Welcome to the Algarve, Portugal!
Known for its stunning coastline, beautiful beaches, and relaxed lifestyle, the Algarve is a popular destination for foreign investors. This guide provides an overview of the tax implications for those looking to settle in the Algarve, taking into account different types of people and income.
1. Residency Status
Your tax obligations in Portugal depend on your residency status. You are considered a tax resident if you:
- Spend more than 183 days in Portugal in a calendar year
- Have a permanent home in Portugal that you have access to
2. Non-Habitual Resident Regime (NHR)
The Non-Habitual Resident (NHR) regime grants new tax residents in Portugal significant tax benefits for a period of 10 years. However, as of January 1, 2024, retirees are no longer eligible to apply for NHR status.
Who can still benefit from NHR:
- Individuals working in Portugal in “high value-added activities”: This includes professions in scientific, artistic, or technical fields.
- Individuals with passive income from abroad: This includes dividends, interest, and rental income (excluding pensions).
Benefits of NHR (for eligible individuals):
- Foreign-source income: Most foreign-source income (e.g., dividends, interest) may be exempt from taxation in Portugal. However, foreign-source pension income is now taxed at a flat rate of 10% for those who obtained NHR status after April 1, 2020.
- Employment income: Employment income derived from a “high value-added activity” is taxed at a flat rate of 20%.
- Capital gains: Capital gains on the sale of real estate located outside Portugal are generally exempt from taxation.
Important Note: The changes to the NHR regime do not affect those who obtained NHR status before April 1, 2020. They will continue to benefit from the original rules, including the exemption on foreign-source pension income, for the full 10-year duration of their NHR status.
3. Personal Income Tax (IRS)
Tax residents in Portugal are subject to IRS on their worldwide income. The IRS is a progressive tax with rates ranging from 14.5% to 48%.
Taxable income includes:
- Employment income
- Business income
- Investment income (e.g., dividends, interest, rental income)
- Capital gains
4. Property Taxes
- Municipal Property Tax (IMI): This annual tax is levied on the value of your property in Portugal. Rates vary depending on the location and type of property.
- Real Estate Transfer Tax (IMT): This tax is payable on the purchase of real estate in Portugal. Rates vary depending on the value and type of property.
- Additional Property Tax (AIMI): This tax applies to individuals who own property in Portugal with a combined rateable value exceeding €600,000. It also applies to companies holding real estate.
AIMI rates for individuals are as follows:
- 0.7% for properties with a combined value between €600,000 and €1 million.
- 1% for properties with a combined value between €1 million and €2 million.
- 1.5% for properties with a combined value exceeding €2 million.
AIMI rates for companies are:
- 0.4% for most companies.
- 7.5% for companies resident in tax havens.
The value of the property used to calculate the AIMI tax in Portugal is the Valor Patrimonial Tributário (VPT), which translates to Taxable Patrimonial Value.
Think of it as the taxman’s assessment of your property’s worth. It’s usually lower than the actual market value.
Here’s how it’s determined:
- Factors: Several factors are considered when calculating the VPT, including location, size, quality of construction, age, and any existing amenities.
- Evaluation: The tax authorities evaluate these factors using a specific formula.
- Land Registry: This VPT is then registered in the Portuguese Land Registry (Matriz Predial Portuguesa).
Important points to remember:
- Annual Update: The VPT can be updated annually, though it’s not always the case.
- Contesting: If you disagree with the VPT, you can challenge it through a re-evaluation process.
Where to find your VPT:
- Finance Portal: You can find your property’s VPT on the Portuguese Finance Portal website.
- Property Deed: It’s also usually mentioned in your property deed.
Ultimately, the VPT is a crucial figure as it forms the basis for calculating not just AIMI, but also your IMI (Municipal Property Tax).
5. Other Taxes
- Value Added Tax (VAT): This is a consumption tax levied on the sale of goods and services in Portugal. The standard rate is 23%.
- Inheritance and Gift Tax: This tax is levied on the transfer of assets located in Portugal. There is no inheritance or gift tax between spouses or direct family members.
Specific Scenarios:
- Retirees: Foreign retirees who become tax residents in Portugal are no longer eligible for the NHR regime. Their foreign-source pensions will be subject to regular income tax rates.
- Entrepreneurs: Foreign entrepreneurs who establish a business in Portugal may still benefit from the NHR regime, paying a flat rate of 20% on their business income, provided they meet the requirements.
- Investors: Foreign investors who purchase real estate in Portugal will be subject to IMT, IMI, and potentially AIMI. Capital gains on the sale of real estate are generally taxable.
Conclusion:
While the Algarve remains an attractive destination for foreign investors, recent changes to the NHR regime have made it less appealing for retirees. It is crucial to understand the current tax implications before making any decisions.
Disclaimer: This guide provides a general overview of the tax implications for foreign investors in the Algarve. It is not intended to be a substitute for professional tax advice. It is recommended that you consult with a qualified tax advisor to discuss your individual circumstances.
