The Portuguese Tax & Customs Authority - Autoridade Tributária e Aduaneira (AT) - issued Circular Letter No. 20255 on 14 April, which formalises a change in the capital gains tax (CGT) treatment of non-residents selling real estate in Portugal.
Previously, gains on the sale of real estate were taxed differently according to the residence status of the property owner. In determining the taxable amount of capital gains realised on the sale of real estate in Portugal, residents were subject to tax on only 50% of the gain, which was charged at their marginal rate of income tax from 14% to 48%.
Non-residents, however, were taxed at a CGT flat rate of 28% in respect of capital gains realised on the sale of real estate in Portugal, but 100% of the gain was taxable. The 50% reduction of the taxable base granted to resident taxpayers was not available.
Non-residents of Portugal who resided in the EU or EEA were also taxed on 100% of the gain but could elect for the progressive income tax rates to apply rather than the CGT flat rate of 28%.
In March 2021, following a challenge by a taxpayer who was resident on France, the Court of Justice of the European Union (CJEU) ruled that different CGT treatments applying to residents and non-residents amounted to a restriction on the free movement of capital and was therefore incompatible with EU law.
in the case of MK v Autoridade Tributária e Aduaneira (C-388/19), the CJEU observed that under the Portuguese tax rules, despite the additional solidarity surcharge paid by residents of Portugal, persons resident in Portugal were systematically taxed at a lower effective CGT rate than non-residents.
Nor was the option for non-residents who resided in the EU or EEA to elect to be taxed under the same rules applicable to residents sufficient to eliminate the discriminatory effect of the regime.
As a result of the CJEU's ruling, the Portuguese government was obliged to amend the CGT framework for real estate capital gains by non-residents via the 2022 and 2023 Finance Acts. These changes have now been clarified in the Circular Letter, as follows:
- Until 31 December 2022, net real estate capital gains were assessed at only 50% of their value and were taxed at the special rate of 28%.
- As of 1 January 2023, real estate capital gains will have to be compulsorily aggregated - at 50% of their value - with the other income obtained by non-residents and will be subject to the corresponding marginal rates of income tax.
The new rules applying to the taxation of capital gains on financial assets, which were announced in the Portuguese State Budget for 2022, have also come into effect in 2023.
These rules will have an impact on the capital gains from the disposal of shares, securities and other financial assets that are held for a period of less than 365 days by taxpayers in Portugal whose overall taxable income is equal to or exceeds the top rate tax bracket, which is currently ?75,009.
Previously, taxpayers could choose to aggregate this income into overall income and be taxed at the marginal tax rates, ranging from 14% to 48%, or be taxed at the flat CGT rate of 28%. From 2023, if the assets are held for less than 365 days, aggregation is mandatory.
The new rule does not apply to capital gains arising from the redemption of units of investment funds that are located in Portugal, which can still be taxed at the autonomous rate of 28%. Gains arising from the redemption of units of investment funds located outside Portugal, however, will be subject to mandatory aggregation.
The law is applicable to all residents and there is no special provision for those with the Non-Habitual Resident (NHR) status. The ability to deduct tax paid in the country of source will depend on the relevant double tax treaty with Portugal.
If you are considering becoming tax resident in Portugal and have substantial capital gains, it may be prudent to sell those financial assets before becoming tax resident in Portugal and take guidance from our professional planners who can assist with this important aspect of taxation on CGT.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
