Navigating Tax Strategies for U.S. Retirees Relocating to Portugal

Are you dreaming of retiring in Portugal with its sunny beaches and rich history? That’s a fantastic choice! But let’s talk about something not so exciting but super important: taxes. Don’t worry, we’ll keep it simple and guide you through what you need to know.

When Do You Become a Tax Resident in Portugal?

Basically, if you live in Portugal for more than half the year (183 days or more), you’ll likely be considered a tax resident. This means Portugal could tax your income from all over the world. And yes, even if you’re a resident in Portugal, you’ll still need to file tax returns back in the U.S., which could raise concerns about double taxation.

How Does the Portugal-U.S. Tax Treaty Help?

There’s an agreement between Portugal and the U.S. to make sure you don’t pay taxes twice on the same income. This means more of your money stays in your pocket.

• Pension Income: Typically, your pension income will be taxed only in the country where you reside. So, if you’re living in Portugal, that’s where you’ll pay taxes on your pension.
• Rental Income: If you have rental properties, the income is usually taxed in the country where the property is located. For a U.S. property, you’ll pay U.S. taxes, and for a Portuguese property, you’ll pay taxes in Portugal.
• Dividends and Interest: The treaty also covers dividends and interest income. The rules here can be a bit more complex, depending on the source of this income and specific treaty provisions.
• Capital Gains: Generally, capital gains from the sale of property are taxed in the country where the property is located. This means if you sell a house in Portugal, the gains are subject to Portuguese tax laws.
• Claiming Tax Credits: The treaty allows you to claim foreign tax credits on your U.S. tax return for taxes paid in Portugal. This helps in reducing your U.S. tax liability and avoids double taxation on the same income.
• Government Service Pensions: There’s a specific rule for government service pensions. These are generally taxed only in the country that pays the pension. For example, a U.S. federal pension is likely to be taxed only in the U.S.
• Social Security Benefits: For U.S. Social Security benefits, the treaty typically allows these to be taxed only in your country of residence. So, if you live in Portugal, Portugal may tax this income.

Portugal’s Non-Habitual Resident (NHR) Tax Regime

The Non-Habitual Resident (NHR) program is a unique initiative by the Portuguese government designed to attract foreign residents by offering favorable tax conditions. Once you qualify, you can benefit from the NHR regime for up to ten years.

Tax Advantages on Foreign Income:

• Pension Income: Under the NHR program, foreign pension income may be taxed at a flat rate of 10%, which is significantly lower than standard Portuguese tax rates.
• Other Foreign Income: Types of foreign income such as interest, dividends, and rental income may be exempt from Portuguese taxes under certain conditions.

Eligibility Criteria:

• To qualify, you must not have been a tax resident in Portugal for the five years prior to your application.
• You need to register as a tax resident in Portugal and have the intention to stay regularly.

It’s important to note that the NHR scheme will end in 2024, and new applicants need to apply before December 31, 2023, and complete their application/approval by March 31, 2024. The Portuguese government is planning to replace the NHR tax regime with a new Incentivised Tax Status (ITS) program, which may offer a more limited range of tax benefits.

U.S. Taxes for Americans Abroad

Even in sunny Portugal, Uncle Sam expects you to file U.S. taxes on your worldwide income. This includes declaring foreign bank accounts and assets over certain thresholds (FBAR, FATCA). But hey, there might be tax credits and exclusions to help you out.

Let’s Talk About Wills and Estates

Moving to Portugal can have significant implications for how your estate is managed and distributed after your passing. Understanding and planning for these differences is crucial to ensure your wishes are respected and to make the process smoother for your loved ones.

Different Legal System:

• Civil Law Jurisdiction: Portugal operates under a civil law system, which differs significantly from the common law system used in many parts of the U.S.
• Forced Heirship Rules: Portugal has forced heirship rules, meaning a portion of your estate must go to certain family members, like children or spouses, regardless of your will’s stipulations.

Portuguese Wills and Inheritance Laws:

• Writing a Portuguese Will: It’s advisable to have a Portuguese will for your assets in Portugal. This can exist alongside a U.S. will for assets in the States, but it’s important they don’t contradict each other.
• Inheritance Tax: Portugal does not have an inheritance tax per se, but there is a stamp duty (Imposto de Selo) at a flat rate of 10% payable under certain circumstances, especially when the beneficiaries are not direct family members.

Impact on U.S. Citizens or Residents:

• U.S. Tax Implications: As a U.S. citizen or resident, your worldwide estate could be subject to U.S. estate taxes. How this interacts with Portuguese law needs careful planning.
• Reporting Requirements: There may be reporting requirements for foreign assets held in Portugal to U.S. tax authorities.

Buying a House in Portugal and Taxes

Owning property in Portugal comes with its own set of tax implications. Being informed about these can help in budgeting and avoiding unexpected costs.

Property Purchase Taxes:

• IMT (Imposto Municipal sobre Transmissões Onerosas de Imóveis): This is a property transfer tax you pay when you buy a house in Portugal. The rate varies depending on the property type and its value, ranging from 0% to 8%.
• Stamp Duty (Imposto de Selo): Alongside IMT, you’ll also need to pay stamp duty, which is typically 0.8% of the property value.

Annual Property Taxes:

• IMI (Imposto Municipal sobre Imóveis): This is an annual municipal property tax, calculated based on the property’s tax value. The rate ranges from 0.3% to 0.45% for urban properties and is lower for rural properties.

Rental Income Tax:

• Tax on Rental Income: If you rent out your property in Portugal, the rental income is subject to Portuguese income tax. The rates can vary based on whether you’re a resident and other factors.

Capital Gains Tax:

• Selling Property: If you sell your property, capital gains tax applies. Residents may be subject to a different rate than non-residents, and only 50% of the gain is taxed.

It’s important to note that non-Portuguese residents are subject to different tax rates compared to Portuguese residents, and the tax implications can vary based on the property value, location, and individual circumstances. 

Contact Us Today

Understanding taxes might not be fun, but it’s key to a happy retirement in Portugal. At DimovTax, our experts in international taxation are here to provide personalized advice tailored to your unique situation. And remember, we’re here to help make your move as smooth as possible!