Income is reported in different categories:
A) Salaries, B) Sole Traders, E) Capital, F) Property,
G) Capital Gains and
H) Pensions and is taxable in Portugal regardless of its origin. For non-residents, only income actually arising in Portugal is subject to assessment.
The current capital gains tax regime defines a flat-rate assessment on the disposal of shares, bonds, derivatives, warrants and other similar securities. In general, these gains are subject to a flat-rate tax of 28%. One significant exemption is the assessment of gains from the sale of shares of micro and small companies not listed on the stock exchange.
Although the 28% formally applies, these companies benefit from a 50% exclusion. Most small businesses (Limitada) as well as Portuguese nominee companies (Sociedade Civil) are eligible for this reduced assessment.
The flat 28% tax rate to capital gains completes the application of the new general tax rate rule for all income from capital. Already interest, dividends and rental income also pay the identical basic 28% flat-rate assessment applied to capital gains. Likewise, exemptions may be available to accommodate particular situations.
Flat-rate taxes are assessed autonomously, thereby avoiding the “top-slicing” effect customary with most additional income. However, they fail to allow for any deductible expenses or credits for taxation at source being applied against them, restricting their benefit.
Alternatively, taxpayers can elect to aggregate capital gains with other sources of income and be assessed at marginal rates. One method can be used for one form of income while another applied to other sources.
Capital Gain on Real Estate
Although it is the tax authority (AT), not you, that does the actual calculation, it is always worthwhile anticipating what the final taxation will be. For a property sold last year originally purchased in 2004, the calculation of the capital gain is as follows:
Step 1: Based on the year of acquisition, multiply the original purchase price by the Inflation Adjustment Coefficient in the table.
Step 2: From the final sales price, subtract the adjusted purchase price, giving the gross profit.
Step 3: Subtract qualifying costs (commissions, notary fees, transfer tax, etc.)
Step 4: Subtract documented capital improvements invoiced in the past 12 years.
Step 5: The difference between adjusted profit and deductable expenses is your net taxable gain.
Step 6: One half of the net profit is assessed unless rolling the gain into another principal residence. Either way, report the sale on your annual IRS declaration.
Resident vs. Non-Resident Individuals
If you are non-resident for tax purposes in Portugal, the capital gains tax calculation is quite simple: 25% of the full net profit.
If you are resident in Portugal, there are two options:
1) You can exclude one half of the capital gain. The other 50% of the adjusted net profit is added to overall income for the fiscal year and taxed at marginal rates. Properties purchased prior to 1989 are exempt for capital gains tax.
2) The gain may be rolled over if another principal residence of equal or greater value is bought between 24 months prior and three years after the sale. For newly acquired properties of lesser value, the gain is calculated on a pro-rata basis. If the reinvestment is less than the amount of the sale, you may owe additional tax and have to pay interest to Finanças on the non-reinvested balance. In the event that no reinvestment takes place, an assessment will be made on the entire non-reinvested balance plus interest.
Since 2007, it is possible to reinvest anywhere within the EU. Note that proof of residency is required from the tax authority in the new country of residence.
By Dennis Swing Greene
Dennis Swing Greene is Chairman and International Tax Consultant for euroFINESCO s.a.