Relocation from Israel to Portugal

In recent years, Portugal has become an increasingly attractive destination for Israelis considering relocation. This is due to the relatively low cost of living, high standard of living, growing Israeli and Jewish community, a variety of employment options, a high-level public healthcare system, and more.

However, relocation from Israel to Portugal requires thorough planning and a comprehensive understanding of the legal, financial, and tax implications associated with the move. This article outlines the key considerations to address before making the move.  

What Does the Relocation Process to Portugal Involve?  

The relocation process consists of several essential steps.

First, a thorough review of employment opportunities in Portugal, the cost of living (which varies between cities like Lisbon and Porto), the local tax system, educational options for children, available healthcare services, and other important factors.  

Second, consider whether you wish to terminate your Israeli tax residency and the numerous implications that come with it. It is important to plan how you will manage your finances and assets, as well as arrange for private health insurance. In Portugal, public healthcare services are only available to residents and citizens of the European Union or foreigners from countries that have reciprocal healthcare agreements with Portugal.  

Simultaneously, you must arrange your legal status in Portugal– obtaining the work permit, residency, citizenship, or visa.  

In this regard, one of the main challenges in relocating to Portugal is obtaining the appropriate residence visa. Each visa type has different requirements, such as age, education, income, minimum investment, employment contract, health insurance, and more. It is essential to select the visa that best suits your circumstances and to arrange it in advance.  

It should be noted that Portugal has eliminated the eligibility for residency (“golden visa”) through the purchase of real estate worth €500,000, a significant change for investors who are also interested in immigration benefits. Such legislative changes emphasize the need to stay up to date on regulatory changes, as they may dramatically affect the feasibility of the move. 

Tax Aspects of Relocation to Portugal 

Whenever moving to a foreign country, the question arises whether you will still have tax obligations in Israel after the move. The answer usually depends on whether you have terminated your Israeli tax residency.  

Termination of Tax Residency  

One of the main issues in the relocation process is determining your residency for tax purposes. In Israel, Israeli residents are taxed on their worldwide income, while non-residents are taxed only on income sourced in Israel. Residency status is determined according to your “center of life,” which is examined using both qualitative and quantitative tests.  

If you intend to settle in Portugal for the long term, it may be preferable to sever your residency from Israel (for both income tax and National Insurance). Note that Israelis who sever their residency are required to pay an “exit tax” on certain assets.  

According to Section 1 of the Israeli Income Tax Ordinance, residency is determined based on the center of life test, and a rebuttable presumption based on the number of days you stayed in Israel, as follows:  

• The center of life test – this is a substantive test, in which all personal, family, economic, and social ties are examined. These include a permanent place of residence, a place of economic activity, a location of economic interests, and more. 
• Days test –an individual is considered an Israeli resident if they spent 183 days or more in Israel in a single tax year, or if they spent 30 days or more in the current tax year and a total of 425 days or more in Israel during the current tax year and the two preceding years. This presumption can be rebutted if the individual proves that, despite their stay in Israel, their center of life is not in Israel. 

Anyone who meets the days test, i.e., is considered an Israeli resident under this test, must file Form 1348 – “Declaration of Residency” – with the Israel Tax Authority (ITA) to declare the termination of Israeli tax residency and detail the circumstances supporting that their center of life is not in Israel.  

It is important to note that terminating tax residency is usually not a one-time event but an ongoing process, and the ITA may review your residency status even years after leaving. Therefore, it is recommended to keep detailed documentation of all actions indicating the transfer of your center of life to Portugal, and to avoid creating new ties to Israel.  

These days, a dramatic bill to amend the Income Tax Ordinance regarding the definition of Israeli residency for tax purposes has been submitted to the Knesset.  

According to the proposal, there will be absolute presumptions (which cannot be rebutted) based on the number of days that define an individual as an Israeli resident, and the “center of life” test will serve only as a secondary tool in cases not covered by these presumptions.  

As a result, there may be situations where an individual who has terminated their residency in Israel will still be considered an Israeli resident for tax purposes in future years, since, in many cases, the number of days they spent in Israel will be sufficient.  

A link to the draft bill can be found here – click here.  

Double Taxation Treaty between Israel and Portugal

Israel and Portugal have a double taxation treaty. This treaty is intended, among other things, to prevent a situation where a person pays double tax on the same income. The treaty regulates issues such as determining residency in cases of dual residency, withholding tax rates on passive income (dividends, interest, royalties), and taxation of employment income.  

Under the treaty, employment income earned by an Israeli resident who works in Portugal is generally subject to tax in Portugal, provided the work is physically performed there. However, if the employee is present in Portugal for less than 183 days in a 12-month period and certain additional conditions are met, Israel may retain the right to tax that income. Each case should be assessed based on its specific circumstances. 

In addition, the treaty also addresses dual residency. In cases where an individual is considered a resident for tax purposes in both countries, the treaty offers equalization rules for determining residency, as follows: 

1. The individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; if a permanent home is available in both States, that individual shall be deemed to be a resident only of the State with which the individual’s personal and economic relations are closer (centre of vital interests);
2. If the State in which the centre of vital interests is situated cannot be determined, or if a permanent home is not available to the individual in either State, the individual shall be deemed to be a resident only of the State in which that individual has a habitual abode;
3. If the individual has a habitual abode in both States or in neither of them, the individual shall be deemed to be a resident only of the State of which the individual is a national;
4. If the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.

To read the Double Taxation Treaty between Israel and Portugal in English – click here.  

Exit Tax 

Israelis leaving Israel may be required to pay an “exit tax” on certain assets. This tax is intended to capture the latent gain in assets held by Israeli residents.  

According to Section 100A of the Income Tax Ordinance, an individual who ceases to be an Israeli resident is deemed to have sold their assets. This deemed sale occurs on the day before terminating the tax residency (“Exit Day”). The tax is calculated on the notional gain between the original purchase price and the value on the exit day.  

Exit tax applies to certain assets when an individual ceases to be an Israeli tax resident. This tax is levied on unrealized capital gains of various qualifying assets at the time of departure, though some assets like Israeli real estate may be exempt as they remain taxable in Israel regardless of residency status.  

There are various methods for calculating and paying exit tax liability, each with different implications for the taxpayer. The timing and structure of these payments can significantly impact the overall tax burden. It is highly recommended to consult with an international tax expert before departing Israel to develop a tax strategy that best aligns with your specific circumstances and financial goals. 

How Will Terminating Tax Residency Affect Taxation of Income? 

If the move to Portugal is temporary, you remain an Israeli resident for tax purposes and cannot terminate tax residency. This means you are liable for Israeli tax on your worldwide income and must report all income, including income from Portugal, to the Israeli tax authorities.  

If tax residency is not terminated, it is often possible to claim a tax credit for taxes paid in Portugal.  

If the move to Portugal is permanent and you have terminated your Israeli tax residency, you will only be liable for Israeli tax on income sourced in Israel, while all other income will be subject to tax in Portugal. 

For more information on the termination of residency, click here.  

Tax System in Portugal

In Portugal, an individual is considered a tax resident if they have stayed in Portugal for 183 days or if the individual has a residence in Portugal with the intention to use it as their main residence.

Individuals who are residents of Portugal are subject to personal income tax on their worldwide income, including capital gains.

Portugal has a progressive personal income tax system.  

The tax brackets in Portugal for taxable income of a Portuguese resident are: 

• Up to €8,059 – 12.5%.
• €8,059 – €12,160 – 16%.
•  €12,160 – €17,233 – 21.5%.
• €17,233 – €23,306 – 24.4%.
• €23,306 – €28,400 – 31.4%.
• €28,400 – €41,629 – 34.9%.
• €41,629 – €44,987 – 43.1%.
• €44,987 – €83,696 – 44.6%.
• Above €83,696 – 48%.

Additionally, there is a solidarity surcharge applied to higher income levels. This surcharge is 2.5 percent on income above €80,000 but not more than €250,000, and 5 percent on income above €250,000. 

Capital gains taxation in Portugal is considered as regular income (according to tax brackets), however, there is an exemption on 50% of the capital gain when disposing of an asset.

The tax rate on capital gains from the sale of shares and other securities is 28% (a 50% exemption may be granted in certain cases), but individuals can (and in certain circumstances, are required to) be taxed on their income at progressive tax rates together with their other income considered as regular income.

For individuals who are not residents of Portugal, their income is subject to marginal tax rates, however, gains from the sale of shares, quotas, securities, bonds, or units in investment funds are subject to a tax rate of 28%.

Additionally, according to the new NHR regime in Portugal (NHR 2.0), individuals who relocate to Portugal may be eligible for significant tax benefits, including a fixed tax rate of 20% on employment income and exemption from taxes on income generated outside of Portugal, including income, interest, royalties, and capital gains. 

The corporate tax rate in Portugal is 20%. However, there are special reduced rates for small and medium-sized businesses and startups, which can be as low as 12.5% for those who meet the criteria. 

Portugal has no inheritance or estate tax, allowing for the transfer of assets between generations without tax liability. However, it’s important to note that transfers without consideration (such as those received through inheritance) may be subject to stamp duty at a rate of 10% if no exemption applies. There are transfers exempt from stamp duty, such as transfers between spouses and descendants. 

National Insurance  

An Israeli resident staying abroad is required to pay National Insurance (Bituach Leumi) contributions, but if tax residency is terminated, there is no obligation to pay National Insurance,  but also no entitlement to health services and social rights in Israel. 

Between Israel and Portugal, there is no social security agreement. In the absence of such an agreement, you may be subject to social security liability in both jurisdictions,  so if you intend to immigrate to Portugal, recommended to terminate your residency in Israel with regard to national insurance. 

Public health insurance is available to legal residents and citizens of Portugal. However, if you are not a legal resident, you will have to get a private health care plan  

Transferring Funds from Israel to Portugal

You should review the various options for transferring funds abroad – bank transfers, international credit cards, etc. Each option has its advantages and disadvantages in terms of fees, transfer times, exchange rates, amount limits, and regulations. Pay attention to reporting requirements for authorities and banks, following anti-money laundering laws and international regulations (FATCA, CRS). It is also advisable to open a bank account in Portugal in advance.

According to Section 170(a) of the Ordinance, when making a payment from Israel to a foreign resident that constitutes taxable income, withholding tax applies.

According to Section 170(a) of the Ordinance, when making a payment from Israel to a foreign resident that constitutes taxable income, withholding tax applies. There are several exceptions to this obligation for which there is no need to apply to the Tax Authority for an exemption from withholding tax.

In addition, there are additional requirements regarding the transfer of money abroad, such as an accountant’s certification regarding tax payments or the source of funds, and more.

For more information, see the article “Transferring Funds from Israel Abroad.”  

Opening a Bank Account in Portugal

Opening a bank account in Portugal is possible for foreigners, but the process requires a valid passport, proof of address in the country, proof of income, a NIF (Portuguese tax number), and sometimes additional documents.  

Returning to Israel  

Upon returning to Israel, you should consider the various implications. If you have terminated your tax residency, you may be entitled to benefits as a regular or veteran returning resident (depending on the length of your stay abroad), including tax exemptions on income and capital accumulated abroad.  

You should also consider the waiting period (up to 6 months) for the renewal of  National Insurance rights and possible benefits from the Ministry of Aliyah and Integration.  

In short, relocation to Portugal offers many opportunities, but it is a complex process that requires professional planning, personal guidance, and a thorough understanding of all legal and tax aspects. It is recommended to consult with international tax experts to ensure early and comprehensive planning for a smooth and successful transition to your new life in Portugal.  

Nimrod Yaron & Co. specializes in terminating tax residency and providing comprehensive advice for relocation to foreign countries, including Portugal. Our team of experts will assist you in optimal tax planning and residency. For an initial consultation, click here.  

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