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Credit or Exemption? The Two Methods to Eliminate Double Taxation in Portugal (and When Each Applies)

  • Blog Post
  • Tax, Live in Portugal

Credit or Exemption? The Two Methods to Eliminate Double Taxation in Portugal (and When Each Applies)

There are two ways to avoid paying tax twice on foreign income: the credit method — tax the income in Portugal and deduct the foreign tax — and the exemption method — don’t tax the income in Portugal at all. In Portugal, the credit is the general rule. The exemption only applies under the special regimes for non-habitual residents (NHR) and IFICI. Here’s the difference and why it matters.
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🧮 The Credit Method (General Rule)

For ordinary Portuguese residents:

  • All foreign income is included in the Portuguese return
  • It’s taxed under Portuguese rules (progressive or special rates)
  • The foreign tax is deducted, up to the Portuguese tax on that income and the treaty limit

 

Result: you end up paying the higher of the two taxes (Portuguese or foreign).

✨ The Exemption Method (NHR and IFICI)

Under the NHR regime (for those still within their 10 years) and the IFICI regime, many types of foreign-source income are exempt in Portugal:

  • Foreign employment or business income (under conditions)
  • Dividends, interest and royalties from abroad
  • Rents from foreign properties
  • Capital gains on foreign assets (in some cases)

 

Result: you pay only the foreign tax (if any). The exempt income may still be considered to determine the rate on your other income.

📌 Conditions for the Exemption

NHR (for foreign income other than pensions):

  • The income must be one that may be taxed in the source country under the tax treaty (or, without a treaty, under the OECD Model and not from a tax haven)
  • Foreign pensions: 10% rate for those registered from April 2020 (or exempt under the older rules)

 

IFICI:

  • Applies to foreign-source employment, business, capital, rental and capital gains income
  • Not to income from tax havens
  • Not to foreign pensions — taxed under general rules with the credit method

⚖️ Why It Matters

Example: dividends of €10,000 from a company in a country with 0% withholding:

  • Credit method: Portuguese tax at 28% = €2,800 (no credit, nothing paid abroad)
  • Exemption method (IFICI): €0 in Portugal

 

For income from countries with low or no withholding, the exemption method makes a big difference.

⚠️ Points to Watch

  • The source of the income is determined by Article 18 — income that is Portuguese-source is never exempt
  • Tax havens: no exemption, and higher rates may apply
  • Option: NHR beneficiaries can sometimes choose the credit method instead, if more favourable
  • Declaration: exempt income must still be declared in Annex J

💡 Practical Tips

  • New residents: check whether you qualify for IFICI before your first tax year.
  • NHR beneficiaries: check how many years are left and plan accordingly.
  • Map the source of every income stream under Article 18 and the treaties.

🚀 Final Considerations

For most residents, Portugal eliminates double taxation through the credit method — you pay the higher tax. Only NHR and IFICI beneficiaries can benefit from the exemption method on foreign income, which can reduce Portuguese tax to zero.

📢 Expert Advice: If you have significant foreign income, the choice of regime when you arrive in Portugal can be worth more than any other planning. Check IFICI eligibility early.

Moving to Portugal with foreign income? Step Inside Portugal’s tax team can analyse which regime applies and how your income will be taxed — find out more about our tax services here. ✨

This article is for general information only and doesn’t constitute tax advice. Each regime has specific conditions.

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