Selling a property as a non-resident in Portugal: factors to take into account

If you are selling your property in Portugal as a non-resident taxpayer, you are subject to Portuguese income tax ("IRS") and have to report the transaction in your income statement for the year in which you sold your property. In this article, we explain the factors to take into account, with the help of the tax experts from PwC.

How is the capital gain or capital loss calculated?

As a non-resident taxpayer in Portugal, only Portuguese-sourced income is subject to IRS in Portugal (principle of territoriality), as explained by PwC in this article prepared for idealista/news. As regards real estate capital gains, those resulting from the sale of real estate located in Portuguese territory are considered to be from a Portuguese source.

Regarding the capital gain or loss resulting from the sale of a property, the gain corresponds to the difference between the sale value (or the taxable patrimonial value, if higher) and the purchase value of the property in Portugal. All expenses inherent to the increase in value of the property, made in the last 12 years, acquisition and sale of the property may also be deducted.

What is the applicable taxation regime?

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

• taxation in accordance with the regime-rule of taxation applicable to non-tax residents, i.e. taxation of 100% of the capital gain ascertained, at the special rate of 28%;
• in the case of residents of a Member State of the European Union or the European Economic Area (in the latter case, provided there is an exchange of information on tax matters), taxation of 50% of the capital gain, at marginal tax rates (which currently vary between 14.5% and 48%), plus the additional solidarity tax (currently up to 5%).

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, account should be taken of income earned abroad, which, in the case of tax residents in Portugal, would be subject to the marginal Personal Income Tax rates (for example, income from employment and business and professional income).

As regards residents in third countries, the legal framework currently in force only provides for the possibility of applying the above-mentioned regime-rule, and it is therefore expected that, in the case of such a situation, the Portuguese Tax Authority will assess tax on 100% of the capital gain and tax it at the special rate of 28%.

Nevertheless, we would like to point out that, currently, there are many judicial disputes between taxpayers and the Tax Authority regarding the conformity, or not, of the referred rules with the European law, being expected a new decision on the subject by the European Court of Justice (Case C-388/19), which may have impact on the current jurisprudence of national courts. Not disregarding the importance of such discussion in ensuring the safeguard 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.

Photo by Tyler Franta on Unsplash

Practical case

Let us imagine the following scenario, for a taxpayer, single, not resident in Portugal and resident in France:

• purchase of a property in Portugal on 1 March 2019, for €150,000;
• sale of said property on 1 December 2020, for €250,000;
• incurred expenses and costs 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), after deducting the expenses incurred with the purchase and sale of the property (€25,000).

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

On the other hand, if the taxpayer opts to tax only 50% of the capital gain (i.e., €37,500) according to the marginal Personal Income Tax 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, hypothetically, the taxpayer in question has also earned employment income in the country of residence (e.g. France) amounting to €50,000?

In this scenario, the taxation under the general regime would remain unchanged and the tax due would be €21,000. However, in case of an option for taxation at the marginal Personal Income Tax rates, these €50,000 should also be taken into consideration for the purposes of determining the rate to be applied. Let's have a look.

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 (corresponding to an effective tax rate of 19.3%).

In general, the taxation of capital gains according to the marginal Personal Income Tax rates will appear to be more advantageous since, excluding from taxation 50% of the capital gain obtained, the maximum effective tax rate that may result therefrom is 26.5% (i.e. the result of the division by 2 of the sum of the maximum marginal rate currently applicable of 48% with the additional maximum solidarity rate of 5%), which is therefore lower than the 28% rate applicable under the general regime.