Personal Income Tax

Employment income – Young people

The law introduces a partial exemption from Personal Income Tax (PIT) on employment income earned by taxpayers aged between 18 and 26 years old, that do not qualify as dependents and earn an amount of gross income equal or lower than EUR 29,179 (taxable income of EUR 25,075).

The exemption only applies in the first three years in which these taxpayers earn income, after the year of completion of a level of education equal or higher than level 4 of the National Qualifications Framework, occurring in 2020 or following years.

The exemption corresponds to 30% of the income earned in the first year, 20% in the second year and 10% in the third year, capped at 7.5 x SSI (Social Support Index – “Indexante dos Apoios Sociais” or “IAS”), 5 x SSI and 2.5 x SSI (EUR 438.81 in 2020), respectively.

Each taxpayer can only benefit from this exemption once. The identification of the taxpayers who complete in each year one of the above levels of education is communicated to the Portuguese Tax Authorities in accordance with the procedure to be established by Decree.

In the annual income tax return (Form 3 or “Modelo 3”) the taxpayer should mark the option to exempt the referred income. Any remainder income earned is taxed at the general rates, however the full amount of income earned is considered for the purpose of determining the applicable rate (exemption with progression).

The withholding tax rate should also be determined with reference to the total income earned however applying only to the portion of income subject to tax. The taxpayer is required to provide proof of completion of a cycle of studies to the payer of the income.

Exclusion from taxation – Students

It is created an exclusion from taxation, capped at 5 times the IAS (i.e., € 2,194.05, for 2020) on employment income (Category A) from a labour contract and self-employment income (Category B) from a service-rendering activity, including single acts, obtained by students which are considered dependents for tax purposes and who are studying in a school integrated in the national education system or equivalent.

For this purpose, taxpayers should file a document supporting their attendance of the relevant school through the Portuguese Tax Authorities’ (PTA) website, up to 15 February of the year following the one to which the income relates to..

Dependents – Deductions

The current legislation provides for a personal deduction of EUR 600 per dependent, as well as an additional deduction of EUR 126 when the dependents are aged up to 3 years old with reference to 31 December of the tax year concerned.

In case of joint parental responsibility and alternate residence of the minor, the deduction amounts to EUR 300 with an additional deduction of EUR 63.

The additional deductions mentioned have been increased to EUR 300 and EUR 150, respectively, applicable to the second and following dependents, regardless of the age of the oldest dependent.

Capital gains – Transfer of residential real estate to private sphere

Capital gains arising from the transfer to the private sphere of residential real estate allocated to the entrepreneurial activities of self employed individuals are now exempt from taxation provided that the real estate is immediately allocated to the earning of real estate income (currently such gains are equivalent to a capital gain realized on the sale of real estate).

However if as a result of the transfer the real estate does not generate income in the next five years, the transfer shall qualify as a capital gain under Category G.

Self-employed income under the simplified regime – Local housing

Income generated by local housing in villas or apartments located in a containment area now benefits from a 50% relief from taxation (in 2019, the coefficient was 0.35), as per the rules applicable to business and professional income (Category B).

Progressive rates

The limits of the general PIT brackets have been increased by 0.3%. The applicable tax rates remain unchanged.

Accordingly, the table of tax rates for 2020 (for Portugal mainland) is the following:

Simplified regime – Expenses

Upon filing of the annual tax return, taxpayers can amend the amounts included in the e-invoice platform in respect of expenses with personnel, rents and other expenses with the acquisition of goods and services necessary for the exercise of their professional activity.

In relation to these expenses, it will not be possible to challenge these amounts in March, if the taxpayer detects that the values included in the e-invoice platform are not correct.

Deduction in case of requesting an invoice

The tax deduction granted to taxpayers in respect of the VAT incurred, for requesting the issuance of invoices in certain specific sectors of activity now includes the acquisition of medicines for veterinary use.

Tax deductions – Amendment

The transitional regime that allows the taxpayers to amend upon filing of the 2019 annual tax return the amount of health, education, rents and retirement homes expenses included in the e-invoice platform.

In relation to these expenses, it will not be possible to challenge these amounts in March, if the taxpayer detects that the values included in the e-invoice platform are not correct.

Non-habitual residents

A flat rate of 10% applicable to the net pension income from a foreign source obtained by non-habitual residents is introduced. The former exemption is revoked.

In addition, it is established that this 10% rate also applies to other income from a foreign source, such as pre-retirement benefits (and equivalent income) and benefits derived from life contributions made by employers to insurance premiums, pension funds or any complementary social security regimes, as well as any lump-sum payments received by the beneficiary.

A foreign tax credit for international double taxation is available against any foreign tax paid on the above i income by the taxpayer.

As an alternative to the 10% rate, taxpayers may opt to include the above income and tax it at progressive rates.

During the period in which taxpayers are registered as non-habitual residents, the exemption in respect of foreign pensions will continue to apply for taxpayers who, at the time of entry into force of the legislation:

• are already registered as non-habitual residents; or
• have already submitted an application for registration, which is pending from the analysis from the PTA; or
• already qualify as Portuguese tax residents and apply for the registration as non-habitual residents by 31 March 2020 or by 31 March 2021, as a result of meeting the conditions to qualify respectively in 2019 or 2020.

Taxpayers in the situations above may opt for one of the two regimes on their personal income tax return for 2020.

Time-sharing (“Direito Real de Habitação Duradoura- DHD”)

Several changes were introduced to the PIT Code related to DHD contracts which legal regime was recently created by Decree-Law no. 1/2020 of 9 January.

The DHD is intended to provide to one or more persons (dweller) access as permanent home of an immovable property owned by someone else, for a lifetime period, upon payment to the respective owner of a pecuniary deposit and a periodical compensation.

In return for the DHD the dweller is obliged to pay the owner:

• a monthly compensation, for each month of the duration of the DHD, to be established in the contract; and
• an annual cash payment, for each year elapsed as from the 11th year up to the end of the 30th year of the contract, corresponding to 5% of the initial deposit. This annual cash payment is deducted from the amount of the initial deposit.       

Category F - rental income

The amounts earned by the property owners from contracts concluded under the DHD regime are classified as rental income.

It is also establishd that this income is subject to taxation according to the following rules:

• from the moment it is received or made available, in the part that concerns the monthly payments;
• from the moment the annual payment is considered income for the owner or, in the part that corresponds to the initial deposit, when it is deducted by the owner due to the non-compliance by the dweller of the respective obligations under the terms provided for in the DHD legal regime.

Taxation - special rate

Similarly to the regime applicable to rental contracts for permanent housing with a duration of twenty years or more, rental income from DHD contracts also benefits from a reduction of 18 percentage points on the respective autonomous rate (28%) in respect of the monthly payments.

Likewise, whenever by agreement of the parties, the DHD contract is terminated early, the right to the reduced taxation rate ceases to apply effective from the beginning of the contract. In that case, in the year of termination of the contract, the owner must declare that fact for the purpose of regularizing the difference between the amount of tax that was paid in each year and that which should have been paid, plus compensatory interest.

 Tax deductions – expenses with property

15% of the amounts paid in relation to DHD contracts are tax deductible in the year in which such amounts are taxable as the owner's income, capped at EUR 502.

It is also established the obligation for the dweller to indicate the amount paid as an initial deposit in the annual income tax return (“Modelo 3”) for the year this is considered taxable income of the owner under the referred rules, that is, when it is deducted by the owner due to non-compliance by the dweller with the respective obligations under the terms of the DHD legal regime.

Obligation to issue a receipt

It is established the obligation for the owners of DHD contracts to issue a receipt, using the official format, of all the sums received from their tenants, including in respect of deposits, advance payments or reimbursement of expenses.

Withholding tax – Crowdfunding

Entities managing crowdfunding platforms, whose head office or permanent establishment is located in the Portuguese territory, shall be obliged to withhold PIT on investment income paid or placed at disposal.

Waive from withholding tax obligation

As a result of the change introduced to Article 53 of the VAT Code, it is increased from EUR 10,000 to EUR 11,000, in 2020, and to EUR 12,500 in 2021, the annual amount of income up to which no withholding taxes are due, except when withholding tax is due at flat rates, in respect of income from category B in general (self-employment/entrepreneurial) and category F (property income).

Payments on account

Individuals earning income of any category can make advance payments on account of the final tax due, in case the debtor of the income is not obliged to withhold tax (formerly applicable only in case of employment and pension income). This applies in case each payment on account is equal or higher than EUR 50.

Accessible habitation rentals - interpretative nature

It has been granted interpretative nature to the changes introduced through Law no. 119/2019, of 18 September, to some articles of the PIT Code in relation to the tax regime for accessible habitation rentals, as a result of which those changes produce effects as from 1 January 2019.

Legislative authorisations

Forest Savings Plans

The Government is authorised to create a tax benefits scheme applicable to Forest Saving Plans (“Planos de Poupança Florestal” or “PPF”). The scheme shall foresee an exemption from PIT applicable to interest derived from PPF, as well as tax credit corresponding to 30% of the cash amounts invested in the respective year in the PPF, capped at EUR 450 per taxpayer.

Environmental deductions

The Government is authorised to create environmental deductions on the acquisition of renewable production units for self-consumption, as well as heat pumps of energy class A or above, allocated to private use. Consequently, allowing part of such expenses as a tax deduction capped at EUR 1.000.