5 Kore Rules on Tax Return Preparation

Tax returns are a central part of a tax system as they embody the principal moment when taxpayer and Tax Authorities communicate. Personal income tax return filing is also the moment for implementing of many tax benefits and special regimes, such as the Non-Habitual Residents (NHR) regime.

With the 2021 Portuguese filing season approaching (April-June 2022), it might be useful to see which are the most crucial aspects to consider when preparing your personal return in Portugal.

Below you find the 5 Kore rules on tax return preparation (see also our infographic):

1.     Your Tax Status is Crucial

Your tax status of resident or non-resident determines your taxable base and corresponding filing obligation: non-residents only have to report Portuguese-sourced income, whilst residents, including those with the special NHR status, have to report worldwide income. NHR regime is not a territorial system nor a remittance base system.

Portugal allows partial-year tax residence, which means an individual may have two tax statuses within one fiscal year (non-resident and resident) and in some cases even two separate tax returns would need to be filed.

After relocating to Portugal, beware that there is a final deadline for securing the NHR status, which falls just before the start of the filing season. Only provided you have requested the status you may easily benefit from the corresponding tax benefits. Another point generally forgotten deals with filing a joint tax return (with the spouse) or a separate tax return, as the outcome may change.

Our experience shows that being well acquainted with residency rules, knowing your exact tax status and eventual overlaps with other jurisdictions before filing reduce potential double taxation conflicts and filing and assessment mistakes.

2.    Beware of Tax Return Timelines & Extensions

The Portuguese tax year runs from January to December unless partial residence rules apply and regardless of your tax status. Personal income tax filing season is from April to June of the following year.

Taxpayers who may have the right to a credit of foreign taxes not yet assessed or filed may file for an extension of the Portuguese filing deadline to year-end. 

The three months filing period may seem a long time to prepare a tax return, but sometimes far from sufficient, especially where there is foreign-sourced income and foreign tax liabilities.  One focal point relates to income from financial portfolios which requires validation of portfolio statements from financial institutions with sometimes complex issues arising, such as income qualifications, use of foreign currencies and other.

The NHR regime, albeit providing for a tax exemption of certain types of foreign income, requires that all income derived throughout the tax year is reported.

Our experience shows that anticipating the preparation of the tax return as soon as possible often may allow to avoid surprises and makes the process smoother.

3.     Tailored Pre-Planning with Tax Rulings only for Uncertain Positions

Through pre-planning, it may be possible to streamline your income and transactions adapting them to the Portuguese tax landscape, taking advantage of applicable tax rules in a compliant manner.

During pre-planning, any complex and unclear situations should be identified, and if necessary, one can start a dialogue with the Tax Authorities prior to tax return by filing a tax ruling. This can provide assurance as regards the tax framework of your specific situation and avoid uncertain tax positions and taking risks.

Thus, it is key to pre-plan the filing, as there may be situations requiring a more thorough analysis for purposes of qualification and quantification of income positions. More importantly, it is highly advisable to seek guidance on disposal of assets and investments as in certain situations those transactions may result in unfavorable outcome in terms of taxation or even aggravated taxation or non-ability to offset losses.

Our experience shows that a comprehensive prior analysis of your expected income streams saves the valuable filing season time and eases the tax return preparation moment, and, more importantly, avoids adverse outcomes when the final tax assessment is received. 

4.     Go for a Joint Review and Always Retain Records

Tax return filing is not rocket science but, in some situations, involving foreign-sourced income and special regimes or tax benefits, it can turn out to be a puzzle hard to solve.

Besides adequate pre-planning, we also suggest not to self-venture into the seemingly murky fields of the so-called “Modelo 3” but, resort to professional assistance instead. The taxpayer may have the knowledge of the material situation, but the expert should have the knowledge to translate the material situation into Portuguese tax language. A joint review of the final filing ensures the most predictable outcome.

The general statutory limitations period is 4 years, or 12 years when the underlying income involves government-listed tax havens. This means that after the submission of a return and assessment of tax regarding each given tax year, that year may be opened for eventual questioning by the Tax Authorities during the following four or, in few limited cases, twelve years.

Within this period, the Tax Authorities may challenge what the taxpayer reported or not reported and issue additional tax assessments. Thus, it is recommended to retain a record of the documentation related to the income received and reported during each year so if questioning arises, it is answered swiftly and with proper documentation, facilitating solution and closing at the administrative pre-litigation stage.

Our experience suggests that thorough joint due diligence, joint review and record-keeping helps taxpayers and their advisors to sleep better at night.

5.     Follow-Up is Key to Successful Tax Return Season

After the tax return is filed, the Tax Authorities follow with the assessment based on the information self-reported, which should lead to a result projected at the time of filing. However, assessment mistakes can arise and, also, divergences in interpretation of the law may arise or the automatic processing system might not be able to account for specific characteristics of a given situation, which all may lead to an assessment that is different from the initially expected result.

A thorough analysis of the tax assessment is key and, if necessary, react against it by substituting the return, by presenting an administrative appeal with a visit to the tax office or even, depending on the circumstances, appeal directly to the court.

The early stages of a tax dispute are often the most important moment and may even encompass informal or formal enquiries from the tax authorities. Getting these enquiries answered and clarified right at the very beginning may resolve many potential disputes. These early stages of tax disputes may be time-intensive and require precision to ensure that replies to such enquiries do not leave margins for the slightest doubt regarding the facts with very high chance to be fully settled long before ending up in front of a judge.

Finally, the absence of the tax assessment during the first couple of months may mean that the tax return was not processed with a reason for it, or there might have been an inquiry. The detection of such events after filing and timely reaction, again, prevents escalation into a tax dispute. Our experience indicates that adequate follow-up is key to a tax return season without tax disputes.

About Us

Kore Partners is a boutique law firm centered on the private wealth sector. With almost 40 nationalities within our client pool, we are involved in high value and complex multijurisdictional issues touching all the cornerstones of the private client business.

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© Kore Partners, 2022.

This briefing provides for general information and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, this should not replace legal advice tailored to your specific circumstances. This briefing is intended for the use of clients and selected recipients. Queries or comments regarding this including joining our mailing list can be directed to kore@korepartners.com