The Portuguese real estate capital gains taxation regime to non-residents

The issue of the alleged discrimination on the taxation of real estate capital gains by non-residents in Portugal is not new and has been widely discussed in the Courts as a result of various disputes opposing taxpayers and the Portuguese Tax Authorities (“PTA”).

As a result of such disputes, changes to the regime have already been made, resulting in different regimes available at the moment for capital gains resulting from the disposal of immovable properties located in Portugal, depending on the residence of the taxable person. Specifically, there are, in Portugal, three taxation regimes, one for residents, another for EU or Economic European Area (“EEA”) residents, and another one for third country residents.

To residents in Portugal, the regime established is the one of article 43 of the Portuguese Personal Income Tax Code, according to which capital gains resulting from the disposal of real estate are taxed over half of their amount at the general progressive tax rates between 14,5% and 48%, to which may still be added the solidarity additional rate between 2,5% and 5% depending on the taxable income.

To EU and EEA residents, the capital gains resulting from the disposal of real estate located in Portugal are subject to autonomous taxation at a 28% rate, according to article 72(1), with the option of being taxed according to the residents’ regime, provided there is an information disclosure agreement in force between Portugal and the residence country, case in which all the taxable person’s income, including the income obtained abroad, should be considered for the tax rate determination, as happens to Portuguese residents.

Finally, to third country residents, only the autonomous taxation regime is available, with no possibility of opting to any other regime.

In face of the above, the alleged discrimination issue derives from the exclusion of 50% of the capital gains only being available to Portuguese residents, and, more recently, to EU and EEA residents who choose to be taxed according to such regime.

In this context, and although the current regime for EU and EEA residents, introduced by Law 67-A/2007, of 31 December, as a consequence EUCJ’s Hollmann judgement – that declared the previous regime incompatible with EU law for subjecting to a higher taxation the capital gains obtained by other EU member state residents than the ones obtained by Portuguese residents – now includes the possibility of opting by the Portuguese residents regime, the incompatibility issued seems to have not been fully resolved.

In fact, in recent years, the current taxation regime for non residents continues to generate disputes between the taxpayers and the PTA, with various decisions from the Administrative Arbitrage Center and from Administrative Courts favorable to the taxpayers, for considering that, even with the possibility of opting to the residents regime, there is still a violation of the Treaty on the Functioning of the European Union, more precisely its article 63 that forbids any violation to the free movement of capital between Member States and between these and third countries.

However, those divergences between the PTA and taxpayers may acquire new outlines, with an unexpected outcome, considering the recent Advocate General’s conclusions in process C-388/19 from 19/11/2020 who considered that the EU Law “must be interpreted as not precluding national legislation which makes the taxation of capital gains derived from the sale of immovable property situated in a Member State by a resident of another Member State, subject to a different tax regime than the one applicable to residents, provided that that same legislation offers non-residents the possibility of opting for the tax regime applicable to residents”

Adding that, in such conditions, the Portuguese Authorities must “ensure that the possibility of making such a choice has been brought to the attention of the non-residents in a clear, timely and intelligible manner and that the consequences attached to the fact that the whole of the income of the person concerned is not taxed in that State are neutralized”, which may not be easy to apply.

Hence, and although the European Commission has already noticed in a reasoned opinion sent to Portugal that “a mere option to be treated as a resident taxpayer does not remedy the infringement if the default taxation still imposes a greater burden on non-resident taxpayers – which is the case considering that, in general, the current regime,  without the option, implies a greater burden to non-residents than for residents, with the last being subject to a maximum rate of 24% (50% of the maximum rate of 48%) and the first being subject to a 28% rate – we must remain alert to the impact that the Advocate General’s opinion may have in future decisions.