Income tax on gain from sale of real estate in Portugal

Buying or selling property in Portugal? Whether you're buying your first home here, downsizing or leaving the country, it's important to understand the rules for capital gains tax on the sale of property in Portugal. The amount of tax you pay depends on whether you are a resident, whether you are selling the property in continuous residence status and whether you can take advantage of the tax portability benefit.

Portugal residents are liable to pay tax on gains from the sale of real estate worldwide. Only 50% of the gain is taxable, and after two years of ownership, you are eligible for inflation relief. Real estate acquired before 1989 is not taxable. The taxable amount is added to your other income for the year and is subject to a scale of income tax rates, currently ranging from 14.5% (for income up to €7,479) to 48% on income over €78,834.

Main exemptions for principal residence - tax portability rules

When selling a property that was your main home, you may be able to avoid income tax altogether, depending on the circumstances and what you do with the proceeds. Two exemptions are available (they can both be claimed):

You must report the amount you intend to roll over on your tax return for the year you sell the property. The new home must be in the European Union (including, obviously, Portugal) or a European Economic Area (EEA) country that exchanges tax information with Portugal. You must purchase a new home within 36 months of the sale of your first home or 24 months before and move into it within six months of the three-year period. Otherwise, any tax due would become a valid tax (with penalties and interest). Reinvesting in land to build a new home also qualifies. All income must be re-invested. This includes agency commissions, legal and other contingencies, so tax is usually required. The property must be in your name, not the company's name. It is recommended to have a "history" in it. For example, being registered as your address on local government, utility companies and tax returns.
• < - Gains from the sale of your property may also be exempt from tax if you are retired and transfer the proceeds into an insurance contract or pension. You (or spouse/partner) must be retired or over 65. The proceeds from the sale are invested in a pension fund, public pension system or insurance contract within six months.

Non-residents

In current Portuguese law, non-residents selling property in Portugal are taxed on all gains. Individuals are taxed at a rate of 28%. Companies are subject to Portuguese corporation tax at 25%, while tax haven companies are taxed at 35%. If you are a resident of an EU or EEA state, you can choose to be taxed as a resident of Portugal. This is only beneficial for those with very low incomes. This situation is evolving. The Portuguese Constitutional Court and the European Court of Justice have ruled that such different treatment discriminates under EU law. Portuguese law has not yet changed, but reports suggest that the Portuguese tax office already treats residents and non-residents the same.

Non-residents with continuous residence (NHR)

Persons with NHR status avoid income tax liability on income from certain foreign sources of income, depending on which country is entitled to taxation under a bilateral tax treaty. Where profits are taxed in the source country - for example, with property in the UK - there is no tax liability in Portugal for NHR residents. Profits are exempt with progression, so are still added to your annual taxable income to calculate your effective tax rate in Portugal.

Tax planning

As usual with taxation, what may seem simple at first glance actually turns out to be more complex in practice, so it is advisable to seek personalized professional advice from a local advisor. They can also recommend tax-efficient ways to hold your assets and make sure your arrangements are right for you. Tax rates, income and exemptions are subject to change. Any statements regarding taxation are based on our understanding of current tax laws and practices, which are subject to change. Tax information has been summarized; individuals should seek personalized advice. Keep up to date with financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.

Author: Sharon Farrell || [email protected] Sharon Farrell is a partner at Blevins Franks in Portugal. www.blevinsfranks.com