duty (Imposto do Selo) and Surcharge to the Property Tax (Adicional ao Imposto Municipal sobre Imóveis).

Category H (pensions) also benefit from a deduction of highest between € 4,104 or the full contributions made to Social Security.

Once the tax base is determined, the progressive tax rates will apply. If a joint tax return is being filed, the total income declared will be split by two in order to determine the applicable rate.

Finally, once the tax is computed, a series of deductions will apply, such as withholding tax made throughout the year with reference to income included in the tax return and the deductions mentioned below.

- Can I deduct any expenses from my income tax?

Expenses such as education (own or from dependants), health, housing, general family expenses, expenses that allow for the refund of VAT (e.g. hotels, restaurants, veterinary, car maintenance, public transport passes) can be offset.

However, please note the same cannot simply be included in the tax return. Throughout the year, when a good or service is purchased, the taxpayer should ask for the respective invoice with his/her taxpayer number (número de identificação fiscal or NIF).

Such invoices should then be uploaded to the Tax Authorities’ website, which, as a rule, is made by the supplier of the goods or services within legally provided deadlines. Nonetheless, each taxpayer may also do it if he/she realizes that the supplier has not done it.

As a rule, only if the invoices are included in the Tax Authorities’ website with one’s NIF can the same be considered for purposes of deductions to the income tax.

- I have tax to pay. How can I do it?

If in Portugal, the tax can be paid through one of the following mechanisms: direct debit, MB Way, ATM, home banking or directly at a Local Tax Office, post office (CTT) or a bank.

- I have tax to pay but I am abroad and do have access to the typical means for payment. How can I do it?

It is still possible to opt for direct debit into a foreign bank account or, alternatively, it can be made through bank transfer.

- In the event, I do not manage to file my tax return on time, what can be the consequences?

To start with, filing the tax return after 30 June will trigger the payment of a penalty varying between Anyone who submits the IRS after the deadline will be punished with a fine that would be between € 150 and € 3,750.

However, this amount may be reduced if the situation is voluntarily settled, i.e. the tax return is filed to an amount as low as € 25 if the tax return is filed within 30 days counted from the legal deadline for the respective submission. The penalty will increase the longer it passes between the legal deadline for the submission of the tax return and the respective presentation.

Moreover, if tax is due, the Tax Authorities may demand compensatory interest, computed at a 4% rate per year, counted since the legal deadline for payment of the tax.

In addition to the above, the following consequences may also occur:

  • Once the legal deadline elapses, the family and health deductions which may amount to € 1,600 will no longer be available;
  • If there is a Property Tax (Imposto Municipal sobre Imóveis) exemption in place, the same may be terminated.
  • The option for a joint tax return is not available if the same is filed after 30 June.
  • Finally, if there is a refund, taxpayers who filed after the legal deadline will have to wait longer for the refund since the Tax Authorities give priority to the payment of refunds relating to returns submitted within the legal deadline.

This information is of a general nature only and does not imply any sort of legal or tax advice nor replaces the same. Should you have questions regarding your specific situation, seek appropriate counsel.

Sérvulo & Associados, SP, R.L., a board member of CLS, is available to assist should any questions or queries arise through the following e-mail: .

Partner

Sérvulo & Associados
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