Foreign Income Tax in Portugal: What ‘Exemption’ Really Means

For those planning on moving to Portugal from the US or relocating under the new tax regime, it’s common to hear that foreign earned income is “exempt.” However, in Portugal, exemption doesn’t necessarily mean complete freedom from tax obligations. There are important nuances to understand regarding how foreign-earned income is treated under the new tax rules.

This post walks through how foreign-sourced income is treated under the new regime and how the concept of englobamento works in practice. To make it easier to understand, we’ll use a real-world example featuring a US citizen who relocated to Portugal in 2024.

How Foreign-Sourced Income Is Treated Under Portugal’s New Tax Regime 

Portugal implemented a revised Non-Habitual Resident (NHR) tax regime in 2024, replacing the previous version. While the new regime maintains several tax advantages for expats, it introduces updated conditions and benefits.

Under the new framework, a flat income tax rate of 20% applies to income from employment (Category A) and self-employment (Category B) derived from high-value-added activities, as defined by the Portuguese government. These typically include professions in scientific research, information technology, and international-oriented sectors.

A key feature of this regime is the option to apply an exemption method to foreign-sourced income. This applies to the following categories:

• Category A: foreign salary
• Category B: foreign freelance or consulting income
• Category E: dividends and interest
• Category F: rental income from property abroad
• Category G: capital gains from selling foreign shares or real estate

This exemption method applies if the income is effectively taxed abroad and doesn’t come from a blacklisted jurisdiction. However, even when income qualifies for exemption, it’s not necessarily invisible to the Portuguese tax authorities. That’s where englobamento comes in.

What Is Englobamento?

Englobamento refers to the way exempt foreign income is still taken into account when determining the applicable tax rate for the rest of your income. So while that income may not be taxed directly in Portugal, it can push your other income into a higher tax bracket. This rule applies to most categories of foreign income, even if they’re exempt, except for specific cases covered by other articles in the Portuguese tax code.

Real-Life Example: Michael Moves to Portugal from the US

Michael, a 36-year-old software engineer from San Francisco, moved to Portugal in 2024 to work for a Lisbon-based artificial intelligence company. He qualifies for Portugal’s new tax regime under Article 58.º-A.

In 2025, his income looks like this:

• €60,000 salary from his Portuguese employer (Category A, eligible for the 20% flat rate)
• €25,000 in dividends from US stocks (Category E, taxed in the US at source)
  

At first glance, Michael assumes he only needs to pay tax on his Portuguese salary, and that his US dividends don’t count. But because those dividends are declared and exempt under the method of exemption, they still impact the rate applied to his other income due to englobamento

This means that, although the €25,000 in US dividends aren’t directly taxed in Portugal, they raise Michael’s overall taxable base. If Michael had additional taxable income, such as rental income in Portugal or capital gains, these would be taxed at a higher rate because of the consideration of the exempt foreign income.

How the Tax Is Calculated

Without considering the dividends, Michael’s €60,000 salary is taxed at the flat 20% rate under the special regime. His tax bill would be:

• €12,000 in IRS

However, due to englobamento, the €25,000 in US dividends increases his overall taxable base for rate determination. Although that previously taxed income is not taxed again in Portugal, they raise the effective rate applied to any other income that doesn’t qualify for the flat rate

In this case, if Michael also earned income from, say, renting out a property in Portugal or had other taxable capital gains, those would be taxed at a higher rate than they would have been without the €25,000 in foreign earned income being considered.

Common Misunderstandings

There’s a lot of confusion about what “tax in Portugal for expats” and “exemption” really mean. Here are three frequent misconceptions:

• “If it’s exempt, I don’t need to report it.”—This is incorrect. You must declare all foreign income, even if it’s exempt from taxation.
• “Exempt means it won’t affect my taxes at all.”—Not quite. Exempt income can still raise your overall effective tax rate through englobamento.
• “This only matters if I’m retired.—Actually, it’s especially relevant for working professionals with investment income, overseas clients, or real estate abroad.

What You Should Do

To make sure you’re complying with Portuguese tax law and not paying more than necessary:

• Declare all foreign-earned income using the proper annexes (Annex J and L) in your IRS return.
• Keep documentation showing the income was effectively taxed abroad.
• Understand that the method of exemption doesn’t always shield you from indirect effects like englobamento.

Conclusion

Although the NHR regime as we knew it has ended, Portugal’s new tax regime continues to offer meaningful benefits to international professionals. The 20% flat tax remains in place for qualifying work income, and many types of foreign income can still be exempt, provided the rules are followed closely.

The key is understanding how englobamento works in practice. Even if you’re not taxed directly on income from abroad, that income can still influence your final IRS bill in Portugal.

Need Help Understanding These Rules?

At Tytle, we work with expats every day to help them understand how Portugal’s tax rules apply to their unique circumstances. Our highly-qualified experts can walk you through your reporting obligations, help optimize your tax position, and explain every detail clearly—no jargon, no guesswork.

At Tytle, we provide tailor-made services including:

• Obtaining a NIF number hassle-free​
• Accounting/bookkeeping
• Accurate tax filing​
• Estate planning​
• Cross-border advice​
• Immigration services​
• And much more!​

For more expert tax filing advice, feel free to explore “Tax Deadlines and Other Important Dates in Portugal: A Guide for Expats” and “Moving to Italy from the USA: Basics About Taxes as an Expat”.