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- Tax, Live in Portugal
Portuguese-Source vs Foreign-Source Income: Article 18 of the IRS Code Explained
🌍 Why It Matters
- Non-residents pay IRS only on income obtained in Portugal. Everything else is outside Portuguese tax.
- IFICI and NHR beneficiaries can be exempt on many types of foreign-source income — so whether income counts as foreign is decisive.
- Residents in general are taxed on worldwide income, but the source still matters for double taxation relief and for declaring foreign income in Annex J.
📍 When Is Income Obtained in Portugal?
Article 18 lists the situations. The main ones:
Employment income (category A):
- From work performed in Portugal, or
- When paid by an entity resident in Portugal (or a Portuguese permanent establishment)
- Board members’ remuneration from Portuguese companies
Business and professional income (category B):
- Attributable to a permanent establishment in Portugal
- From professional activities performed in Portugal
- From services performed or used in Portugal and paid by a Portuguese entity (with some exceptions, such as transport, telecommunications and financial services)
Capital income (category E):
- Interest, dividends and royalties paid by entities resident in Portugal (or charged to a Portuguese permanent establishment)
Property income (category F):
- Rents from property located in Portugal
Capital gains (category G):
- From the sale of property located in Portugal
- From the sale of shares in Portuguese companies
- From shares in companies (Portuguese or foreign) whose value comes mainly (more than 50%) from Portuguese real estate
Pensions (category H):
- Paid by Portuguese entities (or by a Portuguese permanent establishment)
🤔 Tricky Cases
- Working remotely for a Portuguese company while living abroad: under Article 18, the income can be Portuguese-source because it’s paid by a Portuguese entity — but a double tax treaty may give the right to tax to your country of residence.
- Freelancers abroad with Portuguese clients: services paid by a Portuguese entity may be Portuguese-source, but treaties usually prevent Portugal from taxing if there’s no permanent establishment.
- Shares in a foreign company holding Portuguese property: the gain can be Portuguese-source.
Always read Article 18 together with the applicable tax treaty.
📌 Non-Residents: What Happens to Portuguese-Source Income?
Non-residents are generally taxed at flat rates, for example:
- 25% on employment and business/professional income
- 25% on rental income
- 28% on capital income (often withheld at source as the final tax), 35% for tax-haven residents
- Capital gains on real estate under the specific rules for non-residents
Some of this tax is withheld at source; other income (such as rents or property gains) must be declared in a Portuguese IRS return.
✨ IFICI and NHR: The Foreign-Income Exemption
For residents under IFICI (the new regime for scientific research and innovation) or NHR (for those still within their 10 years), many types of foreign-source income are exempt — such as employment or business income from abroad, dividends, interest, rents and some capital gains — with exceptions:
- Income from tax havens is not exempt (and can be taxed at higher rates)
- Foreign pensions are generally not exempt under IFICI
- The income is still declared in Annex J, and exempt income may be considered to calculate the rate on other income
The first question is always: is this income foreign under Article 18? If Article 18 says it’s Portuguese, the exemption doesn’t apply.
💡 Practical Tips
- Map each income source against Article 18 before assuming it’s foreign.
- Check the tax treaty with the other country.
- Keep proof of where work was performed and who paid you.
- Changing residence mid-year? The split-year rules and source rules interact — get advice.
🚀 Final Considerations
Article 18 is the dividing line between what Portugal can tax and what it can’t, for non-residents, and between taxable and exempt income for IFICI and NHR beneficiaries. Getting the source right is the foundation of a correct tax return.
📢 Expert Advice: Before relying on a foreign-income exemption, confirm that the income is really foreign under Article 18. Many problems start with assuming it is.
Non-resident or under IFICI or NHR? Step Inside Portugal’s tax team can analyse the source of your income and prepare your return — find out more about our tax services here. ✨
This article is for general information only and doesn’t constitute tax advice. Tax treaties can change the result; each case should be analysed individually.
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