Capital Gains Tax

Capital Gains Tax

We all hope and aim to make a solid investment when purchasing a property in Portugal. Over a period of time we expect that it will rise in value and when the time comes to sell it we can reflect on a nice 'profit'. This profit is the difference between the sales price and the purchase price and is usually referred to as a 'capital gain'. It is important to remember that any capital gain will attract a tax when you sell it. So, you will not be entitled to keep all of the profit. There are ways to reduce and maybe avoid this tax although this depends on several factors. Let's explore this in more detail below.

The Paperwork and Figures

Firstly, in order to calculate your capital gain here is a list of the items/paperwork you would usually need;

• The sale price and the purchase price, as documented on the deed/escritura. 
• Any property improvement costs. This needs to be work that genuinely (for the long term) has improved the structure, appearance and worth of the property. Windows, extensions, brickwork are all acceptable. Furniture, gardening for example, isn't. The property improvement costs need to have been documented by acceptable invoices. The iva (vat) is included in the cost unless you were able to claim it back. 
• The amount of buying costs (transfer tax, stamp duty, registration costs).
• The amount of selling costs (for example, our commission, energy certificate cost).

To calculate the gain, we first take the profit from the sale (sale price less purchase price) and deduct the allowable expenses detailed above. 

How much is it?

Until 2022, capital gains from the sale of real estate in Portugal by non-residents were taxed at a special flat rate of 28% on 100% of the gain, unless the individual was a resident of an EU Member State or the European Economic Area (EEA) and opted to be taxed under Portugal’s progressive tax rates, which range from 14.5% to 53%.

In contrast, residents in Portugal were taxed on only 50% of the balance of their capital gains. Non-residents, however, were taxed on the full amount, a disparity that was deemed a violation of European law by Portuguese tax courts, including the Supreme Court.

To address these legal challenges and align the tax treatment of residents and non-residents, the Portuguese government introduced legislative changes. The new rules aim to equalize the taxation of real estate capital gains between these groups.

The Portuguese Tax Authority clarified this change through Circular Letter no. 20255, issued on April 14, 2023, outlining the following updates:

1. Until December 31, 2022: Real estate capital gains for non-residents were considered at only 50% of their value but taxed at the special flat rate of 28%.

2. From January 1, 2023: Real estate capital gains for non-residents must now be aggregated (at 50% of their value) with other income earned in the same year. These gains are subject to Portugal’s progressive tax rates, which can go up to 53%.

Non-residents earning capital gains from the sale of real estate after January 1, 2023, must include this income with their total annual earnings to determine the applicable tax rate.

Additionally, when the law requires non-resident taxpayers to aggregate income for tax purposes, all income earned, including income from outside Portugal, will be considered to calculate the applicable tax rate on Portuguese-sourced income. This does not mean foreign income will be taxed in Portugal, but it is factored into determining the tax rate for Portuguese income.

Summary

Bear in mind the law changes regularly and we are not chartered accountants. We have done our best to give you an overview of the different scenarios and what you should expect. We do, however, recommend with all tax and legal matters to consult the appropriate experts for up to date advice and professional guidance. We cannot be held responsible for any actions made on the basis of the information given.