Portugal is an excellent country to buy a property or invest in the real estate market, with attractive returns on investments and many desirable locations on offer to choose from. Indeed, many individuals have opted to buy property in Portugal, given that property is very affordable when compared with neighboring countries. When it comes to taxation in Portugal, it can at first seem a little complicated, particularly with capital gains tax. Indeed, if you live in Portugal and own Portuguese property or other assets, you may face capital gains tax in Portugal and the UK, depending on your Portugal residency status.
As is the same in many other countries, there is a capital gains tax in Portugal that is imposed on the sale of assets.
However, with taxation in Portugal, unlike in other countries, the capital gains tax in Portgual only applies to gains that are made on real estate and investments. Therefore, personal items are not subject to tax, and inheritances are only subject to a limited form of stamp duty.
The Portugal tax rate falls between 14.5% to 48% as of 2021. This article focuses on the capital gains tax, which is important to know when buying and selling property in Portugal. If you are looking into Portugal capital gains tax crypto, you can see our article here that covers the topic.
It is very important to understand taxation in Portugal. Exposure to capital gains tax will depend on your Portugal tax residency status, how you own the asset, and, if it applies to owning property, whether it is your primary residence. Foreigners will also be able to have significant tax advantages in Portugal, under the non-habitual residence (NHR) scheme, which we will also cover in this article.
What is Capital Gains Tax 
Capital gains are the profit that you generate when selling a property (i.e. when you sell a property, the eventual profit that you make from a purchase).
This capital gain that you make from the purchase of the property is liable to tax. The owner of the property will need to disclose the tax return for the year in which the house was purchased and the respective price that was paid when acquiring the property.
If there were works or maintenance that were carried out on the property, these should be declared —for example installing a new heating system. You will need to show the invoices and the amounts that were paid. These will be carried out in the capital gains assessment.
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 Portuguese property market.
Capital gains tax for Portuguese residents
Portuguese 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.
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 significant tax benefits for up to ten years, if structured correctly.
If you have NHR status, then you are able to avoid liability for capital gains tax on certain worldwide gains. This will depend on which country has the taxing rights under the terms of the double tax treaty. A double tax treaty 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
If you are a non-Portuguese resident, then the full capital gain from the sale of a property, bonds, or securities in Portgual are taxable at a flat rate of 28%.
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 tax rate 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 tax 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.
How to reduce your capital gains tax exposure?
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.
Goldcrest – your buyer’s agent in Portugal
Goldcrest is a buyer’s agent based in Lisbon. We provide expert advice on real estate investments and on buying properties in Portugal, working with you to secure the best deal for you. If you are thinking of relocating to Portugal, investing in the property ladder here, or would simply like to discuss your options, please book a call with us today.
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