Income received by a resident is broken down into different categories: A) Salaries, B) Self-Employment, 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.
Despite several important exceptions, the current Capital Gains Tax Regime (category G), implemented in 2010, defines a new level of flat-rate assessment on the disposal of shares, bonds, derivatives, warrants, and other similar securities. In general, these gains will now be subject to a flat-rate tax of 28%. This also applies to mixed or closed (private subscription) investment funds.
Old rules
Under the previous regime, capital gains on shares of listed companies were taxed at a flat-rate of 10% with a full exclusion being conceded for holdings of more than one year. These former rules have been revoked with the exception of open investment funds that continue to benefit as in the past under the previous rules. However, this exemption is only on shares traded within the structure by fund managers and not on the transfer of units by the investor (the exclusion merely avoids double taxation on internal and external trading).
New reporting obligations designed to combat fraud and tax evasion also apply to intermediaries involved in these operations.
A key exception
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 will now benefit from a 50% exclusion, leaving a net effective tax rate of 14%, similar to what existed prior to the changes. This means that most small businesses (“Limitadas”) as well as Portuguese Nominee Companies (“Sociedade Civil”) should suffer little real impact because of the new CGT rules.
Portuguese Nominee Companies are non-trading companies – sharing certain similarities with “trusts” in English Common Law – used to hold real property and other assets in Portugal and elsewhere in Europe. Nominee Companies have become increasingly popular with Non-Residents in recent years due to their tax efficiency, moderate cost and fully compliant structure.
Overall strategy
The introduction of the flat 28% tax rate to Capital Gains completes the application of the new general tax rate rule for all income from Capital. Already both Interest and Dividends also suffer the identical basic 28% flat-rate assessment as is now being 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. Simultaneously, they fail to allow for any deductible expenses or credits for taxation at source being applied against them, restricting their benefit to certain taxpayers.
By Dennis Swing Greene
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Dennis Swing Greene is Chairman of the Board and International Fiscal Consultant for euroFINESCO s.a. | www.eurofinesco.com
