Real estate capital gains in Portugal for non-residents (IRS and taxes)

The sale of a property located in Portugal, by a non-resident taxpayer, for tax purposes in Portuguese territory, is subject to IRS taxation and will have to be reported in the income tax return for the year in which the transaction took place. In this article, we explain the factors to take into account, with the help of tax experts.

How is surplus or minus value calculated?

Since these are non-resident taxpayers in Portugal, only income from a Portuguese source is subject to IRS in our country (principle of territoriality), as PwC* recalls in this article prepared for idealista/news, clarifying that, with regard to real estate capital gains, Those resulting from the onerous transfer of real estate located in Portuguese territory are considered to be of Portuguese source.

Regarding the calculation of the capital gain or loss resulting from the sale of a property, the gain will correspond to the difference between the sale value (or the taxable patrimonial value, if higher) and the acquisition value of the house in Portugal, and all expenses inherent to the valuation of the property may also be deducted, carried out in the last 12 years, acquisition and sale of the property.

What is the applicable tax regime?

In the case of non-tax residents in Portugal, when a capital gain is calculated, there is the possibility of choosing between two different tax regimes, namely:

Taxation in accordance with the taxation regime applicable to non-tax residents, i.e., taxation of 100% of the capital gain assessed, at the special rate of 28%;

In the case of residents of a Member State of the European Union or of the European Economic Area (in the latter case, provided that there is an exchange of information on tax matters), taxation of 50% of the capital gain assessed, at marginal tax rates (which currently vary between 14.5% and 48%), plus the additional solidarity tax (currently, up to 5%). In other words, an option for taxation that would be due if the taxpayer were a tax resident in Portugal.

It should be noted that, in the case of opting for taxation according to the marginal tax rates, in order to determine the rates to be applied, the income earned abroad should be taken into account, which, in the case of tax residents in Portugal, would be subject to the marginal IRS rates (for example, income from employment and business and professional income).

With regard to residents in third countries, the legal framework currently in force only provides for the possibility of applying the above-mentioned rule regime, so it is expected that, if in this situation, the Tax Authority will pay tax on 100% of the capital gain and tax it at the special rate of 28%.

Nevertheless, we would like to note that there are currently many legal disputes between taxpayers and the Tax Authority regarding the compliance, or not, of these rules with European law, and a new decision on the subject by the Court of Justice of the European Union (Case C-388/19) is expected, which may have an impact on the current case law of national courts. Not neglecting the importance of such a discussion in ensuring the safeguarding of taxpayers' rights, in this article we focus only on the tax regimes currently in force in Portugal, in order to give the reader a precise and simple idea of the regimes currently in force.

Case study

Let us then imagine the following scenario, in which a taxable person, single, not resident in Portugal and resident in France:

Acquired 100% of a property in Portugal, on March 1, 2019, for the amount of €150,000;

He sold the property on December 1, 2020, for the amount of €250,000;

Incurred expenses and charges with the acquisition and sale, in the amount of €25,000;

In this scenario, the taxpayer would have a capital gain of €75,000, corresponding to the difference between the sale value (€250,000) and the acquisition value (€150,000), also deducting the expenses with the purchase and sale of the property (€25,000).

If we consider taxation according to the rules of the rule regime, the capital gain calculated will give rise to a tax payable of €21,000 (which corresponds to the taxation of 100% of the capital gain, at the special rate of 28%).

On the other hand, if the taxpayer chooses to tax only 50% of the capital gain (i.e., €37,500) according to the marginal IRS rates, if he has no other income, the amount of tax payable would be approximately €10,900 (which corresponds to the application of an effective tax rate of, approximately 14.5%).

What if, by hypothesis, the taxable person in question has also earned income from dependent work in the country of residence (for example, France), in the amount of €50,000?

In this scenario, taxation under the rule regime would remain unchanged, with tax in the amount of €21,000 being due. However, in case of opting for taxation at marginal IRS rates, this €50,000 must also be taken into account for the purpose of calculating the rate to be applied. Let's see.

If we add to the 50% of the taxable capital gain (€37,500) the amount of €50,000, we obtain an income subject to taxation of €87,500, which would give rise to a tax payable in Portugal on the capital gain of approximately €14,475 (which would correspond to an effective tax rate of 19.3%).

In most cases, the taxation of capital gains according to the marginal rates of IRS will appear to be more advantageous, insofar as, excluding from taxation 50% of the capital gain obtained, the maximum effective tax rate that may result from it is 26.5% (i.e., the result of dividing by 2 the sum of the maximum marginal rate currently in force (48%, with the maximum additional solidarity rate of 5%), therefore lower than the rate of 28% applicable in the rule regime.

How to report in the IRS Model 3 declaration?

First, it should be noted that the operations related to the transfer of ownership of a property (with the exception of those that must be declared in Annex G1) must be reported in table 4 of Annex G of the IRS Model 3 declaration.

However, in the case of taxpayers who are not resident in Portugal, it is also important to pay special attention to table 8-B of the cover page of the IRS Model 3 declaration, in order to make the option of taxation by the rule regime or by the taxation regime according to marginal rates.

In the case of opting for the rule regime, in table 8-B of the cover page, the indication that a "Non-resident" is in question, indicate the respective country of residence and/or NIF of the tax representative (if any) and indicate that you want taxation under the rule regime (field 07).

On the other hand, in the case of opting for the taxation of 50% of the capital gain obtained at the rates applicable to residents (marginal rates), field 09 must be selected (replacing field 07) and, additionally, if income has been earned abroad which, if earned by tax residents in Portugal, were also subject to marginal IRS rates, they must also be indicated in box 11.