Discover the untold story behind Value Added Tax (VAT) in Portugal and how it shapes the nation's growth and well-being. In our blog post, "Unlocking Prosperity: The Advantages of Paying VAT in Portugal.
In Portugal, like in many other countries, VAT plays a significant role in generating revenue for the government and supporting various public services. While paying taxes might not always be a favorite topic, it's important to recognize the benefits that VAT brings to both the country's economy and its citizens. In this blog post, we will explore the advantages of paying VAT in Portugal.
Individual - Other tax credits and incentives
In the context of tax credits available for the year 2023 to individuals subject to taxation in Portugal, specific deductions can be claimed against their tax liability. These deductions pertain to dependents and ascendants residing in the same household, provided they do not earn an income surpassing the minimum pension threshold established under the general regime.
For dependents and ascendants falling under this criteria, a fixed sum of EUR 600 and EUR 525, respectively, can be offset against their tax obligations. Additionally, if there are dependents under three years of age by the end of the calendar year, or if only one ascendant qualifies, these fixed amounts can be augmented by EUR 126 and EUR 110, correspondingly. In cases where multiple dependents are part of the household, an extra deduction of EUR 600 can be increased by EUR 300 for the second and subsequent dependents aged up to six years old, irrespective of the eldest dependent's age.
It's important to note that if dependents appear on more than one annual tax return, the applicable tax credit amount stands at 50% of the aforementioned sum. This provision addresses situations where dependents might be considered for tax deductions in multiple tax returns.
In Portugal, there's a noteworthy opportunity to gain tax benefits through your household expenses. The concept is simple yet effective: you can claim up to 35% of the total expenses incurred by any member of your household. However, there's a cap set at EUR 250 per taxpayer. The catch? You need to ensure that your individual taxpayer number is properly included in the invoices for the goods or services you've acquired. Also, don't forget to communicate these expenses to the Portuguese tax authorities.
Yet, there's more to this story. While this benefit covers a wide range of sectors, there are certain specific areas that aren't included. Make sure to double-check if your expenses align with the sectors eligible for these tax advantages.
Now, if you and your partner file your tax returns jointly, here's where it gets interesting. The maximum limit of EUR 250 suddenly doubles to an impressive EUR 500. This is an excellent incentive for couples to consider when they're managing their household finances.
However, there's an added layer of consideration for single parents. The tax credit percentage gets bumped up to 45% for them. While this is great news, there's a global limit set at EUR 335 for this credit. This adjustment acknowledges the unique circumstances single parents often face and extends a slightly higher credit to help ease their financial responsibilities.
Remember, these provisions have implications for your tax planning. By staying informed and strategic, you can make the most of these benefits and optimize your financial situation in Portugal. 15% of non-reimbursed health expenses exempt from VAT, or subject to VAT at a rate of 6%, communicated to the Portuguese tax authorities, up to a limit of EUR 1,000.
15% of the VAT incurred by any household member, included on invoices communicated to the Portuguese tax authorities, with a global limit of EUR 250, for services acquired in any of the following activity sectors:
Maintenance and repair of motor vehicles, motorcycles, and related parts and accessories.
Accommodation, restaurants, and similar food service activities.
Hairdressers and beauty salons.
Veterinary expenses (increased to 35% instead of 15% of the VAT).
Sports and recreational activities, sports club, and gyms/fitness club expenses.
Maximizing Your Tax Benefits: A Comprehensive Overview
When it comes to optimizing your tax situation in Portugal, there are several key avenues to explore. Each of these options can help you retain more of your hard-earned money while adhering to the tax regulations. Let's delve into these opportunities:
1. Transportation and Enlightening Reads:
Take note of the VAT paid by any member of your household on monthly passes or tickets for public transportation.
Ensure that these expenses are detailed on invoices reported to the tax authorities.
The same principle applies to invoices for subscriptions to periodicals, including newspapers and digital magazines, with the advantage of being taxed at the reduced VAT rate.
2. Alimony, Deducted:
For those making alimony payments, there's a rewarding deduction awaiting you.
This deduction amounts to 20% of the alimony sum paid, with the significant aspect of not having an upper limit.
It's important to remember that the alimony will be subject to taxation at the same rate.
3. Compassionate Donations:
Display your generosity and receive tax benefits by contributing to central, regional, or local administration entities and foundations.
A substantial 25% of the donated amount can be deducted from your taxes.
It's noteworthy that there is no restriction on the amount you donate; however, if your contribution is to entities other than those mentioned, the deduction is limited to 15% of the donation.
4. Empowering Education:
If education expenses are part of your financial landscape, you're in for some advantageous tax treatment.
A generous 30% of these expenses can be subtracted from your tax liability.
If you have a household member aged 25 or under attending a recognized educational institution more than 50 km away from your permanent residence, the deduction is further enhanced.
This enhancement is substantial, capped at EUR 800, and is even higher if rented property factors into the equation – reaching up to EUR 1,000.
5. Real Estate Insights:
Delve into the realm of real estate expenses, uncovering potential deductions.
Particularly, expenses related to interest payments on loans taken up until December 31, 2011, and rents for urban properties can be deducted.
This deduction accounts for 15% of the expenses incurred.
For loans, the maximum cap is EUR 296, while rents have a cap of EUR 502. Remember, these caps might increase based on your income level.
25% of the amount of expenses incurred with retiring homes, with a global limit of EUR 403.75.
20% of contributions to individual retirement saving plans (Plano Poupança Reforma [PPR]), with the following limits:
For taxpayers younger than 35 years old: EUR 400.
For taxpayers between 35 and 50 years old: EUR 350.
For taxpayers older than 50 years old: EUR 300.
EUR 1,921.72 for individuals with disabilities.
20% of contributions made to individual accounts managed under a public capitalization regime, with the following limits:
For taxpayers younger than 35 years old: EUR 400.
For taxpayers older than 35 years old: EUR 350.
Note
For households with three or more dependants, this limit is increased by 5% for each dependant not subject to PIT.
Non-habitual resident's tax regime
A person who becomes a tax resident in Portugal for a specific year and hasn't been a resident taxpayer in the country for any of the past five years can seek the special tax arrangement meant for non-habitual residents.
In broad strokes, non-habitual residents are subject to a fixed tax rate of 20% on income from employment (Category A) and self-employment (Category B) related to advanced scientific, artistic, or technical activities.
An updated roster of these high-value activities was introduced in 2020. Under specific criteria, a tax exemption (with variations based on the income category) is applicable to foreign-source income such as property earnings, interest, and dividends. Typically, capital gains from securities sales are taxed at a uniform rate of 28%. Additionally, a consistent 10% flat tax rate applies to pensions originating from foreign sources, along with other payments from pension funds and comparable retirement plans.
This advantageous tax status as a non-habitual resident endures for a ten-year duration.
To tap into the privileges of this arrangement, an application for the non-habitual resident tax scheme needs to be submitted electronically by the 31st of March, inclusive, during the year following the one in which the individual becomes a tax resident in Portugal.
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