If you are looking to reinvest your total selling price into a new property then the potential capital gain may not be subject to tax. This is only applicable if the house you are selling is your permanent address and corresponds with your tax address — in that you have Portugal tax residency.
An important consideration is the time period. You must purchase a new house and reinvest the total selling price 24 months before such a sale or 36 months after the sale. If this is the case, the owner needs to inform the Portuguese Tax Authorities that they intend to reinvest back into the property market in Portugal.
Capital gains tax for Portuguese residents
Regarding capital gains tax, Portugal residents are liable to tax gains on worldwide property and investments that were acquired from 1 January 1989 onwards. Capital gains on real estate are added on to other income for the year and are taxed at the income tax scale rates — ranging from 14.5-48%.
Shares, bonds, and securities are taxed at a flat rate of 28%. Assets that are deemed to be from a “tax haven”, such as Gibraltar and Guernsey, are taxed at a greater rate of 35%.
The rules are quite generous for Portuguese residents. As an example, only 50% of the gain of the sale of real estate is liable to be taxed and you are positioned to have inflation relief after two years of ownership. There also may be exemptions available to you, so it is best to check with a financial advisor.
Main home exemptions for residents
If you reinvest the proceeds from a property sale into another main home in Portugal, or anywhere in the European Union or European Economic Area (EU/EEA) that has a tax treaty with Portugal, then you will not have to pay tax on capital gains. Note that the property has to be your primary residence. To qualify, you will need to reinvest into the property market within 36 months after the sale of your property market or 24 months before the sale.
Note that this tax exemption no longer applies to UK properties. This means that British expats that want to sell their Portuguese property to return to reinvest this money in the UK no longer benefit.
In 2019, an additional capital gains relief was introduced that is focused on benefiting retirees. If you are retired or above the age of 65 then you are tax exempt on capital gains arising if you reinvest the proceeds from the primary home in a pension income fund or eligible insurance contract within six months after the sale.
Rules for non-habitual residents (NHR)
The non-habitual residence (NHR) scheme is perfect for expats that are looking to move to Portugal. Under the scheme, you are able to have a significant taxable benefit for up to ten years, if structured correctly.
If you have NHR status, then you are able to avoid liability for tax on capital gains on certain worldwide gains. This will depend on which country has the taxing rights under the terms of the double tax treaty (DTT). A DTT is a two-party agreement between two countries that is made up to resolve issues relating to the double taxation of passive and active income for their respective citizens.
If the gain is taxable in the same country, for example with the UK property market, then there is no liability in Portgual for those with NHR status. Nonetheless, the capital gains are “exempt with progression” and are still added to your annual taxable income to calculate the effective tax rate in Portugal. As a result, although not directly taxable, the gain could increase your overall tax bill.
On the other hand, UK shares are taxable in the country of residence. Therefore, this gain will be taxed in Portugal under the NHR scheme.
You can learn more about the NHR scheme here.
Capital gains tax for non-Portuguese residents
Regarding capital gains tax for Portugal non residents, then the full capital gain from the sale of a property, bonds, or securities in Portgual are taxable at a flat rate of 28%.
Put simply, capital gains tax in Portugal is charged on the sale of property or other assets at a rate of 28% for individuals and 25% for companies and non-residents. Residents will need to pay taxes on just 50% of their capital gains.
If you are an EU resident, then you can choose to be taxed as a Portuguese resident instead of at the sale income tax rates. Nonetheless, you will need to declare your worldwide income to calculate the correct and relevant rate of tax on the gain. Therefore, this may not be the most tax-efficient way forward for you.
If you own a property in Portugal through a non-resident corporate structure (i.e. a company, business, or trust) then the capital gains have only recently become taxable in Portugal. From January 2018, if 50% or more of a company’s value, if owned by a non-resident, comprised of Portuguese real estate, the gain on the transfer of shares attracts a 25% corporation tax rate. If it’s from a blacklisted jurisdiction, then this rises to 35%.
This only applies where the double taxation treaty between Portugal and the company’s country of incorporation provide Portugal with taxation rights. This is the case for US-owned companies, for example.
There are also companies that are not affected. For instance, companies based in the UK or Luxemburg pay a corporation tax rate in their respective country as opposed to in Portugal.
Taxation on rental income
Regarding rental income and taxable income, as a rule of thumb, if you are renting out your property, then rental income is taxed at a flat rate of 28%. However, there are certain tax deductions that could apply to you. When you declare your rental income to the Portuguese Tax Authorities, there are deductions for fire insurance as it is compulsory to have this for all rental properties. Additionally, property owners can deduct expenses such as the IMI, costs regarding obtaining the energy certificate, and condominium fees (if applicable). It is often worth speaking with an accountant who can help you regarding your tax return on renting property, particularly if you do not speak Portuguese or are unfamiliar with the processes.
With a thorough plan, you may be able to significantly reduce your tax liability. As an example, certain types of life insurance policies can provide significant tax benefits in Portugal. Discuss your options with an experienced wealth manager about the best option for your situation.
Scouting out an advisor with cross-border or international experience can help you find tax-efficient and compliant ways to manage your financial assets so that you do not need to pay more tax than is necessary, whether in Portugal or your resident country.