# US-Portugal Tax Treaty



## Brazitalian

Hello everyone, I apologize in advance if this is a dumb question, but I just can't grasp this...Of course, when tax time comes, we will hire a tax accountant for our Portuguese taxes but in the meantime perhaps I can get some understanding for my own peace of mind...

Tax Treaty - Article 20 - Pensions
*1. Subject to the provisions of Article 21 (Government Service):
(a) pensions and other similar remuneration derived and beneficially owned by a
resident of a Contracting State in consideration of past employment shall be taxable only in that State; and*
So if one worked only in the US, the pension derived from the US from past employment but the person is a resident of Portugal, who gets to tax it under the tax treaty?

*(b) social security benefits and other public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States may be taxed in the first-mentioned State.*
So I heard that SS is taxed in Portugal as well but not Public pensions.

This I would assume considering that one is NOT a non-habitual resident.

Then to complicate matters in my head when one becomes a non-habitual resident, Article 81 of the Portuguese Tax Code says

5 – To non-habitual residents in Portuguese territory who obtain income from abroad in Category H, to the extent that it, where it arise from contributions, did not benefit from a deduction for the purposes of Article 25 (2), the exemption method shall apply, provided that either:
*a) it is taxed in the other Contracting State in accordance with an agreement to eliminate double taxation concluded by Portugal with that State*, or
b) the income, in accordance with the criteria set out in Article 18 is not considered to be obtained in Portuguese territory.

Question is, if one still will pay taxes in the US, what's the point of the non-habitual status other than not to pay taxes here in Portugal? Seems like it is not totally tax free income. Am I just out of my wits with this? We applied for NHR in early January but don't know if will get approved before we have to file our first Portuguese Tax, just trying to figure out how much money we may be giving to all these tax people.

Thanks for your understanding and patience,
Sandra


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## Bevdeforges

Oh, you're going to make yourself crazy trying to actually read that gobbledy **** legal speak!

Simplest thing to do is to check the IRS publication on US Social Security benefits. That outlines the few countries where there is an exception to the general rule that the US gets first dibs on taxing US Social Security benefits.

In very general terms, for public pensions (i.e. US Social Security and other government pensions), the issuing state is the one that taxes them. Private pensions (if you're lucky enough to be getting a private pension from your former employer in the States) can vary, depending on what the laws are in Portugal. (And I admit to knowing little or nothing of Portuguese tax law.)

Can't help you with the non-habitual resident question, as I'm not familiar with the status. But you might want to post your question over in the Expat Tax section to see if anyone there has any experience. Expat Tax - Expat Forum For People Moving Overseas And Living Abroad
Cheers,
Bev


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## grammymissy

We are going thru this now, applied for NHR tax status, 10 years tax free when approved. Our understanding is private pensions and social security is taxable, unless receiving for government work. If we had worked for the US, then tax free, if age related social security and private pension, then taxable. File taxes in USA and Portugal. Pay US if needed. With NHR, then NHR is applied, and no tax bill for 10 years, in Portugal. Of course dividends, interest and other incomes have different rules under NHR is what we understand. In Portugal, tax form is filed, bill is then issued, if one, thru the mail. Even if no tax due, form needs filing. Our understanding, proof of filing will be needed in future when renewing residency. Best advice is find a tax accountant in Portugal, and set up a meeting , for peace of mind. NHR is applied for after residency established, 180 plus days.


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## grammymissy

Also, should note, even when NHR expires, credit will be given for taxes paid to USA, on Portugal tax return, so no income is double taxed. However if tax rate is higher in Portugal than USA, then difference must be paid to Portugal.


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## Brazitalian

Thanks Bev! I am crazy already, lol...The problem is I am an overthinker. Not trying to run away from the taxes, just don't want to pay too much or underpay Will definitely look into the IRS Publications, check and perhaps post over in the Tax Forum, didn't know one existed...I just want to be ahead of the game and know a bit when time comes to file our taxes.
Best regards,
Sandra


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## Brazitalian

grammymissy said:


> Also, should note, even when NHR expires, credit will be given for taxes paid to USA, on Portugal tax return, so no income is double taxed. However if tax rate is higher in Portugal than USA, then difference must be paid to Portugal.


Thanks Grammymissy, we better get this NHR soon before we have to file here and pay


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## SeriousVoyager

Hi did you ever get to the bottom over who withholds tax on IRA/Pension? I've tried to understand Articles 20 and 21 of Treaty but failed!
I understand it maybe a moot point for a US Citizen or Green Card holder but it could be more significant for a Non Resident Alien.


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## SeriousVoyager

Brazitalian said:


> Hello everyone, I apologize in advance if this is a dumb question, but I just can't grasp this...Of course, when tax time comes, we will hire a tax accountant for our Portuguese taxes but in the meantime perhaps I can get some understanding for my own peace of mind...
> 
> 
> 
> Tax Treaty - Article 20 - Pensions
> 
> *1. Subject to the provisions of Article 21 (Government Service):
> 
> (a) pensions and other similar remuneration derived and beneficially owned by a
> 
> resident of a Contracting State in consideration of past employment shall be taxable only in that State; and*
> 
> So if one worked only in the US, the pension derived from the US from past employment but the person is a resident of Portugal, who gets to tax it under the tax treaty?
> 
> 
> 
> *(b) social security benefits and other public pensions paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States may be taxed in the first-mentioned State.*
> 
> So I heard that SS is taxed in Portugal as well but not Public pensions.
> 
> 
> 
> This I would assume considering that one is NOT a non-habitual resident.
> 
> 
> 
> Then to complicate matters in my head when one becomes a non-habitual resident, Article 81 of the Portuguese Tax Code says
> 
> 
> 
> 5 – To non-habitual residents in Portuguese territory who obtain income from abroad in Category H, to the extent that it, where it arise from contributions, did not benefit from a deduction for the purposes of Article 25 (2), the exemption method shall apply, provided that either:
> 
> *a) it is taxed in the other Contracting State in accordance with an agreement to eliminate double taxation concluded by Portugal with that State*, or
> 
> b) the income, in accordance with the criteria set out in Article 18 is not considered to be obtained in Portuguese territory.
> 
> 
> 
> Question is, if one still will pay taxes in the US, what's the point of the non-habitual status other than not to pay taxes here in Portugal? Seems like it is not totally tax free income. Am I just out of my wits with this? We applied for NHR in early January but don't know if will get approved before we have to file our first Portuguese Tax, just trying to figure out how much money we may be giving to all these tax people.
> 
> 
> 
> Thanks for your understanding and patience,
> 
> Sandra



Hi Brazitalian, did you ever get to the bottom over who withholds what tax on IRA/Pension? I've tried to understand Articles 20 and 21 of Treaty but failed!
I understand it maybe a moot point for a US Citizen or Green Card holder but it could be more significant for a Non Resident Alien.


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## SeriousVoyager

grammymissy said:


> We are going thru this now, applied for NHR tax status, 10 years tax free when approved. Our understanding is private pensions and social security is taxable, unless receiving for government work. If we had worked for the US, then tax free, if age related social security and private pension, then taxable. File taxes in USA and Portugal. Pay US if needed. With NHR, then NHR is applied, and no tax bill for 10 years, in Portugal. Of course dividends, interest and other incomes have different rules under NHR is what we understand. In Portugal, tax form is filed, bill is then issued, if one, thru the mail. Even if no tax due, form needs filing. Our understanding, proof of filing will be needed in future when renewing residency. Best advice is find a tax accountant in Portugal, and set up a meeting , for peace of mind. NHR is applied for after residency established, 180 plus days.




Hi Grammmissy,

Did you ever get to the bottom over who withholds tax on IRA/Pension? And who was able to verify your info?
I've tried to understand Articles 20 and 21 of Treaty but failed!
I understand it maybe a moot point for a US Citizen or Green Card holder but it could be more significant for a Non Resident Alien.


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## grammymissy

Yes, taxes processed for last year. We have a pension that is taxed by the US. Since it is not from a US government job, it is taxable by Portugal, however since we applied for NHR status we should be tax free for 10 years for it, then taxable by Portugal. We have not been officially given our NHR but since the Portugal taxes are deductible on USA taxes, we are okay if it is not accepted. We have now found that when we do start paying Portugal income tax, it is deductible on our US taxes, due to tax treaty. However, Portugal does not allow deductions for taxes paid to US. We originally were told incorrectly that USA pension and social security are not taxable in Portugal, not true, this was by Americans who live here ... Fortunately we researched, I did get it backwards though, I thought Portugal credited US taxes and US did not credit Portugal taxes, but other way around . Do the research on the USA IRS website for your income sources, and the Portugal tax website, be careful of what others tell you, this is what we did, and happily it is working out.


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## SeriousVoyager

grammymissy said:


> Yes, taxes processed for last year. We have a pension that is taxed by the US. Since it is not from a US government job, it is taxable by Portugal, however since we applied for NHR status we should be tax free for 10 years for it, then taxable by Portugal. We have not been officially given our NHR but since the Portugal taxes are deductible on USA taxes, we are okay if it is not accepted. We have now found that when we do start paying Portugal income tax, it is deductible on our US taxes, due to tax treaty. However, Portugal does not allow deductions for taxes paid to US. We originally were told incorrectly that USA pension and social security are not taxable in Portugal, not true, this was by Americans who live here ... Fortunately we researched, I did get it backwards though, I thought Portugal credited US taxes and US did not credit Portugal taxes, but other way around . Do the research on the USA IRS website for your income sources, and the Portugal tax website, be careful of what others tell you, this is what we did, and happily it is working out.



Thanks for that Grammmissy,
It sounds like you're the mine of information I've been looking for. The subject is so complex that I'm not sure that I understood everything you wrote. 
I don't use this forum much, so I don't know the rules but is there any way I could talk to you by phone or Skype without either of us having to give out personal info publicly here on this website such as a phone number or Skype name??


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## grammymissy

There is private messages, with five posts recorded, you can then send and receive private messages, works well. Just click on my icon and then click on send a private message, easy peasy. .


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## SeriousVoyager

Hi I've made four posts. This should be my fifth, so after this I can HOPEFULLY use PM


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## Brazitalian

Hello SeriousVoyager and Grammymissy,

I'll give you guys my findings which I am assuming are correct at least for myself...First, in our case, we live on my husband's 3 incomes: Public Pension from a government job, so that one, is a not brainer, US taxes it, and no one else touches it according to the treaty on Public Pensions and US Social Security and a Private Pension (401k). 

About the 2 other incomes (SS and 401K), we talked to a tax accountant (american) which was listed as recommended on the US Embassy site in Portugal. He said that as US citizens, in the US we pay taxes as we had never moved anywhere else. He said, you just file your taxes as normal. United States is one of the few countries in the world that will tax its CITIZENS on worldwide income. So no matter where we go, uncle Sam will always have a piece of it based on our citizenship. 

The US has a "Savings Clause" on its tax treaties with most of the countries which states that it "may" tax its citizens as if there was no treaty. Well, according to the tax accountant and more and more diggings on my part, I find that it hold true, the "May" means "Will" tax its citizens!!

*PROTOCOL
*At the signing today of the Convention between the United States of America and the Portuguese Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, the Contracting States have agreed upon the following provisions, which shall form an integral part of the Convention:
1. With reference to Article 1 (Personal Scope):

(iv) For the purpose of this paragraph, a "measure" is a law, regulation, rule, procedure, decision, administrative action, or any other form of measure. *(b) Notwithstanding any provision of the Convention except paragraph (c) of this
provision, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and the United States may tax its citizens, as if the Convention had not come into effect.*

So basically, for US citizens, the treaty does not apply per say. Now, if you lived in the US as resident alien, worked, and able to receive some sort of pension (non-Public), then retire in Portugal, the treaty DOES apply to you, because you are not a US citizen and do not reside in the US. So Portugal will tax you, and under the NHR, you get 10 years free.

Now to address Grammymissy's comments on tax credit, what I also learned *(this is my interpretation and as of TurboTax when I do my taxes online)* that on US Form 1116, the only foreign tax credit we can claim on US taxes, is if we work in Portugal, otherwise, we cannot claim taxes we paid for making a choice to live somewhere else...When I did my taxes earlier this month, I tried to "Pretend" to have paid taxes in Portugal and TurboTax would not allow me to move forward to another screen unless it was from a job! Then I read Instructions on Form 1116 and Pub. 514, and from what I understand, that's how it works, foreign taxes on foreign income. But I am no expert, Grammymissy, you probably know much more than I do on this...But here is an excerpt from Pub. 514.

"The foreign tax credit is intended to relieve you of a double tax burden when your foreign source income is taxed by both the United States and the foreign country. In most cases, if the foreign tax rate is higher than the U.S. rate, there will be no U.S. tax on the foreign income. If the foreign tax rate is lower than the U.S. rate, U.S. tax on the foreign income will be limited to the difference between the rates. *The foreign tax credit can only reduce U.S. taxes on foreign source income; it cannot reduce U.S. taxes on U.S. source income.*"

Taxes are very complicated matter. We are now paying a tax accountant in Portugal to do our taxes, and of course, nothing changed in the US, so I used TurboTax and done. Although, we have not heard about our NHR yet, the NHR is a GREAT benefit for mostly those who receive income from other EU countries or countries that do not tax their citizens on worldwide income, which is not our case in the US They can say, they live totally tax free (which I am jealous, we US citizens don't, the NHR basically just give us a break in Portugal. It can be misleading for us, US citizens. Hope this helps a bit, sorry I talked too much


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## SeriousVoyager

That's, a fantastic synopsis. Thank you so much for taking the time! 
You just provided 10 times more of what I was looking for than I got from 3 long nights of Internet trolling this week.
Thank you.


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## grammymissy

It is our understanding also, that we can't take the foreign income tax credit, due to our pensions being earned in the US, but we can deduct on schedule A any foreign income taxes paid. Hopefully with NHR, not an issue for the next 10 years


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## Brazitalian

grammymissy said:


> It is our understanding also, that we can't take the foreign income tax credit, due to our pensions being earned in the US, but we can deduct on schedule A any foreign income taxes paid. Hopefully with NHR, not an issue for the next 10 years


Grammymissy,

You are probably more knowledgeable on this than I am, but from what I read and understand, we can NOT deduct the income taxes we pay in Portugal, unless it is job related in Portugal, but just by the fact that we pay portuguese taxes on our US income (without NHR), it cannot be deducted from our US taxes the following year...Am I correct?


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## grammymissy

https://www.irs.gov/taxtopics/tc503.html. They are foreign non business income tax. .


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