Income is reported in different categories: A) Salaries, B) Sole Traders, E) Capital, F) Property, G) Capital Gains and H) Pensions and is taxable in Portugal regardless of its origin. For non-residents, only income actually arising in Portugal is subject to assessment.
Taxation of bank interest was harmonised throughout the European Union with the introduction of the EU Savings Directive. The following situations reveal which tax options exist and the implications of each scenario.
A. Banking in Portugal:
1) Withholding at source - flat rate of 28%: tax is final: no further reporting necessary; or
2) Aggregate Assessment - reporting interest with other income taxed at marginal rates (englobamento) - (14.5-48%). Withholding acts as a tax credit applied to final assessment.
(Note: When choosing nº2, all bank accounts must be reported to Finanças)
B. Banking in the European Union:
1) EU Savings Directive dictates information sharing;
2) Tax Withheld at source:
a) assessment at source limited by Double Tax Conventions (DTC);
b) balance of withholding to be refunded as per DTC procedures;
3) Reporting Interest Income - 2 options
a) aggregate assessment - assessed with other income at taxed at marginal rates.
(Note: all bank accounts must be reported and made available to Finanças) or
b) autonomous assessment: flat rate of 28% plus
c) application of international tax credit may apply as per Double Tax Conventions.
C. Banking Offshore
1) Withholding at source
Interest paid net:
¼ of withholding to Source Country; ¾ to Country of Residence (Portugal). or
2) Information Sharing: Interest paid gross - Declaration with tax paid in Country of Residence (Portugal).
3) Reporting for final assessment in Country of Residence (Portugal)
a) Autonomous Assessment: taxed independently at a flat rate of 28%. or
b) Aggregate Assessment (Englobamento): Interest declared with other income and taxed at marginal rates (14.5 - 48%).
c) International Tax Credit:
For the non-EU jurisdictions within Europe (Liechtenstein, Switzerland, Andorra, Monaco and San Marino) as well as the following Offshore jurisdictions (Jersey, Guernsey, Isle of Man, Turks and Caicos Islands, British Virgin Islands and the Dutch Antilles as well as the Cayman Islands, Antigua, Montserrat and Aruba), tax credits for withholding at source are eligible for an International Tax Credit, up to the tax due in Portugal. Withholding beyond tax due in Portugal should be refunded at source.
D. Banking outside of the EU: around the world
1) Reporting Income: with other income at marginal rates (14.5 - 48%).
2) DTC rules and subsequent international tax credit may apply.
Next: Part 4 - Dividends
Dennis Swing Greene is an International Tax Specialist and Chairman of euroFINESCO s.a.
