Need to understand tax in Portugal? This guide breaks down income tax, social security, and recent Portuguese State Budget 2025 changes for expats. Learn how to manage your finances efficiently.
Key takeaways
Understanding tax in Portugal
Taxes in Portugal are multifaceted, encompassing various types such as income tax, social security contributions, corporate tax, and value-added tax (VAT). The tax year in Portugal begins on 1 January and ends on 31 December. It is in line with the calendar year. This means that all taxpayers, including expats, must align their financial planning accordingly.
The Tax and Customs Authority is responsible for managing the tax system. It ensures both compliance and the collection of taxes. For expats, understanding the tax system in Portugal is not just about knowing the rates but also about recognising the various deductions, credits, and schemes available, such as the NHR scheme.
Moreover, Portugal has established key double taxation agreements (DTAs) with several countries, to facilitate international tax compliance. These agreements are designed to prevent double taxation on the same income, providing a smoother financial transition for those moving to Portugal.
The key changes in 2025
Personal income tax
Non-Habitual Resident (NHR) Scheme
The Non-Habitual Resident (NHR) regime, introduced in 2009, provides specific tax benefits to eligible foreign residents in Portugal. Starting in 2024, the NHR scheme has been significantly narrowed, limiting its applicability to only select cases. Foreign pension income from countries with a Double Taxation Agreement (DTA) is tax-exempt for NHR beneficiaries. Income from blacklisted tax havens is taxed at a rate of 28% or 35%, while income from other countries is typically tax-exempt.
The NHR scheme attracts professionals in specific areas by allowing a flat tax rate of 20% on self-employment and employment income; derived from a high-value activity. Individuals who have not been taxed as residents in the past five years and register as residents in Portugal qualify.
Eligibility for the NHR scheme is open to individuals with residency rights through programs like the Golden Visa Program. Once granted, expatriates benefit from the NHR program’s tax treatment in Portugal for the first ten years.
Is the NHR returning?
The old NHR scheme is not making a comeback. However, individuals can explore the new NHR 2.0, which focuses on a more specific application process tailored to high-skilled workers. For those who don’t qualify or are looking for alternatives, there are other options to consider. Cyprus, for instance, offers attractive tax schemes worth exploring. Alternatively, Portugal still remains an option, though it’s important to understand the tax implications without the NHR.
Reach out to us for personalised guidance or request a detailed report on your tax situation. You can also browse through our articles for further insights into these opportunities.
Minimum wage
The minimum wage in Portugal will increase by 50€ in 2025, making a total of 870€ per month. it’s the aim of the Government that this wage is 1020€ in 2028!
Meal allowance
For 2025, the tax-free portion of the meal allowance provided through vouchers is increased to €10.20 per day. Only the amount exceeding 70% of the legally established limit (currently €6) will now be taxed as employment income, replacing the previous 60% threshold.
Specific deduction – Category A and Category H
The specific deduction for employment and pension income is increased to 8.54 times the IAS value. Based on the previous IAS, this change will raise the deduction to €4,349.08, offering additional tax relief for workers and retirees alike.
Subsistence level
The reference value of the subsistence level will be updated in line with the increase in Portugal’s monthly national minimum wage. This adjustment aims to align tax policies with rising cost-of-living expenses.
Autonomous taxation rates
The acquisition cost limits for passenger or mixed vehicles subject to autonomous taxation are increased from €20,000 to €30,000. This applies to business and professional activities requiring organised accounts, giving taxpayers more flexibility when purchasing vehicles for work purposes.
Withholding taxes for self-employed workers
The withholding tax rate for self-employed professionals listed under Article 151 of the PIT Code is dropped from 25% to 23%. This reduction aims to lessen the tax burden on independent workers.
Payments on account
Taxpayers earning income under Category B will see a reduction in payments on account. The amount will decrease to 65% of the current formula’s result, down from 76.5%, providing some financial relief throughout the year.
Withholding taxes on overtime work
For non-resident taxpayers, the tax exemption for overtime income will apply to up to 100 hours, doubling the previous limit of 50 hours.
For resident taxpayers, overtime pay will now be subject to 50% of the autonomous withholding tax rate from the very first hour of overtime, replacing the previous threshold of 101 hours.
Corporate income tax
Corporate income tax is a vital aspect for businesses operating in Portugal. Starting in 2025, the general corporate tax rate will decrease from 21% to 20%, creating a more competitive landscape for companies. Small and medium-sized enterprises (SMEs) will also see benefits, with their corporate tax rate on the first €50,000 of taxable income dropping from 17% to 16%. This reduction offers notable savings, fostering entrepreneurship and promoting business growth.
Portugal further supports businesses with various tax incentives aimed at encouraging investment and innovation. A solid understanding of these tax obligations and opportunities is essential for effective financial planning and compliance.
Autonomous taxation updates
Changes are occurring for autonomous taxation, specifically on expenses related to passenger cars, certain light commercial vehicles, motorcycles, or motorbikes. Additionally, expenses incurred for events or shows provided to clients, suppliers, or other parties will no longer be classified as representation expenses, exempting them from autonomous taxation.
For the 2025 tax year, the additional 10-percentage-point increase in autonomous taxation will not apply if:
Health insurance tax benefits
Expenses related to health insurance for employees, retirees, or their families, if recognised as a social benefit under corporate tax rules, will be deductible at 120% of their value. This adjustment offers businesses additional financial incentives for supporting employee well-being.
These changes to Portugal’s corporate tax framework not only reduce tax burdens but also aim to stimulate growth, encourage compliance, and reward investments in employees and innovation. Businesses should review these updates closely to take full advantage of the opportunities they present.
Indirect taxes
Value added tax (VAT)
Exemptions
The transfer of the following items is now exempt from VAT until 31 December 2025:
These exemptions include the right to VAT deduction, ensuring greater support for agricultural and animal welfare activities.
Housing construction or rehabilitation
The VAT Code has been amended to update item 2.18 of List I, allowing for a reduced VAT rate on the construction and rehabilitation of housing properties. These construction services are now defined based on criteria set by the Government officials responsible for finance and housing. However, services related to properties exceeding the value limit consistent with the Government’s social housing policies are excluded from this benefit.
VAT refund
Entities managing forest fire brigades, as part of the Integrated Rural Fire Management System (“Sistema de GestĂŁo Integrada de Fogos Rurais”), can now claim a refund equivalent to the VAT paid on goods and services when they are unable to exercise the right to deduction. This measure provides critical financial support for organisations working to prevent and manage rural fires.
VAT rates
The VAT rate will be reduced from 23% to 6% on baby’s food and electricity, on the initial 200 to 300 kWh consumed monthly.
Tax benefits
Incentives for wage increases
The tax incentive for wage increases (“Incentivo fiscal Ă valorização salarial”) now applies when the average annual base salary per worker increases by at least 4.7% (previously 5%). The application of this regime is no longer dependent on maintaining the same salary range. Instead, companies must show an average increase of at least 4.7% in the annual base salary for workers earning up to the company’s average annual base salary. Salary increase costs are now increased by 200% (previously 150%), up to a maximum annual amount per worker of five times the National Minimum Monthly Wage (previously four times). As a result, the maximum deduction to taxable profit per worker has increased to €4,350 (previously €1,640).
Capitalisation of companies
The Incentive for the Capitalisation of Companies (ICE) is now calculated by applying the average 12-month Euribor rate plus a spread of 2 percentage points (previously 1.5%), regardless of the company’s size. Starting in the 2025 tax year, the incentive rate increases by 50% (up from the previously planned 30%).
Personal income tax & social security
Productivity bonuses, performance bonuses, profit sharing, and balance sheet bonuses, when paid voluntarily and irregularly in 2025, are now exempt from PIT and excluded from Social Security contributions, up to a limit of 6% of the annual base salary. This exemption only applies if the employer has met the conditions for the tax incentive for wage increases. Employers must explicitly state in the worker’s annual income statement that the regime’s conditions have been met. These amounts are subject to the withholding tax rate applied to the monthly salary in the month the payment is made.
Company Recapitalisation
The PIT incentive for individual investment in company recapitalisation has been strengthened. Individuals can now deduct 20% of capital contributions made in cash from the gross amount of profits distributed by the company or, in the case of a sale, from the balance of realised capital gains and losses. This deduction is no longer limited by specific requirements related to the company’s economic situation and now applies to most companies. However, it does not apply to contributions made to entities supervised by the Bank of Portugal, the Portuguese Insurance and Pension Funds Supervisory Authority, or branches of credit institutions, financial institutions, or insurance companies in Portugal.
Extension of tax benefits
The following tax benefits under the Tax Benefits Code (EBF) have been extended until 31 December 2025:
Additionally, the extraordinary support regime for agricultural production costs (Article 240 of Law 82/2023, of 29 December) has also been extended until 31 December 2025.
Other taxes & levies
Stamp tax
The Stamp Tax Code now ensures seamless data transmission between the Institute of Registries and Notaries, the Treasury and Public Debt Management Agency, and the Tax Authority. This includes details on the death of public debt securities and certificate holders to guarantee compliance with tax obligations.
Housing credit exemptions
The exemption for housing credits, up to the amount of the outstanding capital, has been extended until 31 December 2025. This applies to:
New housing credit contracts for debt refinancing, which now include exemptions on associated guarantees, as well as guarantees tied to changes in the credit institution or subrogation in the rights and guarantees of the mortgage creditor.
Temporary instalment fixation
The tax exemption under item 17.1 of the general table (granting of credit) has been extended until 31 December 2025. This applies to temporary instalment fixation and capitalisation of deferred amounts within loans for primary and permanent residences.
Real estate
The brackets used to determine the IMT rate for transferring residential urban properties have been updated by 2.3%. As a result, IMT is now only applied to the acquisition of urban properties or building units intended exclusively for permanent residential use if the taxable basis exceeds €104,261 (previously €101,917).
Summary
Navigating the Portuguese tax system can be complex, especially with the changes introduced from the 2025 budget. Whether you’re an expat managing your finances or a business operating in Portugal, staying informed is vital to maximising tax benefits and reducing liabilities.
We specialise in providing tailored advice on cross-border tax planning. Following the state budget updates, our team is here to help you explore the best ways to structure your taxes in Portugal while taking full advantage of available incentives, including the benefits of double taxation treaties. These agreements are designed to prevent double taxation, ensuring a smoother financial experience for those with global income streams.
Other countries
Beyond Portugal, we can assist clients in navigating the tax systems of other favorable jurisdictions. For example, in Cyprus, the non-domiciled tax regime offers significant benefits for expats, including exemptions on dividend and interest income. Additionally, the corporate tax rate in Cyprus is one of the lowest in Europe at just 12.5%, and this can drop to as low as 2.5% through the use of an Intellectual Property (IP) box, making it a prime location.
If you’re looking beyond the EU, the UAE is another excellent option. With no personal income tax and corporate tax rates set at 0% until 2026 for most businesses, it offers an appealing environment for individuals and companies seeking a tax-efficient structure. The region’s robust infrastructure and business-friendly policies make it a standout choice for global entrepreneurs.
