Wondering how the Portugal US tax treaty can help you with taxes as an American citizen?
It’s time to do an explanation of the tax benefits in Portugal and how you can stop taxes slowing your efforts to scale your businesses.
Give it a full read to this article of Portugal US tax treaty if you’re an American citizen, you will learn how the tax incentives of Portugal can benefit you and your business.
Many Americans across the globe have foreign assets, accounts, investments, and income generated in Portugal.
However, some Americans are still subject to US tax on Portugal-sourced income unless you claim a treaty position under the Portugal US tax treaty.
The US and Portugal entered into a tax treaty back in 1994.
By claiming tax treaty benefits, as a resident of one of the contracting states, you’ll be able to limit certain taxes.
The agreement between the US and Portugal covers the corporate income tax, personal income tax, and local surtax in the case of Portugal.
The US Portugal tax treaty aims to ensure proper tax treatment of money earned by US citizens, Portuguese citizens, and residents of each other’s countries.
We’ll walk you through some basics examples to understand how the tax rules work.
Why invest in Portugal?
Portugal is an attractive country for foreign investors. As tourism generates quite generous profits, many people choose to buy a property in Portugal and get residency in return.
The simplified process of getting Portuguese residency, the multiple real estate projects, the advantageous taxation system, and the stable and solid business climate represent some of the benefits Portugal offers to those who decide to invest in the country.
What is the Portugal US Tax Treaty?
The Portugal US tax treaty is an agreement between the two countries that regulates taxation for individuals and businesses. The treaty was first signed in 1994 and has been updated several times since then.
Its purpose is to prevent double taxation of income and to encourage cross-border trade and investment.
How Does the Treaty Work?
Under the treaty, US citizens living in Portugal are subject to Portuguese tax laws on their worldwide income.
However, you are also entitled to certain tax credits and exemptions that can help reduce your tax liability.
For example, US citizens living in Portugal can claim a foreign tax credit on their US tax return for taxes paid to the Portuguese government.
Similarly, Portuguese citizens living in the US are subject to US tax laws on their worldwide income.
However, they are also entitled to certain tax credits and exemptions to help reduce their tax liability.
Tax Treaty for individuals
When it comes to businesses, the tax rules get more complicated.
Taxes vary depending on whether or not the company has a permanent establishment in the other country. For that reason, we’ll explain how the tax rules work for individuals.
Real estate taxes
As a foreign investor or a resident, if you own a rental property in Portugal, you must pay tax on the income derived from it.
The rental income taxation in Portugal has different categories, but the Portugal US tax treaty would prevent this double taxation on your rental income.
Read more about rental income tax in Portugal here.
This will apply if you choose to apply for your Portugal golden visa with the job creation route.
According the Article 7 of the US Portugal tax treaty, “the business profits of a company shall be taxable only in that State unless the company carries on or has carried on business in another State.”
For example: If a company operates only in Portugal, it will not be taxed in the United States. Even if the business is conducted in the United States.
If there is no permanent establishment in the United States, the profits are generally still not taxable in the US.
If a Portuguese company operates through a permanent establishment in the US, naturally the portion attributed to that permanent establishment may be taxable.
Dividends tax in Portugal
The portion of the Portugal US tax treaty on the issue of dividends is complicated.
To put it in simple words: If a Portuguese company pays dividends to a resident of the United States, the US can tax that income.
Portugal may also tax the dividend, but if the beneficial owner of the dividend resides in the other state (US), the tax Portugal charges should not exceed 15% of the gross amount of the dividends.
Capital gains in Portugal and USA
When it comes to capital gains in Portugal and the US, it may be taxed in both countries. The taxation includes: gains made on real estate, stocks, participation, or other rights in a company.
Self-employment income tax
Lastly we got the income derived by a resident of one country for personal services is only taxable in that country. There might be some exclusions and limitations that apply though.
If you’re a US citizen living in Portugal, it’s important to understand the Portugal US tax treaty and how it affects your tax liability.
By taking advantage of the treaty’s provisions, you can avoid double taxation and ensure that you’re paying the right amount of taxes in each country.
At Golden Port Visa, we specialize in assistance with residency and property investments in Portugal. We’ve helped clients worldwide find the ideal property providing local insights and finding the best investment opportunities in real estate.
FAQ - What does the Portugal US tax treaty cover?
Are pension funds taxable in the US?
Pension tax law is complicated. Due to the distinction between contributions, growth and distributions. Pensions earned by a resident of one country in consideration of past employment shall be taxable in that country.
Is there a tax treaty with Portugal?
Yes, there is a tax treaty between Portugal and the USA. The US Portugal tax treaty aims to ensure proper tax treatment of money earned by US citizens, Portuguese citizens, and residents of each other’s countries.
Do I report interest income or dividends from Portugal?
The taxation rules for interest follow the same general rule as dividends.
For example, if a person from Portugal resides in the USA, the United States can tax them on their interest income.
Likewise, if the company paying the interest is a Portuguese company, then Portugal can also tax them, but the interest is limited to 10%.
Do I have to pay taxes in both countries if I get dual citizenship?
The answer to this question all depends on how much time you’ll spend in Portugal every year and the rules in your current country of citizenship.
If you spend less than 183 days in Portugal each year and don’t consider Portugal your country of residence, then you’re considered a non-tax resident.
You won’t pay tax in Portugal on your worldwide income, but you’ll pay tax on any Portuguese-sourced income (if any).