For U.S. citizens considering relocating their tax residence to Portugal, there are several tax benefits that can make Portugal an attractive destination. However, it’s important to note that U.S. citizens are subject to U.S. tax laws, which means they must file U.S. tax returns and pay U.S. taxes on their worldwide income, regardless of where they reside. That said, Portugal offers specific tax incentives that can provide significant advantages to U.S. citizens, particularly those who qualify for the Non-Habitual Tax Regime (NHR) or take advantage of the Foreign Tax Credit and other tax planning strategies. Here are the main tax benefits for U.S. citizens moving their tax residence to Portugal:
- Non-Habitual Tax Regime (NHR)
One of the most significant tax advantages for U.S. citizens moving to Portugal is the Non-Habitual Tax Regime (NHR), which offers substantial tax benefits for the first 10 years of residency. This regime can reduce the tax burden on foreign income and pensions, which can be especially valuable for retirees, entrepreneurs, and professionals.
Key Benefits Under NHR:
- Pension Income: For U.S. citizens, pension income received from abroad (e.g., Social Security or private pensions) can be exempt from Portuguese tax under the NHR regime, provided the pension is taxed in the country of origin (subject to applicable tax treaties). This is one of the most attractive benefits for retirees.
- Foreign Income Exemption: Income derived from foreign sources (such as wages, business profits, rental income, or investment income) can be exempt from Portuguese tax, if certain conditions are met. This can be particularly beneficial for U.S. citizens who have substantial foreign income.
- Flat 20% Tax Rate for High-Value Professions: Professionals in certain high-demand fields (such as architects, engineers, doctors, IT professionals, and others) may qualify for a flat 20% tax rate on their Portuguese-source income. This preferential rate can significantly reduce the tax liability for U.S. citizens who are entrepreneurs or self-employed.
- No Wealth or Inheritance Tax: Portugal does not impose a wealth tax, and inheritance and gift taxes are typically only applicable to direct family members, making it an appealing choice for individuals concerned about their estates.
This special tax regime has expired at the end of 2024 , should you not have become tax resident in Portugal prior to the 31st December 2024 then this tax regime is no longer available to you. Should you have become tax resident prior to the end of 2024 then you have until the 31st March 2025 to apply for your NHR status ( assuming you meet 1 of the 5 qualifying criteria introduced in 2023)
- Foreign Tax Credit and Exclusion
Even though U.S. citizens are required to file tax returns with the IRS and pay U.S. taxes on their worldwide income, they can potentially reduce their U.S. tax liability through the Foreign Tax Credit (FTC) and the Foreign Earned Income Exclusion (FEIE).
Foreign Tax Credit (FTC):
- U.S. citizens can use the Foreign Tax Credit to offset U.S. taxes with taxes paid to the Portuguese government. If you pay Portuguese income taxes on your salary, for example, the amount paid in Portugal can be credited against your U.S. tax liability, reducing the potential for double taxation.
Foreign Earned Income Exclusion (FEIE):
- The Foreign Earned Income Exclusion (FEIE) allows U.S. citizens working abroad to exclude up to $120,000 (for 2023) of foreign-earned income from U.S. taxation. This can be very beneficial for individuals who are employed in Portugal or who earn self-employment income. The exclusion does not apply to investment income or pensions, but it can significantly reduce the U.S. tax liability for U.S. citizens living and working in Portugal.
Foreign Housing Exclusion/Deduction:
- U.S. citizens may also be eligible for the Foreign Housing Exclusion/Deduction, which allows them to exclude or deduct certain housing expenses incurred while living abroad. These expenses may include rent, utilities, and certain costs associated with moving to Portugal. This can provide additional savings for U.S. citizens who are relocating.
- Double Taxation Treaty (DTT) Between the U.S. and Portugal
Portugal and the United States have a Double Taxation Treaty (DTT) that helps prevent double taxation on income earned in both countries. The treaty allocates taxing rights between the two countries, typically providing relief from being taxed on the same income in both Portugal and the U.S. The treaty also allows for certain exemptions or reduced tax rates on specific types of income, such as pensions and investment income, making Portugal a favorable jurisdiction for U.S. citizens.
Key aspects of the DTT include:
- Pensions: The treaty often provides that pension income is only taxable in the country of residence (Portugal) or in the country where the pension originates (the U.S.), depending on the specific type of pension and the treaty provisions. For many U.S. retirees, this means that their pensions may be exempt from Portuguese tax if they are taxed in the U.S.
- Dividends, Interest, and Royalties: The treaty typically reduces the withholding tax rates on U.S. dividends, interest, and royalties paid to a resident of Portugal, making it easier for U.S. citizens to benefit from income earned in the U.S. without facing heavy taxation in both countries.
- No Inheritance or Wealth Tax
Portugal does not have a general wealth tax, which can be a significant advantage for individuals with substantial assets. The country does have inheritance and gift taxes, but these only apply to assets passed to individuals outside the immediate family (children, spouse, parents, and siblings). This means U.S. citizens can pass on their wealth to family members with minimal tax impact, especially when compared to U.S. estate and inheritance taxes, which can be quite high.
- Cost of Living and Property Taxes
Portugal has a relatively lower cost of living compared to many other Western European countries, which can be advantageous for U.S. citizens living on a fixed income, such as retirees. Property taxes in Portugal are also relatively low, and the government has been known to provide various tax incentives to encourage foreign investment in real estate, making it an attractive option for U.S. citizens looking to purchase property in Europe.
- Capital Gains Tax on Real Estate
For U.S. citizens who invest in real estate in Portugal, there are potential tax advantages:
- Portugal offers capital gains tax exemptions on real estate gains if the property is sold after being held for a certain period and if the proceeds are reinvested in another Portuguese property. Additionally, Portugal offers exemptions for primary residences if the seller is over a certain age and has lived in the property for a number of years.
- If the real estate is located outside Portugal, U.S. citizens can also use the Foreign Tax Credit to offset U.S. taxes with taxes paid in Portugal.
- Tax Residency Requirements
To become a tax resident in Portugal, individuals must meet the following criteria:
- Spend 183 days or more in Portugal during a calendar year, or
- Have a permanent home available to them in Portugal. Once established as a tax resident, U.S. citizens can take advantage of the NHR program and other benefits for their first 10 years in Portugal.
Conclusion
For U.S. citizens moving their tax residence to Portugal, the main tax benefits are the Non-Habitual Tax Regime (NHR), which provides exemptions and reductions on foreign income, pensions, and business income, and the ability to utilize U.S. tax relief mechanisms such as the Foreign Tax Credit and Foreign Earned Income Exclusion to reduce double taxation. Portugal’s favorable tax environment for retirees, professionals, and entrepreneurs, combined with the Double Taxation Treaty between the U.S. and Portugal, makes it an appealing destination for U.S. citizens seeking to minimize their tax liability while enjoying the benefits of living in Europe. However, U.S. citizens should still be mindful of their U.S. tax obligations and consult with tax professionals to ensure they optimize their tax situation.