Everything you need to know about Capital Gains Tax in Portugal

In simple terms, capital gains correspond to the profit made on the sale of an asset, i.e. the difference between the price at which you sold the asset and the price at which you bought it. This difference can be positive and represent a capital gain, or negative and represent a capital loss. This financial concept applies to various assets, including both tangible ones like real estate and intangible ones like financial products. However, what might raise eyebrows is that these gains aren't free from taxes. Let’s take a look at capital gains tax in Portugal.

For companies, capital gains tax usually falls under the broader umbrella of income and is taxed based on corporate income tax (IRC) rates. But for individuals, it's a more nuanced journey.

Understanding Capital Gains Tax Calculations in Portugal

In Portugal, the calculation for capital gains tax is:

Capital Gain or Loss = Realized value – (Acquisition value x Monetary correction coefficient) – Acquisition and sale costs

• Realized value: this is the amount you receive when you sell or redeem an asset.

• Acquisition value: the value at which the asset was bought. It should be noted that the cost of acquisition is calculated using the oldest purchases. For example, suppose you bought 50 shares in company X in 2015 for 100 euros each and another 50 in 2018 for 120 euros each. If you sold 80 shares in 2022, the acquisition value to be taken into account would be 8,600 euros (50 shares x 100 euros + 30 shares x 120 euros).

• Monetary correction coefficient: this is a number that adjusts the acquisition value to account for inflation or changes in the value of money since the purchase date. It reduces the overall capital gain, and is used when more than two years have passed between the purchase and sale dates.

• Acquisition and sale costs: these are the costs incurred that are directly related to the acquisition and sale. It includes, for example, the buying and selling commissions that brokers charge in the respective processes, but does not include overheads such as custodial fees for securities.

Capital Gains Tax on Different Assets in Portugal

How capital gains are taxed depends on the nature of the asset involved, as various assets are subject to different rules.

Take real estate, for instance; only 50% of the capital gain is considered income, but it's combined with your other earnings and taxed according to the IRS tax brackets table. In contrast, when it comes to stocks and shares, you have options. You can either include them with your other income and be taxed based on your overall tax bracket, or choose a straightforward 28% flat tax rate (taxation at special rates).

Now, these rules are generally applicable to assets acquired after January 1st, 1989 (the year in which the IRS Code came into force). Anything acquired prior to that date usually can get an exemption from capital gains tax.

Capital Gains Tax on Real Estate in Portugal

As of January 2023, significant modifications have reshaped the taxation of real estate capital gains in Portugal for emigrants and non-resident citizens. These changes were implemented through the State Budget for 2023 (OE2023) and are designed to simplify the tax structure.

Previously, non-residents, including foreigners and Portuguese emigrants, faced the arduous task of paying a 28% autonomous tax rate on the full amount of the capital gains from real estate sales. In contrast, residents experienced - and still experience - a more favorable regime, with only 50% of their real estate capital gains being counted towards taxation, and then combined with other income and subject to the standard IRS tax brackets.

Now, the rules are consistent for both residents and non-residents alike.

For taxation purposes, only 50% of the total real estate capital gains are considered income. These gains are then added with other sources of income and subject to the progressive IRS tax rates.

These recent changes seek to ensure a more equitable and transparent system for real estate capital gains for both residents and non-residents.

It's essential to note that non-residents must declare all income on the Portuguese tax return, even if it is not taxable in Portugal. This declaration is vital for accurately establishing the applicable tax bracket, ensuring that the appropriate tax rate is applied to their real estate capital gains. This approach doesn't imply double taxation but rather helps in determining the precise tax rate applicable.

In the context of real estate capital gains, considerations extend beyond the basic acquisition and sale costs. To calculate the capital gain, you should also factor in expenses associated with property appreciation over the preceding 12 years. 

The formula for this calculation is as follows:

Capital Gain or Loss = Realized value – (Acquisition value x Monetary correction coefficient) – Acquisition and sale costs – Expenses with the appreciation of the property sold (last 12 years).

Expenses related to property appreciation include maintenance, construction, renovation, or rehabilitation costs.

Acquisition and sale costs are categorized as follows:

• Acquisition:
  - The amount paid in IMT, the Municipal Tax on the Transfer of Real Estate;
  - The amount paid in Stamp Duty on the transaction value;
  - Fees associated with the property deed.

• Sale:
  - The amount paid for the issue of the energy certificate for the property you sold, which is compulsory for the selling of new or used properties;
  - The commission paid (and declared) to the real estate company that helped you sell the property, if applicable;
  - Any solicitor costs you may have incurred (this might also be applicable for the acquisition portion).

Example:

You acquired a property in 2008 for €200,000 and sold it in 2022 for €500,000. With acquisition costs of €10,000, €50,000 in expenses related to property appreciation, and selling costs of €32,000, the calculation would be:

Capital Gains = €500,000 – (€200,000 x 1.11) – (€10,000 + €32,000) – €50,000 = €186,000

Capital Gains subject to tax = €186,000 x 50% = €93,000

The €93,000 will be combined with your other income for 2022 (e.g., salary) and will be taxed according to the progressive IRS tax rates.

Exceptions and Exemptions in Real Estate Capital Gains Tax

In some cases, when properties receive government support for specific purposes, the entire capital gain may be considered as income. This applies to properties that have received non-refundable support from public entities, provided the support exceeds 30% of the property's Tax Value (VPT) for IMI (Municipal Property Tax) purposes, and the property is sold within 10 years of receiving the public support.

If the property from the previous example had received government support and was in the condition described above, the capital gain of €186,000 would be fully included with your other income.

The capital gain from the selling of real estate intended for the permanent residence of the taxable person or his family, may be excluded from taxation (in whole or in part) if:

• You buy another property or land
  
  - If the amount from the sale of your own permanent residence is reinvested in the purchase of another, for the same purpose, you are exempt from paying capital gains. The same applies if you use that amount to buy a plot of land for construction or invest in the extension or improvement of another property. 
  
  - This must be done within 24 months before the purchase of the new property (for situations where the purchase of the new home took place before the sale of the current one) up to 36 months after the sale.
  
  - Prove that the transferred real estate real estate was intended for the permanent residence of the taxable person or his family, for the 24 months prior to the date of transfer.
  
  - It is also important to bear in mind that the amount must be reinvested in full. Otherwise, the exemption will be partial, proportional to the amount of the sale applied. If the reinvestment isn’t made in the same year of the transfer of the property, in order to qualify for this exemption, the taxpayer must mention its intention to reinvest in the annual tax return.
  
  - The new property, which must be for your own permanent residence, can be located in Portugal, in another European Union country or within the European Economic Area.

• The sale was to the Government
  
  - Anyone selling property to the government or local authorities is also exempt from paying capital gains tax. However, taxpayers residing in a country, territory, or region that is subject to a favorable tax regime do not benefit from this.

• You are over 65 or retired
  
  - People over 65 or retired can benefit from an exemption on real estate capital gains. To qualify, within six months after the sale of the property, they must invest the sale proceeds in an insurance contract, a contribution to the public capitalization scheme (e.g., retirement certificates), or a pension fund. With the exception of retirement certificates, these products must be redeemed through a periodic annuity system, with an annual limit of 7.5% of the total amount invested.

• You want to repay a mortgage (temporary measure)
  
  - One option provided for in the “Mais Habitação” (More Housing) program is to exempt from paying capital gain tax those who decide to apply, within three months, the amount from the sale of a property belonging to any member of the household to the amortization of mortgage loans. The loan may be for their own home or that of their descendants (children). This measure, already approved by the government, applies to transactions carried out between the beginning of 2023 and the end of 2024.  It's important to consider that if the amount obtained from the sale is greater than what is used to pay off the loan, the remainder will be subject to IRS taxation.

These exceptions and exemptions serve to accommodate various circumstances, providing individuals with opportunities to optimize their tax obligations when dealing with real estate transactions in Portugal.

Capital Gains Tax in Portugal for Stocks/Shares

Capital gains arise when you sell shares at a higher price than their purchase price. If the sale price is lower, it's considered a capital loss.

In the case of capital gains, they must always be declared in the annual tax return. The positive balance calculated by the difference between the capital gains and losses is subject to the same taxation as other capital income, i.e. at the rate of 28%. You can also opt for taxation by aggregation, this means that you may choose to, instead of having this income taxed at the flat rate of 28%, have it considered along with your other taxable income (e.g., salary), subjecting it to the progressive IRS tax rates.

However, in the case of shares in micro and small companies, only 50% of capital gains are taken into account for taxation, so the effective tax rate is 14% and not 28%.

Capital Gains Tax on Capitalization insurance

Income from the redemption of capitalization insurance is subject to withholding tax. However, the specific tax rate is determined by when you choose to redeem the insurance policy:

• If the redemption occurs within the first five years of the contract, a withholding tax rate of 28% is applied;

• For redemptions between the 5th and 8th years of the insurance contract, a reduced rate of 22.4% applies (provided that more than 35% of the total amount has been invested in the first three years of insurance);

• If the redemption takes place after the 8th year of the insurance contract, the lowest rate of 11.2% is applicable (again, provided that more than 35% of the total amount has been invested in the first three years of the insurance).

It's important to note that these amounts only need to be declared in your annual tax return if you opt for taxation by aggregation.

Capital Gains Tax on Investment funds in Portugal and from abroad

In Portugal, the taxation of income from investment funds depends on whether they are domestic or foreign funds:

• Portuguese Investment Funds:
  
  - Income generated by domestic securities investment funds is considered capital income and is subject to a withholding tax rate of 28%.
  You are only required to declare this income in your annual tax return if you choose to have it taxed by aggregation. If you opt for aggregation, it will be subject to the progressive IRS tax rates.
  
  - The same applies to income obtained from the redemption or liquidation of units in these funds, which do not need to be declared, unless you opt for taxation by aggregation.

• Foreign Investment Funds:
  
  - If you received income from a foreign investment fund in the previous year, whether it was distributed by the fund or resulted from the redemption or sale of units, you must declare it in your annual tax return.
  
  - This income is generally taxed at an autonomous rate of 28%. However, you have the option to include it in your other taxable income, in which case the progressive IRS rates will apply (taxation by aggregation).

The sale of units in investment funds, domestic or foreign, must always be declared in the annual tax return and the capital gains obtained from the sale, or sales, are mandatorily subject to taxation by aggregation.

Kindly note that the income from participation units in venture capital funds, paid or placed at the disposal of the respective holders, whether by distribution or redemption, is subject to withholding tax at the rate of 10 %, except when the holders of the income are entities exempt from capital income or non-resident entities without a permanent establishment in Portuguese territory to which the income is attributable, excluding:

a) Entities that are resident in countries, territories or regions subject to a clearly more favorable tax regime, included in a list approved by order of the Minister of Finance;

b) Non-resident entities owned, directly or indirectly, by more than 25 per cent by resident entities.

Capital Gains Tax on Crypto (Effective from 2023)

Up until 2022, transactions involving crypto assets conducted by individuals not engaged in professional crypto activities did not need to be declared, and gains were not subject to taxation.

Starting in 2023, capital gains from the sale of crypto assets held for less than 365 days is  subject to an autonomous tax rate of 28%. You must declare these gains in your annual tax return for 2023, when filing in 2024, and so on. Assets held for longer than a year do not need to be declared and are not taxed.

It's important to note that if your taxable income exceeds the amount provided for the last IRS bracket, you are obligated to have the capital gains from crypto assets taxed by aggregation. In other words, if in 2023 you have a taxable income of more than €78,834, a rate of 48% will be applied to these gains.

Additionally, just like with other assets, the taxation of capital gains on crypto assets in Portugal is applied when those gains are realized through a sale or disposition of the assets. If the value of your crypto assets increases during the year but you haven't conducted any sales or transactions, you have no tax obligation on those unrealized gains. Capital gains are only subject to taxation when they are realized, providing consistency in the tax treatment of various types of assets.

Final Thoughts on Capital Gains Tax in Portugal

Navigating the intricate landscape of capital gains tax in Portugal requires a clear understanding of the rules regarding various asset types. Whether you're dealing with real estate, stocks, capitalization insurance, investment funds, or even crypto assets, the Portuguese tax system offers a diverse range of regulations. Recent changes, particularly the adjustment in taxation for real estate capital gains in 2023, emphasize the importance of staying up-to-date.

While this article has shed light on the fundamental principles of capital gains taxation, it is crucial to seek personalized financial advice when dealing with these matters. Each individual's financial situation is unique, and consulting with tax professionals or financial advisors can ensure that you make well-informed decisions, optimize your tax liabilities, and take advantage of potential exemptions or deductions.

Ready to navigate the complexities of capital gains taxes? Let moviinn be your guide. Reach out to us today for expert insights and assistance.