VAT on real estate: non-residents and new tax rules.

Since January, there have been changes in the taxation of gains from the sale of real estate for emigrants or non-residents of Portugal. Following changes made in the 2023 State Budget (OE2023), gains from the sale of real estate will be taxed at 50% and then included in the remaining income subject to progressive individual income tax (IRS) rates, as is already the case for residents. The IRS has now clarified how the entire process will work.

In order to unify the taxation of real estate income tax for residents and nonresidents under the IRS, the government changed the rules in this area in OE2023. The motivation for this change in the IRS Code was a series of court cases in which the IRS was defeated and accused of discriminating against non-residents in this matter.

Previously, non-residents of Portugal - foreigners or Portuguese emigrants - made a profit from the sale of real estate and were taxed on the full amount of the profit at a 28% rate under the IRS. At the same time, gains from the sale of real estate to residents were taxed at 50% and included in the remaining income subject to the general personal income tax rates (IRS).

The rules are now the same for residents and non-residents: real estate gains are taxed at 50% of the total amount and must be included in the remaining income subject to the general personal income tax rates (IRS).

The rules are now the same for residents and non-residents: real estate gains are taxed at 50% of the total amount and must be included in the remainder of income subject to progressive IRS rates.

How will the taxation of real estate profits for non-residents work?

With the aim of "harmonizing procedures", the tax office has clarified how the system of taxation of real estate profits for non-residents is applied, according to a letter published on the Finance Authority's portal.

Firstly, it is stated that in the case of non-residents of Portugal, the taxation of income does not include, with the exception of: profits derived from the "beneficial disposition of real estate rights"; "beneficial disposition of contractual positions or other rights related to real estate contracts".

It is then explained that "where the law requires the aggregation of income earned by non-residents in Portuguese territory, all income, including income earned outside that territory, shall be taken into account under the same conditions as for residents". Specifically, it applies to income earned as of January 1, 2023. The purpose is not to tax these gains in Portugal, but to use them to determine the applicable rate.

Therefore, "income received in Portugal by non-residents relating to gains derived from the beneficial disposition of real estate rights or from the beneficial disposition of contractual positions or other rights related to real estate contracts, as of 01.01.2023" are subject to the following taxation system: determination of the amount of income qualifying as income; compulsory pooling of certain income; "application of the general rates of the IRS Code to pooled income received in Portugal, with the application of the general rates of the IRS Code to the pooled income received in Portugal, with the application of the general rates of the IRS Code to the pooled income received in Portugal, with the application of the general rates of the IRS Code to the pooled income received in Portugal, with the application of the general rates of the IRS Code to the pooled income received in Portugal.

With regard to real estate profits derived by non-residents before December 31, 2022, their calculations, which have been the subject of tax procedures or processes, "the understanding continues to apply in terms of the application of the provisions of Article 43, paragraph 2 of the Tax Code in relation to non-residents, whereby the amount of real estate profits is considered equal to only 50% of its value and is subject to taxation at a special rate of 28%," concludes the article.

According to attorneys and tax advisors, this IRS measure of taxation of real estate profits for non-residents is "fairer" and "less discriminatory." However, they believe that completing Form 3 may be more "complex and costly," and there may be difficulties in monitoring its completion, according to Jornal de Negócios.