Israel-Portugal Tax Treaty

Business activity in Portugal

For nearly three decades, Portugal’s economy was immersed in a deep crisis of budget deficits, external debt, and high unemployment rates, which almost led the country to bankruptcy. The last few years have seen a radical change of direction for the Portuguese economy; this can be attributed to encouraging immigration, attracting foreign investors, and increasing tourism quotas. All of these became major growth engines in the Portuguese economy, which until then had been based primarily on their obsolete industrial and agricultural activities. Today, the Portuguese GDP has been growing steadily yearly; the credit rating has risen, and the real estate market is booming due to increased tourism. 

Bilateral agreements between Portugal and Israel

• Convention for the Prevention of Double Taxation

Convention on the Prevention of Double Taxation between Israel –Portugal

The agreement between the Governments of Israel and Portugal regarding the avoidance of double taxation was signed in 2008 and entered into force on later that year.

To read the agreement in English click here.

Applicability of the MLI

Portugal and Israel have signed the MLI, which means that there is an automatic exchange of information between the two countries. Portugal and Israel signed the MLI in 2017. Israel ratified it in 2019, and Portugal in 2020. This means that the treaty between Israel and Portugal changed automatically according to the content of the MLI treaty, subject to the reservations set by both countries.

Residency for tax purposes in Portugal

Residence of an individual

The Portuguese tax law that took effect in January 2015 set the guidelines for an individual to be considered a resident if they meet one of the following conditions:

• In Portugal, more than 183 days within a 12-month period starting or ending in the fiscal year concerned.
• Outside of spending 183 days, maintaining a residence in Portugal during any day of the period referred to above.

To learn about how an individual is considered a resident of Israel read here.

Residency of a company

Under Portuguese tax law, a fixed place of business used by an enterprise to conduct its activities in Portugal is considered a Permanent Establishment (PE). This encompasses various locations like offices, branches, factories, workshops, mines, quarries, and construction sites that last for more than six months. Certain activities now qualify as a PE, including business services performed by the enterprise’s staff or subcontractors in Portugal for over 183 days within a 12-month period. Additionally, installations, platforms, or ships used for the prospective or exploitation of natural resources are considered a PE if the activity extends beyond 90 days. A PE can also be established if a dependent agent in Portugal acts on behalf of the enterprise, concluding contracts, providing services, or maintaining a stock of goods for delivery.

However, there are exceptions to the definition of a PE in Portugal. Facilities used solely for the storage, display, or delivery of goods, as well as maintaining a stock of goods exclusively for storage, display, or delivery, are not considered a PE.

To learn about how a company is considered a resident of Israel, read here.

The tax system in Portugal

The Portugal Tax Authority is called Portal das Finanças

Income taxation: For Residents the tax ranges from 14% to 35%, Non-residents are taxed at a flat rate of 25%.

Taxation of companies and branches: 21%

VAT: standard rate of 23%, with lower rates for s various goods and services.

Capital gains tax: 28%

Withholding Tax

Inheritance tax and estate tax in Portugal

Under Portuguese inheritance law, the home country of the deceased governs the inheritance process unless stated otherwise in a will. Forced heirship rules in Portugal guarantee a minimum share of 50% or 60% for multiple recipients. Portugal does not have an inheritance tax, but a 10% stamp tax applies to estates and gifts, exempting legitimate heirs. Non-Portuguese heirs may face additional taxes and fees for property transfer. Estate valuation considers assets, expenses, and debts, with tax exemptions for certain items. A person’s pension can be passed on to his decedents that were dependents of the deceased. The probate process must be completed within three months, with penalties for late payment.

Relocation

Portugal provides a range of employment opportunities for immigrants, with sectors such as tourism, technology, finance, and renewable energy experiencing significant growth. The country has been actively attracting foreign investments and fostering entrepreneurship, creating a favorable environment for job seekers and business ventures. The labor market in Portugal is evolving, offering diverse positions for skilled professionals, including engineers, IT specialists, researchers, and language experts. Moreover, the government has implemented initiatives to support startups and innovation, making it an appealing destination for entrepreneurs and creative minds. With a relatively low cost of living compared to other European countries, Portugal offers a favorable work-life balance and a vibrant cultural scene, making it an enticing choice for individuals seeking career opportunities and a high quality of life.

Real estate taxation in Portugal

The real estate tax in Portugal, known as IMI (Imposto Municipal sobre Imóveis), varies based on property location and type. Urban real estate is taxed at a rate ranging from 0.3% to 0.45%, while rural real estate is taxed at 0.8%.

Additional increases in the IMI rate apply to certain properties, such as vacant urban properties, degraded buildings, and properties used for local lodging. Municipalities have the authority to increase the IMI rate up to 100% for local lodging and up to 25% for residential buildings not rented or used as the taxpayer’s permanent abode.

Furthermore, the IMI rate can be increased for urban properties vacant for over a year, buildings in ruins, and residential land in designated urban pressure areas, with potential annual increases up to 12 times the applicable rate.

Transfer of funds from Israel to Portugal

According to section 170(a) of the Israeli income tax ordinance, any transfer of payment to a non-Israeli resident is subject to 25% of withholding tax. The tax authority can allow, under certain circumstances, to reduces or dismiss the withholding tax. Our firm handles withholding tax matters with the Israeli Tax Authority.

Due to the fact that both countries have a tax treaty with each other, one can submit a declaration form (2513/2 form – Statement regarding a payment to a foreign resident that is exempt from withholding tax), and under certain circumstances, there is a possibility to transfer the payment without the withholding tax and the approval of the Tax Authority.

In providing advice regarding the transfer of money abroad, in addition to the issue of withholding tax, our office handles the requirements of the foreign banks, such as an accountant’s approval regarding the payment of taxes and examines additional actions required in light of the uniform standard of CRS between the countries – automatic exchange of information between countries which is carried out first through the banks and then between the tax authorities of each two countries.

The banks raise many difficulties and charge high fees for converting shekels into other currencies, so it is important to consult before transferring the funds – Contact us.

For more information on money transfers abroad, click here.

Types of business entities in Portugal

Portuguese business entities are as follows:

1. Individual Entrepreneur (IE) – A single natural person holds the individual entrepreneur, and the designated or commercial name, which can be the full or abbreviated civil name, may or may not include an expression related to the business or the intended representation of the company in the business environment.

2. Individual Limited Liability Establishment (EIRL) – The company was created with a legal status of EIRL, similar to IE, but the entrepreneur’s assets are separate from the business entity.

3. Sole Proprietorship by Shares – Single shareholder of all, the amount of share capital is freely fixed in the articles of association, corresponding to the sum of the shares subscribed by the shareholders.

4. General Partnership – All partners are liable for the debts incurred.

5. Private Limited Company – More than one shareholder; the amount of corporate capital is freely established in the articles of association.

6. Limited Partnership – Two types of partners limited partners and general partners. Limited partners have limited liability, while general partners have unlimited liability.

7. Cooperative – Cooperatives are autonomous, non-profit entities with variable capital and composition, serving the needs and aspirations of their members with specific characteristics.

8. Association – An association is a non-profit organization formed by individuals with shared objectives, operating without a profit motive while allowing members the option to establish for-profit companies.

Incentive laws in Portugal

Non-Habitual Residence (NHR) refers to the process of establishing tax residency in Portugal, which give individuals to enjoy a reduced tax rate on income and capital gains for ten years. Benefits include:

• No wealth taxes.
• Free remittance of funds to Portugal
• Exemption on all foreign income
• 20% flat rate on some Portuguese income
• Tax exemption on gifts for family members
• No minimum stay requirement
• 10% flat tax rate on foreign-sourced pension income

To qualify for NHR, you must fall both of the following:

• Have the right to reside in Portugal either by being an EU/EEA/Swiss citizen or through opportunities such as the Golden Visa program.
• Not have been a Portuguese tax resident in the five years before residence in Portugal.

To remain in the NHR program, you must have a place of occupancy in Portugal on 31 December of that year. This home must be available in a way that proves an intention to keep and occupy it as a habitual home. With a minimum occupancy of 183 days per year, this home is considered a habitual residence. This residence may also be a rental property with a rental contract for 12 months.

Tax Updates 2024

The year 2024 has introduced several significant tax updates that affect a wide range of stakeholders, from individual workers to businesses across Portugal. Firstly, there has been an adjustment to the Guaranteed Minimum Monthly Wage, which is now set at €820 for mainland Portugal, €850 for Madeira, and €861 for the Azores, with these changes being retroactively effective from January 1, 2024. Additionally, there’s an update regarding municipal surcharge rates on IRC taxable income earned in the 2023 tax period, which are to be collected in 2024. Noteably, 212 out of 308 municipalities have opted to impose these surcharges, which can reach up to 1.5 percent on top of the standard corporate income tax rates. Interestingly, in Madeira, most companies will benefit from a total exemption from this surcharge, except those in the municipalities of Santa Cruz and Porto Santo.

On the personal taxation front, the Personal Income Tax (IRS) rates for 2024 in mainland Portugal have been published, while the rates for Madeira and the Azores are yet to be confirmed, meaning the 2023 rates will continue to apply temporarily in these regions. Moreover, there’s an adjustment for taxpayers under the simplified accounting system, with the turnover threshold for VAT exemption now increased to €14,500 from the previous €13,500. This adjustment similarly applies to the exemption from IRS withholding tax, providing a slight relief for small taxpayers. These updates reflect the government’s ongoing efforts to adapt the tax system to the economic and social realities of the country.

Portugal Double Tax Treaties: