What will Brexit mean for the individual’s taxation in Portugal?

The never-ending saga between the United Kingdom and the European Union is soon to come to an end on December 31, 2020. The transition period will finally cease and a new life from January 1, 2021 will become the new normal. Many issues still need to be clarified but, from a Portuguese tax perspective, some topics are already very clear and of extreme relevance.

Individuals and corporate entities will face new tax challenges soon, whether due to the changes in the current legislation, whether due to the entry into force of a new one.

In terms of the current applicable legislation, individuals will face a significant change on the taxation of properties deemed as their primary residence in Portugal. The reason for this is the fact that the Portuguese legislation in force allows a partial or total exclusion from personal income tax (‘PIT’) on the capital gains derived from the sale of a Portuguese-situs real estate property, provided that such property is deemed an individual’s primary residence and the reinvestment of the sale’s proceeds in the acquisition, improvement or construction of another primary residence takes place within a certain timeframe (ie. in order to be eligible to benefit from the tax benefit on the capital gains, the individual must have his/her tax residence registered at the address of the property sold, and subsequently change it to the address of the property purchased, within a certain timeframe).”

While this is true in cases where the tax benefit is applicable either in situations where individuals reinvest the sale’s proceeds in the acquisition of another primary residence in Portugal or in another EU/EEE country with whom Portugal has entered into an administrative assistance agreement, the same will not apply, after Brexit, in those cases where an individual wishes to reinvest in a property located in the UK.

As such, bearing in mind that the UK has left the EU and that it is not a member of the EEE, it is safe to say that no exclusion from tax will be applicable on the sale’s proceeds, should these be reinvested in the acquisition, improvement or construction of a residence located in the UK.

In addition, after Brexit, individuals are set to lose the chance to benefit from a tax deferral on the capital gains derived from tax neutral corporate reorganisations, should they intend to transfer their tax residence outside of Portugal to a third country (i.e., the UK). Considering that the Portuguese law currently in force allows for the possibility of deferring taxation on these situations, provided that individuals change their residency to a country within the EU/EEE with whom Portugal has entered into an administrative assistance agreement, the same cannot be said when individuals change their residence to a third country like the United Kingdom. The twist is on the country where the residence is changed to. Thus, after Brexit, those individual shareholders transferring their tax residence outside of Portugal to the UK will be immediately liable to PIT in Portugal on their deferred taxation capital gains.

As if these changes weren’t enough, upon changing their residency to the United Kingdom (and as a major disclosure obligation before the Portuguese tax authorities), individuals will also mandatorily have to appoint a tax representative in Portugal. Considering that a penalty may be applicable if such tax representative is not appointed, if one happens to forget to comply with this obligation, the risk of increasing costs is higher, as a penalty may be applicable to the defaulting taxpayer.

And what about social security protection? Are British and Portuguese nationals due to pay social security contributions in both countries? Well, the answer is not as clear as we had desired, as Portugal and the United Kingdom are yet to enter into a Social Security agreement.

Given the fact that social security contributions are, as a rule, due in the country where the activity is performed, further queries may arise from situations where employees are working abroad (for periods up to 24 months).

With the United Kingdom out of the EU and the EEE, contributions may eventually be paid therein and in Portugal. Double payment is neither economically attractive for businesses, nor from a taxation standpoint.

Nonetheless, the Portuguese legislation applicable to situations where there is not a Social Security – multilateral or bilateral – agreement in force establishes that, up to a 12-month period (which can be extended), no contributions are due in Portugal, as long as it is proved that the individual is subject to the Social Security scheme in the United Kingdom, and vice-versa.

Overall, as clear as some tax situations are, the fact is that this means more taxes, more obligations and, consequently, more burden to the taxpayers.

If we intend to maintain a close relationship between Portugal and the United Kingdom, thus honouring the lasting bonds between the two countries, perhaps we should be looking at making it “Brexit proof”.