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IRS 2009 Income Nº 6 – CAPITAL GAINS – Investment portfolios

By DENNIS SWING GREENE [email protected]

Dennis Swing Greene is Senior Partner and International Fiscal Consultant for euroFINESCO s.a.

In this series of articles, we examine different forms of income that must be reported on “IRS” tax declarations:

1. Income from Salaries,

2. Self-Employment – the Simplified Regime,

3. Income from Capital – Bank Interest,

4. Income from Capital – Dividends,

5. Rental Income,

6. Capital Gains on Investment Portfolios,

7.  Capital Gains on Real Estate

Portugal has one of the most favourable Capital Gains Tax treatments within the European Union. In 2001, the Revenue experimented with change, dropping total CGT exemption after one year to an assessment as high as 30 per cent.

Unfortunately, this deviation coincided with a major downturn in World Equity Markets and contributed to a catastrophic collapse in investor confidence in the Portuguese Security Markets.  

The current return to tax exemption corrects what proved to be an untenable position for a small, peripheral country. Coupled with the recent abolition of Inheritance Tax, this attractive CGT approach contributes to Portugal’s developing status as a quasi tax haven within Europe.

Questions & Answers:

What constitutes a Capital Gain?

Capital Gains are derived from the sale of property or rights:

1. real estate termination of property rights (to be explained in the next article)

2. shares in partnerships, stocks and other securities and funds

3. literary rights

4. winnings from gambling

Are there any exemptions?

Yes.  The following are exempt from Capital Gains Tax

5. housing purchased prior to

1 January 1989

6. construction lots acquired by gift or inheritance prior to 08/06/1965 as well as

rural property

7. shares in partnerships acquired before 01/01/1989

8. government bonds and debentures

9. shares (acções in publically traded companies) held for more than 12 months;

Is the sale of shares of a Limited Liability Company also exempt?

No. Only the shares (acções) of Corporations (Sociedades Anónimas or S.A.) are exempt after one year but only when assets are less than 50 per cent in real estate holdings. Gains from the sale of quotas (participatory shares) of other forms of companies have a flat rate assessment of 10 per cent.  

Attention: Don’t get confused by the semantics in Portuguese. While English uses the word “share” for all kinds of companies, Portuguese is far more complex and specific. Acções refer to shares in a corporation. Shares in a Limited Liability Companies are called Quotas. Shares of Nominee Companies (Civil Companies) are normally referred to as Participações. The latter two have distinct tax treatment (flat 10 per cent CGT) to corporation shares (exempt after one year).

How is the tax calculated?

In respect to Capital Gains derived from the sale of securities purchased after 1 January, 2001, the following table applies:

PERIOD SECURITIES HELD (FLAT RATE)

Up to 1 year                  10% of gain

More than 1 year                 Exempt

Gains are calculated as the net of profits and losses. Net losses may be carried forward up to five years on income within the same income category.

Next: Capital Gains – Real Estate

Dennis Swing Greene is Chairman and International Fiscal Consultant for euroFINESCO s.a. Consultations can be scheduled in Guia (Albufeira) 289561333, Lisbon (Chiado) 21342421 and in Funchal (Sé), Madeira 291221095.