Portugal Taxes – Three Common Misconceptions
Given how nuanced taxes can be, it would be impossible to draft a “how to” guide on Portugal taxes. Rather, I thought I would talk about common pitfalls, and common misunderstandings when it comes to Portugal taxes. So today we will talk about three common mistakes that I have seen expats make when it comes to Portugal taxes.
Mistake 1 – Crypto trading is tax free
It’s hard to have a conversation with anyone serious about investing before cryptocurrency comes up. I understand why so many people are passionate about it because the returns are rendering every other asset class as irrelevant. Understandably, nobody cares about anything else as long as crypto continues to perform as it does.
Now the Portuguese Tax & Customs Authority (PTA) announced that buying or selling cryptocurrency in Portugal is tax-free. That has led to the establishment of a pretty active crypto community here in Portugal. But as with everything to do with taxes, there are important exceptions to note. Here are the two most important exceptions –
- The receipt of cryptocurrency in exchange for goods or services doesn’t change the tax treatment of the original transaction, and
- Taxpayers who deal in cryptocurrency as a professional or business activity (that is, active crypto TRADERS) are still subject to some taxes.
Let’s talk about trading. As with everything in taxes, you should consult a qualified Portugal tax professional but there are several factors that determine whether one’s trading activity is professional or not. These include:
- Number of trades per day/week/month/year.
- Holding period
- Complexity of traded financial products
- Number of trading platforms used
- Debt-to-equity ratio, credit financing
- Profit level and relationship to other income
- Traders’ main activity
In short, cryptocurrencies in Portugal are taxable if you do it as a professional trading activity.
Mistake 2 – 10% tax on Pensions doesn’t apply to Americans
Before 2020, the NHR or Non Habitual Residence program in Portugal meant that expats could receive their pensions in Portugal tax free. Unfortunately, other European countries complained as their nationals were incentivized to move to Portugal to enjoy tax free income. Tax free in their country of origin and tax free in Portugal.
As a result of these complaints a 10% tax was levied on all foreign pensions received by Portugal tax residents. Now there are those who believe that the 10% tax does not apply to Americans or those receiving pensions from US pension plans. This is because
- The pensions are often taxable in the US and
- For Portugal to tax US pensions would appear to violate the terms of the US – Portugal Tax Treaty.
Unfortunately this is incorrect. Portugal can tax US source pensions (public and private) even if it is taxed at source in the United States. But that does not mean that the pensions would be double taxed since the Tax Treaty can be invoked to eliminate double tax when doing the US tax returns. While this may be new to Portugal, Americans in Spain have been dealing with the situation for many years. While it is complex, once you use a qualified tax team that understands international taxes, they should know how to invoke the treaty to eliminate double taxation.
Mistake 3 – Once I collect money outside of Portugal, it is tax free to Portugal
To some extent, this perception is correct. Foreign source passive income may be tax free to Portugal tax residents on the NHR program. But this only works where
- The income is subject to taxation in the source country
- It is not deemed derived in Portugal and
- It is not obtained from a black listed jurisdiction
So that’s passive income. What about earned income? It may be tax free to Portugal tax residents under the NHR once it meets the same three criteria above.
Some mistakenly believe that if they form a company outside of Portugal and run that company from Portugal and bank that income outside of Portugal, it is tax free to Portugal. This is incorrect because there is a risk that the Portugal tax authority deems a foreign company (especially if it is a shell company) to be operated from Portugal, the foreign company itself becomes taxable in Portugal.
So where do we go from here? My intention behind writing this was simple. To demonstrate how it is easy to misinterpret tax rules. After all, there is a reason why tax professionals spend years qualifying in their relevant jurisdictions. So, when in doubt, please seek professional advice from qualified US tax teams in Portugal who are experienced in all the jurisdictions in which you may be exposed.
We are all grateful to Portugal for offering us a home in this beautiful country. Let’s not abuse this kindness. Be sure to pay your fair share of taxes. It’s the right thing to do.
Happy tax season everybody.