Double taxation agreement between Portugal and the United States of America – on Pensions

Double taxation agreement between Portugal and the United States of America – on Pensions

The number of United States citizens matter-of-factually living in Portugal has increased seven times since 2017. Data from the Agency for Integration, Migration and Asylum (AIMA), show that there were almost 21.000 US citizens registered in Portugal in 2024, an increase of almost 50% compared to 2023, when approximately 14.000 were accounted for legally.

Many of these citizens, regardless of their age, come to Portugal as retired or pensioners. While the employed fringe of the foreign population is making mental calculations about the possibility IFICI (Incentivo Fiscal à Investigação Científica e Inovação) application, called for all intents and purposes NHR 2.0, foreign-sourced pensions received by individuals will be taxed under standard progressive rates. As a foreign citizen with just pension or retirement as source of income, IFICI is not applicable, so the examination lies (and relies) on the applicability of the Double taxation agreement (DTA) between Portugal and the United States of America.

Resolution no. 39/95 from the Portuguese Republic’s Assembly, published on Serie I-A, Bulletin no. 236 from October 12^th 1995, in force since January 1^st 1996, is the DTA between Portugal and The United States.

All DTAs aim to avoid double taxation between citizens from the two signatory parties and ensure fair taxation between them. We briefly go over the DTA celebrated between Portugal and the United States, to create awareness, but this subject should be a case-by-case analysis as the tax method to avoid double taxation, and its exceptions to the rule, may vary from agreement to agreement.

Objectively the DTA applies to income taxes, such as IRS in Portugal and Federal Income Tax in the United States.

If a (fiscal) resident in Portugal receives income from the United States, the tax paid in the US can be deducted in Portugal (as there is a declaratory obligation to report all income received) reducing the tax burden. For pensions, in specific, the DTA establishes that its amount can be taxed in the country of origin (U.S.), but the tax paid in the country of origin can be deducted from the tax due in Portugal through the tax credit mechanism.

The Tax Credit Mechanism means taxes paid in the U.S. on income (including pensions) can be used as a tax credit in Portugal, preventing double taxation, provided that the tax paid to

 the United States will not be less than the tax that would be paid under the DTA if the individual were not a citizen of the United States.

The application in Portuguese IRS of DTA is not automatic, tax residents in Portugal receiving income from the United States (or any other country with which Portugal has a DTA celebrated) must declare this income in Annex J of the IRS return and the taxpayer must indicate the source of the income and the tax paid in the country of origin.

It is recommended to consult a lawyer specialized in tax and international tax law, as well as having an accountant with experience with foreign income tax declaration, to provide the best tax planning possible. This text focuses on pension income, but all DTAs will have specific rules regarding certain type of incomes to be received by citizens.