UK Resident Selling Property in Portugal

Considering selling your property in Portugal ? As a non-resident taxpayer in Portugal, you are subject to Portuguese income tax (“IRS”) and must report the sale of your property in your income statement for the year in which you sold your property. With the help of PwC’s tax experts, we lay out the considerations in this article.

 

Calculating capital gains and losses is complicated.

According to PwC’s explanation in this article for idealista/news, as a non-resident taxpayer in Portugal, only income derived from Portugal is subject to IRS in Portugal (principle of territoriality). Real estate capital gains derived from the sale of property in Portugal are considered to originate in Portugal.

The difference between the sale price (or the taxable patrimonial value, if higher) and the purchase price of a property in Portugal is the capital gain or loss resulting from the sale of the property. All costs related to the appreciation of the property, whether incurred in the last 12 years or incurred during the purchase or sale of the property, are eligible for a tax deduction.

 

What is the taxation system that is in effect?

Capital gains can be taxed differently depending on whether the non-tax residents of Portugal are tax residents or not.

Non-tax residents are subject to the regime rule, which entails taxing 100% of the capital gain, at a special rate of 28%; European Union or European Economic Area residents (in the latter case, provided that information on tax matters is exchanged), on the other hand, are taxed 50% of the capital gain at marginal tax rates (which are currently 20%). (currently up to 5 percent ).

To determine the tax rates to be applied in the case of marginal taxation, it is important that foreign income is taken into account, since in the case of tax residents in Portugal it would be subject to the marginal Personal Income Tax rates for tax residents (for example, income from employment and business and professional income).

The legal framework currently in place only allows for the application of the above-mentioned regime-rule, and it is therefore expected that the Portuguese Tax Authority will assess tax on 100% of the capital gain and tax it at the special rate of 28%.

It is worth noting that there are currently numerous legal disputes between taxpayers and the Tax Authority over whether the referred rules comply or not with European law, and the European Court of Justice (Case C-388/19) is expected to rule soon on the matter, which could have an impact on national court jurisprudence. With the goal of providing the reader with a clear and concise understanding of the current tax regimes in Portugal, we have chosen not to ignore the importance of such a discussion in protecting the rights of taxpayers.

 

Practical case

The following scenario, for a single, non-Portuguese tax payer, who is also a French citizen:

When a property is purchased for €150,000 and sold for €250,000, the taxpayer will have a capital gain of €75,000, based on the difference between the sale value and acquisition value, after deducting the property’s purchase and sale expenses (€25,000).

The capital gain will result in a tax bill of €21,000 if taxation is done in accordance with the regime-rule (which corresponds to taxation of 100 percent of the capital gain at the special rate of 28 percent ).

Taxpayers who choose to tax only half of their capital gain (i.e., €37,500) at the marginal Personal Income Tax rates will owe an additional €10,900 in taxes if they have no other sources of income (which corresponds to the application of an effective tax rate of approximately 14.5 percent ).

Suppose the taxpayer has also earned €50,000 from employment in their country of residence (for example, France)?

The general tax regime would not change in this scenario, so the tax due would be €21,000 in this case. However, if the marginal Personal Income Tax rates are available, these €50,000 should be taken into account when determining the tax rate to apply. See what we can find.

If we add €50,000 to the 50% of the taxable capital gain (€37,500), we arrive at a taxable income of €87,500, resulting in a capital gain tax of approximately €14,475 in Portugal (corresponding to an effective tax rate of 19.3 percent ).

It is more advantageous in general to tax a portion of a person’s capital gains at the marginal Personal Income Tax rates because the maximum effective tax rate that may result from this is 26.5 percent (i.e. the result of the division by two of sums from 48 percent to 5 percent), which is lower. Consequently, it is more advantageous to tax capital gains at the marginal Personal Income Tax rates.

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