Should Expats File Their Own Portuguese Tax Return?

Here’s my philosophy about Portuguese tax returns.

Fair warning before you proceed reading this article: this is a real story based in The Office.

I want to talk about DIY your own Portuguese tax return when you are an expat with foreign sourced income.

My philosophy is basically this, and this is something that I live by, and I always have, and I always will: don’t ever, for any reason, do anything to anyone, for any reason, ever, no matter what, no matter where, or who, or who you are with, or where you are going, or where you have been, ever, for any reason whatsoever… do your own tax return in Portugal.

It’s not a matter of not speaking the language. It’s a matter of not being fluent in tax law and international tax treaties.

What my friend Michael, who used to run a mid-size paper company in Pennsylvania and wrote a best-selling book called Somehow I Manage, would also agree with is this: don’t do anything that is this big of a deal unless you’re good at it. Otherwise, you might get into trouble.

And let me tell you: when you receive a large tax bill in Portugal, screaming BANKRUPTCY does not get you out of it.

Compliance requirements attached to specific types of income, physical presence tests, hybrid mismatches in income classification between jurisdictions, the correct application of tax credits and other reliefs, to name just a few of the challenges.

Just to give you an example, the first time I ever heard about 401(k)s was while watching The Office several years ago, when management broke the news to the bullpen that Corporate would no longer be matching 401(k) contributions.

Now that you know that The Office got me into tax law, let me explain a little bit how taxation of a 401k can look like in Portugal.

Generally, distributions are classified as pension income in Portugal, especially when the taxpayer is over 59½ years old and is no longer subject to the early withdrawal penalty in the US. However, some rulings issued by the Portuguese Tax Authorities to clarify the tax treatment of distributions from similar tax-deferred retirement accounts across Europe might suggest that, depending on how the distributions are taken, there could be grounds to reclassify them as capital income and therefore have a different tax outcome.

This sounds crazy to any US tax preparer, who knows that regardless of how distributions are taken, the entire amount reported on Form 1099-R is generally taxed as ordinary income.

My point is this: translating an entire international tax strategy into a Portuguese tax return in a technically and legally defensible way is an enormously complex exercise.

Therefore, don't prepare your own tax return unless you are a tax specialist in Portugal.

Also, just another FYI: if you missed the filing deadline (June 30), the late-filing penalty in July is only €25. Of course, that's equivalent to at least two dozen pastéis de nata, but it's still not a fortune.

There's still time to call in experts to handle your taxes the best way possible.

Michael, and more importantly, David Wallace, would be proud of you.