The resultant figure is your taxable income. The term ‘income’ is broadly defined to include income from employment as well as business profits, rental income and capital gains.
There are two types of allowable tax credits: those that are deducted in arriving at income under each of the categories of income shown below, and those deductible by reference to the personal expenditure or family circumstances of a taxpayer.
It’s essential to corroborate any deductions with receipts. Tax deductible expenses are subtracted from gross income to arrive at net income for each category, which are then totalled to give net income. A number of allowances laid down in the tax legislation are deducted from this value to give the net taxable income. IRS (2002) is calculated under the following nine categories of income:
A. Income from Employment
Includes salaries, wages, bonuses, fringe benefits in cash and kind, and other remuneration from employment. Deductions include 70 per cent of gross income up to a maximum of €2,484. When compulsory social security contributions exceed this amount they’re deductible without limitation.
B. Income from Self-employment
Includes income earned by professionals, such as doctors and lawyers and royalties earned by authors or other original owners of intellectual property.
A wide range of business expenses may be deducted in calculating the profits of a trade or business, including all expenses incurred by and related to a business activity except when they relate to vehicles (oil, insurance, depreciation, rents) or to entertainment expenses, which are 80 per cent deductible.
For professionals, certain items such as entertainment and travelling expenses are deductible only to the extent that they don’t exceed 10 per cent of gross income. Depreciation of fixed assets and automobile operating expenses are 50 per cent deductible.
C. Commercial or Industrial Profits
Corporate Tax Code rules apply to this category with the possibility of carrying forward losses for five years where the trade was inherited on death. Tax may be levied by estimated assessment in certain cases.
D. Income from Farming/Agriculture
As for category C above.
E. Investment Income
No deduction is allowed from income earned from capital.
F. Income from Property
Income from property consists of rent from any assets owned in Portugal. Expenses for repairs and maintenance of buildings are deductible provided they’re substantiated by documentation.
Non-residents receiving income from a Portuguese source, e.g. from letting their Portuguese home, should instruct their fiscal representative to file an income tax declaration on their behalf (if they’re unable to do it themselves). Letting income on property owned by non-residents or an offshore company is generally taxed at a flat rate of 25 per cent.
Rental income for property owned by offshore companies: from 2002, all offshore companies owning property in Portugal are subject to a rental tax on a fictional rental income irrespective of whether the property is let or not.
This ‘income’ is assumed to be 6 per cent of the rateable (or ‘patrimonial’) value of the property and the tax is levied at 25 per cent of this ‘income’ value. For example, if the rateable value of your property is €150,000, the fictional rental income will be €9,000 and the rental tax will amount to €2,250. This tax is similar to a wealth tax such as the one levied on all non-resident property owners in Spain. Note that if the property has real rental income, the offshore company may be eligible for deductible expenses.
Note, however, that if a rental business is declared with all relevant costs and the rental income is lower than the above, the higher rate will apply!
G. Capital Gains
Exemptions include gains arising from corporate bonds or debentures acquired before 1st January 2001; units in investment funds; shares held for over one year; the disposal of a principal home provided that the proceeds are invested in a new home within two years of the sale or one year previous to the sale; plus a 50 per cent deduction on the gain from the sale of property used for residence purposes only, intellectual or industrial property, and a business or sub-lease. Capital losses can be offset against capital gains.
H. Pensions
Annual income from pensions less than €7,058 may be excluded from taxable income. The capital element of a life annuity is excluded; when it isn’t possible to distinguish between capital and interest, 65 per cent of the amount received is deductible.
Other Income
This category includes winnings from gambling and lotteries. There are no specific deductions.
As from 1st January 1999, most tax deductions were converted into tax allowances, although compulsory pension contributions and alimony may still be deducted without limit (provided such payments are evidenced in court decisions or agreements and proved by receipts or bank transfer slips). Note that all tax allowances must be suitably accredited by official receipts. In 2002 taxpayers could credit the following against their tax liability:
- €175.58 for each single taxpayer or €133.68 for each married taxpayer;
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€96.77 for each child;
health expenses of the taxpayer and his dependants, up to the limit of €828 for unmarried taxpayers, up to €1,656 for married taxpayers and up to €174.58 for each dependent; - 30 per cent of interest, amortisation of loan payments for the acquisition or improvement of a home in Portugal up to €1,536.30, or rental payments up to €1,536.30;
- 30 per cent of education expenses incurred by the taxpayer and his dependants, up to the limit of €828 for unmarried taxpayers, up to €1,656 for married taxpayers and up to €174.58 for each dependant;
- 25 per cent of life insurance and personal accident premiums, limited to €359.13 for married taxpayers and to €179.57 for single taxpayers.
- 25 per cent of health insurance, limited to €179.57 for single taxpayers, €359.13 for married taxpayers;
- 25 per cent of contributions to individual pension plans, limited to the lower of 5 per cent of gross income. These limits may be increased for taxpayers under 35;
- 25 per cent of donations to the state or municipalities, increased by 20, 30 or 40 per cent according to the type of beneficiary;
- 25 per cent of donations to religious institutions, public utility collective persons (i.e. non-profit entities with a public purpose officially recognised by the government), schools, museums, libraries, cultural associations, philanthropic and charitable institutions;
- advance personal income tax payments and taxes previously deducted at source.
Any personal income taxes paid in another country will also be deducted from your tax base. Note, however, that if you pay higher tax abroad than would have been paid in Portugal, you won’t receive a rebate from the Portuguese tax authorities!
Withholding Tax
Income from certain sources is subject to final withholding tax applied at the following rates:
- 35 per cent: winnings from lotteries, draws and competitions;
- 25 per cent: income from shares; non-resident income earned in Portugal; pensions received by a non-resident in Portugal.
- 20 per cent: interest on demand and fixed-term deposits; income from securities; income corresponding to the difference between the amounts paid as a redemption, advance payment or maturity of a life insurance policy.