We are often asked by people we advise who are under the NHR scheme whether capital gains would be taxable in Portugal.
Capital gains on property
When the capital gains are a result of selling immovable property (like homes or commercial property), the answer is often fairly straight-forward. The double taxation treaties that Portugal is party to normally state clearly that capital gains from a sale of property are taxable in the country where the property is based. Therefore normally only people holding property in a country that does not have a double taxation treaty with Portugal should be worried about taxation from property gains. Such people are almost always better off selling their property before coming to Portugal or holding on to it as long as they are in Portugal.
Capital gains on securities (such as shares)
The question becomes more complex when it comes to capital gains from securities or other assets. The NHR law clearly includes capital gains as a category that could benefit from NHR (category G). The rule that is states in the law is that if the other country may tax the gain, Portugal will not tax it. To know whether a country may or may not tax the gain, we need to look at the relevant tax treaty between Portugal and the other country.
Tax treaties generally give the country of residency the exclusive right to tax capital gains.
The exception is U.S. citizens, where the double taxation agreement expressly reserves the right for the US to apply tax on capital gains.
In a recent case involving a FRESH Portugal client, the tax authoritiesadmitted that capital gains on securities for US citizens are free of tax in Portugal under the NHR.
Declaring capital gains on tax returns
Sadly, however, whoever created the online tax return form “didn’t get the memo”. Even if the taxpayer rightfully claims an exemption from capital gains, the automated calculation will not acknowledge it and will produce a tax assessment that includes full taxation on the gains. This leaves the taxpayer to choose between three bad choices: (1) pay the tax even through it isn’t due (2) choose different category and submit a wrong return (3) submit a correct return and dispute the wrong outcome. In one case, a US citizen taxpayer chose option 3 and successfully won in court, but that had not changed the form.
Tax planning
Whether tax is due or not, considerable capital gains offer a wide range of planning opportunities with the most common structure being incurring capital gains within an entity.
