Portugal Capital Gains Tax

Although learning about taxes might be a daunting task, it is essential when moving to a new country, like Portugal. The Portuguese tax system is among the more lenient tax systems in all of Europe. It has become a popular destination for many people, including expatriates from the UK and other parts of the world. In particular, high-net-worth individuals find this tax system favorable, combined with several factors, including municipal and federal laws.

This article is an in-depth guide of the Portuguese tax system, focusing on the Portugal capital gains tax system. Thus, let us quickly look at what you need to know about the capital gains tax for Portuguese residents.

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The Tax System in Portugal: The Basics

The Portuguese tax system constitutes state and local taxes. Calculations of these taxes depend on taxable income, property ownership, and expenditure. The Portuguese tax year goes along with the calendar year (January 1 to December 31).
In turn, foreigners living in Portugal must register as taxpayers before beginning any paid activity while in Portugal. As a result, they have to complete a form found on the Portuguese Tax Authority’s online portal, Portal das Financas. They will acquire a Numero de Identicacao Fiscal (NIF) from the local tax office.

Upon receiving a NIF, all Portuguese tax residents must comply with Portuguese tax rules. They must submit an annual tax return anywhere between April 1 and June 30 of the calendar year. For example, income obtained between January 1 and December 31, 2020, must submit its tax return by June 30, 2021.

Who Is A Portuguese Tax Resident?

To further understand the Portuguese tax rules, you must first know if you qualify to become a Portuguese tax resident. The qualifications are simple and easy to understand. They include:

• If you have lived in Portugal for at least 183 days within a single calendar year
• If you have a primary residence in Portugal by December 31 in a particular tax year
• If the head of the household is a tax resident individual in Portugal
• If you are part of a yacht, ship, or aircraft crew on a Portuguese-owned entity
• If you reside in another country but work for the Portuguese state

Federal Taxes in Portugal

If you are a qualified Portuguese tax resident, your worldwide income is subject to Portuguese Federal taxes. These include taxes for self-employed and employed individuals on:
• rental income,
• salary,
• Portugal capital gains tax on property sales and other assets,
• Inheritance taxes on estates,
• VAT and corporate tax for businesses

Take note that Portugal is a party to various tax treaties with other countries, like the UK. In turn, this ensures that you are not required to pay tax more than once in multiple jurisdictions from the same income. So, if you are not a resident individual in Portugal, only the income earned in that jurisdiction will be submitted for tax, usually at 20%. But, there are lower tax rates for gains received from various properties.

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Portuguese Local Taxes

Other than state taxes, there are more taxes imposed at the local level. The most significant one is the Imposto Municipal Sobre Imoveis (IMI), a council tax in Portugal. Your IMI tax depends on the general assessment of where you reside and the overall value of your primary residence in Portugal.
Additionally, take note that IMI is only applicable to Portuguese homeowners. To this end, tenants in Portugal are exempt from this tax residency. Taxes from IMI aid in the general maintenance and upkeep of your local area, which includes paying for services like bin recycling and collections.

Another important note is that Portuguese homes worth over €600,000 must pay IMI at an extra level. Officially referred to as AIMI, many residents consider it the wealth tax for Portuguese residents. The same applies to cohabiting or married couples who submit joint tax returns with a Valor Patrimonial Tributavel (VPT) over or equal to €1.2 million. Such parties are liable to pay an additional bill of:

• 0.7% on the total amount of all VPT that is over €600,000 and a maximum of €1 million

• 1% on the total sum of all VPT over €1 million and a maximum of €2 million
• 1.5% on the total fee of all VPT over €2 million
Corporate property owners also pay an extra bill of about 0.4% on their total VPT value. However, suppose the company is in a ‘blacklisted’ locality. In that case, the company property owners will have to pay an additional bill of 7.5% on the total VPT amount as supplemental fees to the 7.5% IMI tax.

Portuguese Taxes on Goods and Services

If you own a business in Portugal with a turnover rate of over €10,000 on taxable services and goods, you must pay Value Added Tax (VAT).
Also referred to as IVA or Imposto Sobre o Valor Agregado, the Portuguese government initiated this tax rule in 1986. It consists of three chargeable categories. They include:
• A 23% general rate on taxable services and goods
• A 13% intermediary rate on drinks and foods and other related goods and services
• A 6% reduced rate on specific fundamental goods, like newspapers, transport, books, hotel accommodation, and certain foodstuffs, like cereal, fruit, meat, and vegetables
It is also worth noting that a separate IVA tax rate applies in the Azores (18%, 9%, and 4%) and the Madeira Islands (22%, 12%, and 5%).

Portuguese Tax on Wealth and Property

If you have Portuguese property or any other assets, you can pay the Portugal capital gains tax. Generally, this tax is dependent on your residence status, whether the property is your primary residence, and how you own the property or asset.
Furthermore, gains tax in Portugal is only applicable to profits made from investments and real estate. To this end, personal properties and items do not form part of your taxable income, while inheritances are only subject to a controlled form of stamp duty.

Portugal Capital Gains Tax for Residents

Resident individuals are responsible for paying gains tax in Portugal on their worldwide investments and property as obtained from the beginning of the 1989 tax regime till date. As a result, they should add any profits made from real estate and other assets to their taxable incomes for that year. It is then taxed at rate scales ranging from 14.5% to 48%.

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Securities, shares, and bonds are taxed at a flat rate of 28%. But, assets from ‘tax havens’ like Guernsey and Gibraltar are taxed at a flat rate of 35%. The Portugal capital tax gains rules are very lenient to resident individuals. For instance, only 50 percent of the profit gained from the sale of a property is taxable.
So, if you sold your property for €30,000, only €15,000 will be considered by the IRS concerning the Portugal capital gains tax system.
Residents can also acquire inflation relief after two years of property ownership. Other exemptions to the Portugal Capital Gains tax include:

• Reinvestment into another primary residence in Portugal or other EEA/EU state with a tax treaty with Portugal using the gains does not attract a capital gains tax liability.
However, qualifications for this exemption include reinvesting the profits within 24 months before or 36 months after the property sale. You must also have resided on the property within six months of the 3-year deadline. You must also indicate in your IRS return all the costs incurred during the purchase of the property. They may consist of but are not limited to real estate mediation fees, costs incurred from improvement, works, or window replacements, expenses with acts and registers, and real estate municipal taxes.
• Suppose you are a retiree or over 65 years of age. In that case, you are exempt from the Portugal capital gains tax if you reinvest the profits from Portugal’s primary residence into a qualified pension fund or insurance contract within six months of the property sale.
• If the property in question was first lived in before January 1989 in your name.

How to Calculate the Portugal Capital Gains Tax

Capital gains tax in Portugal refers to the profits received from the sale of a real estate property. It constitutes the difference between the price a property owner bought a property and that you sold it. If there is no profit during the sale, then there are no tax implications.

The Formula For Calculating Portugal Capital Gains Tax Is:
Plus value= Value of sale – (Acquisition Sale X Devaluation Coefficient) – Expenses related to the buying and selling of the property – Valuation fees

The Portuguese government releases the devaluation coefficient each year. So, ensure that you check to see the current value to subtract and get the gains tax you can pay. When it comes to the expenses, these refer to any investments or repairs done to the property, like solar panel installations.

Such expenses may also include costs incurred from Registro Notarial, IMT, and even real estate brokerage. However, these works must be completed on the property 12 months before the sale, and proper documentation must also be available.

Portugal Capital Gains Tax for Non Habitual Residents Nhr

Non habitual residency nhr was established in 2009 by the Portuguese government with the aim of alluring ‘high value’ residents into the country. This residency status implies that such individuals are subject to several tax exemptions within their first ten years in the country and limited tax rates.

For instance, if a non habitual resident individual is working in Portugal, their income is taxable at a flat rate of 20% instead of the usual tax rate that goes all the way to 48%. However, they must be employed in any predefined artistic, scientific, or technical professions to qualify for this tax exemption.

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Additionally, non habitual resident’s nhr can steer clear of capital gains tax liability on specific worldwide income. However, this is dependent on the responsible taxing jurisdiction in a particular double tax treaty. For instance, if you deal with UK real estate, there is no implied tax for non-habitual resident’s nhr in Portugal. The proceeds are ‘exempt with progression,’ meaning they are still inclusive in your annual taxable income bill.

In turn, this aids in determining your actual Portuguese tax returns. So, even though nhr are not directly liable for gains tax in Portugal, the added proceeds could add numbers to your overall tax rate. On the other hand, individuals with UK shares are subject to taxes in their country of residence, meaning that this gain tax is only subject to Portugal’s taxation rules under NHR.

Portugal Capital Gains Tax Liability for Non-Residents

If you are a non-Portuguese resident, the entire gain from the sale of securities, shares, bonds, or property is taxed at a flat rate of 28%. EU residents have an advantage of choosing whether to have their income subject to the scale income tax rates or Portuguese residents’ tax rules. Regardless of which you select, you still have to divulge information about your worldwide income. This helps in determining the appropriate tax rate on the proceeds.

It is also worth noting that the gain from the sale of Portuguese property owned by non-resident corporations, like a trust or company, is also liable to the Portugal capital gains tax. This tax rule became effective in January 2018. It states that where 50% or more of a non-resident corporation’s worth consists of Portuguese real estate, the proceeds from the sale of shares attract a 25% corporation tax or 35% if from a ‘tax haven’ jurisdiction.

However, this tax rule is only applicable if a double tax treaty between the company’s country of incorporation and Portugal grants Portugal taxing rights. An example of this is US-based corporations. Companies where this tax rule does not apply, like those based in Luxembourg or the UK, are liable to pay corporation tax in those jurisdictions.

UK Capital Gains Tax

In some cases, UK residents are also liable to pay taxes from Portuguese assets in the UK. Likewise, Portuguese residents with UK property are also responsible for UK capital gains taxes, despite the property owner. Such capital gains tax for non-UK residents has been in place since April 2015, but that applies to UK commercial property or land was in operation from April 6, 2019.

In cases where the costs incurred from taxes apply twice, the double tax treaty comes in, requiring the individual to pay the more significant tax amount. It is also worth noting that life insurance policy investments in Portugal are not subject to the gains tax liability. However, the proceeds are taxable once you cash it in or withdraw from it. Several policies can give resident individuals drastic tax benefits in Portugal. Please consult a professional wealth manager and determine which ones apply to you and how to maximize their benefit.

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Portugal Inheritance Tax

Another crucial element of the Portuguese tax system is its tax rules on inheritance. Several years ago, the Portuguese government nullified inheritance within its jurisdiction. However, residents are subject to a stamp duty tax referred to as Imposto do Selo. This tax rule applies only to assets, which are taxed at a flat rate of 10%.

Inheritance tax in Portugal is payable within three months of the date of death of the deceased. This rule is rather strict as failure to meet the deadline amounts to a late penalty fee. Also, take note that if you are still in possession of your UK residence with receiving Portuguese assets as inheritance, you will still be subject to UK inheritance tax on your estate.

Portuguese Tax Penalties

As mentioned earlier, residents living in Portugal must pay taxes, regardless of their residence status. However, there is a specific class of people in Portugal who are exempt from paying taxes. These include people who earn less than €4,104 per year, ex-pats residing in Portugal, and non habitual residents nhr status.

If you fail to submit your Portuguese taxes correctly or in the stipulated period, then you will be liable to pay some penalty charges. Late filing penalties range from €200 to €2500. Late filing penalty fees range from 10% of the taxable amount to double that total amount. However, the maximum late payment penalty amount is €55,000, but this fee is also liable to attract interest rates. Remember that penalties and fines are solely dependent on your status and other contributing circumstances.

The Portuguese Tax System for Foreigners

For foreigners, expatriates residing in Portugal can benefit from the non-habitual resident tax code exemptions. These exceptions apply to the first ten years of residence of the ex-pats. The NHR status is accessible to workers in qualifying professions as predefined in the law.
NHR status offers two primary benefits to foreigners. First, you can live in Portugal and not pay any taxes on your salary in any part of the world. This includes your employment salary as well as that from capital gains.

Another benefit of this status is that it allows residents to pay taxes at a 20% flat rate on Portuguese earnings. It is also worth noting that the Portuguese government recently raised the tax rate on foreign pension funds to 10% from an initial 0%.

Golden Visa Scheme

Foreigners can receive golden visas from the Portuguese government if they buy a property valued over €500,000. The Golden Visa enables foreigners to acquire residency in Portugal and still travel freely within the EU. Since 2012, the government has awarded foreigners over 8,200 golden visas, with more than half going to Chinese nationals.

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Take note that the government banned granting golden visas to individuals who want to buy property across the country’s coastline, including Porto and Lisbon. Beginning from January 1, 2022, property purchases in the inland parts of Portugal, Madeira Islands, and the Azores are the only ones that will qualify for a golden visa award.

How to File Taxes in Portugal

As mentioned earlier, the Portuguese tax year runs alongside the calendar year, with returns filed in the following year’s spring. You can complete your tax returns via physical paper form or through the online portal.

In 2022, the window for completing your income tax returns will be between April 1 and June 30. If you are liable to pay taxes from income that is not deductible through Portugal’s pay-as-you-earn tax code, you are allowed to make payments in installments. These payments are usually due in December, September, and July. There is an official income tax calculator to help you determine the amount of tax due. You can also consult various specialists who deal with taxes.

Freelancers, sole traders, and other individuals who operate unincorporated businesses in Portugal will have their wages assessed as personal earnings. In turn, they will have to pay Portuguese income tax instead of corporate tax.

Closing Thoughts

With professional advice and strategic planning, you can reduce your Portuguese tax liability significantly. For instance, a qualified professional can help you identify the specific life insurance policies that will give you sustainable tax benefits as a Portuguese resident individual. So, as you prepare to file your returns, be sure to consult a professional wealth manager on ways that you can benefit from the favorable Portuguese tax system.

Furthermore, it is advisable to find an expert tax adviser with relevant cross-border experience and expertise in Portugal tax laws. In turn, such a skilled professional will assist you in becoming compliant and tax efficient while managing your assets to help you realize maximum gains.

Additionally, they will help you file your Portugal capital gains tax, otherwise a very overwhelming and often complicated process. You may choose a qualified accountant or skilled tax expert in Portugal or the UK to give you the necessary advice on social security and tax issues. Take note that these professionals are easily accessible through the Institute of Chartered Accountant in England and Wales.