Individuals who are not tax resident in Portugal are generally subject to Portuguese Personal Income Tax only on income regarded as arising from Portuguese sources.
Their obligations will, however, depend on the type of income, whether Portuguese tax was withheld and how the relevant Double Taxation Agreement applies.
When is a Portuguese tax return required?
According to the Portuguese Tax Authority, non-residents are generally required to file a Portuguese Modelo 3 Personal Income Tax return when they receive Portuguese-source income that has not been subject to withholding tax.
Where income has been subject to final withholding tax, the taxpayer may be exempt from filing a return. However, the existence of withholding does not automatically remove every reporting obligation.
It is important to establish:
- the type of income received;
- whether the withholding was final or made as a payment on account;
- whether a statutory filing exemption applies;
- whether a Double Taxation Agreement is applicable;
- whether the taxpayer intends to exercise an option available under Portuguese law.
How do Double Taxation Agreements work?
Portugal has entered into Double Taxation Agreements with numerous countries. These agreements determine which country may tax each type of income and under what conditions.
Contrary to a common assumption, income is not necessarily taxed in Portugal first. Depending on the relevant agreement and type of income:
- Portugal may be entitled to tax the income, sometimes subject to a maximum rate;
- the income may be taxable exclusively in the country of residence;
- both countries may have taxing rights, with the country of residence eliminating double taxation through a foreign tax credit or an exemption.
Claiming an exemption or reduced rate of Portuguese withholding tax may require Form 21-RFI, together with a tax residence certificate issued by the competent authority in the taxpayer’s country of residence.
Reporting in the country of residence
Many countries tax their residents on their worldwide income. Portuguese-source income may therefore also have to be reported in the country of residence, even where Portuguese tax has already been paid.
The precise obligation must be confirmed under the domestic legislation of the country of residence and the applicable Double Taxation Agreement. Portuguese tax may be relieved through a foreign tax credit or another method established by the agreement.
International automatic exchange mechanisms also exist, including DAC2/CRS for certain financial account information. These mechanisms increase tax transparency but do not replace the taxpayer’s own reporting obligations.
In summary
- Non-residents are generally taxed in Portugal only on Portuguese-source income.
- A Modelo 3 tax return may be required where the income was not subject to Portuguese withholding tax.
- Where tax was withheld, it is necessary to establish whether the withholding was final and whether a filing exemption applies.
- The relevant Double Taxation Agreement may limit or exclude Portuguese taxation.
- Double taxation may be relieved through a foreign tax credit or an exemption, depending on the country and type of income.
- Portuguese-source income should be reported in the country of residence whenever required by that country’s legislation.
The correct treatment depends on the type of income, the taxpayer’s country of residence and the applicable treaty. Reviewing the position in advance can help prevent excessive withholding, reporting failures and potential penalties.
This article is provided for general information purposes only and does not replace professional tax advice based on the taxpayer’s individual circumstances.