The Portuguese personal income tax (PIT) relies on tax residence as the most relevant criterion. Portuguese tax resident individuals are subject to PIT on a worldwide basis, whereas Portuguese non-resident individuals are only subject to tax on Portuguese sourced income.
An individual is deemed to be resident in Portugal if they can satisfy one of the following conditions:
- the individual remains in Portuguese territory for more than 183 days, consecutive or not, in any 12-month period commencing or ending in the relevant calendar year;
- though remaining for less than 183 days, the individual has, in any 12-month period of the relevant year, accommodation under circumstances that indicate an intention to keep and occupy it as a habitual residence;
- on 31 December of any given year, the individual is a crew member of vessels or aircrafts operated by entities with residence, head office or place of effective management in Portuguese territory; and
- the individual performs public duties for the Portuguese state abroad.
The NHR applies to any individual taxpayer who transfers the tax residence to Portugal, on the sole condition that such taxpayer did not qualify as a Portuguese tax resident in any of the five years prior to the application to this regime. The NHR does not require the individual to be professionally active, nor does it require minimum personal wealth or income thresholds. Moreover, this regime applies for a 10-year period counted from the year of arrival to Portugal (included).
PIT applies to specific items of income that are expressly set forth under the PIT Code: employment income, business and professional income, capital income (e.g., dividends, interest, royalties), real estate income, net worth increases (e.g., gains from the sale of real estate property or securities, proceeds from the liquidation of companies, non-compete compensations) and pensions.
For 2022, for regular tax residents, income will be taxed at the general progressive tax rates ranging from 14.5 per cent to 48 per cent, depending on the amount of income obtained by the taxpayer in the given tax year. For individuals whose income exceeds €80,000 but remains below €250,000, a solidarity surcharge of 2.5 per cent will also be due on income that exceeds the mentioned, threshold. Income in excess of €250,000 will also be subject to the solidarity surcharge at 5 per cent.
For certain items of income, as it is the case of capital income (such as dividends, interest and royalties) and capital gains derived from the sale of financial assets, will be subject to PIT at a flat rate of 28 per cent, except if the taxpayer opts to include these items of income in their general income that will be subject to PIT under the progressive rates (such option would only make sense, of course, if the effective progressive tax rate of the individual would be lower than 28 per cent).
With regard to resident individuals under the NHR, the applicable benefits range from a full exemption on certain types of foreign-sourced income and a reduced flat tax rate of 20 per cent to other types of Portuguese-sourced income.
In particular, passive income derived outside Portugal (e.g., dividends, interest and rental income) from non blacklisted jurisdictions is fully exempt in Portugal. This exemption applies irrespective of the taxation applicable at source. Capital gains resulting from the sale or redemption of securities remain, as a general rule, taxable at a rate of 28 per cent and pension income is taxable at a rate of 10 per cent.
Active income (e.g., income from employment and also from self-employment derived in connection with 'high value-added activities') may also be fully exempt provided specific conditions are met. The activities qualified as high value-added are identified in a statutory shortlist (published in the Ministerial Order No. 230/2019) that includes certain teachers, science and engineering technicians and professionals, general directors and executive managers of companies and IT professionals, among others. Portuguese-sourced active income derived in connection with high value-added activities will be subject to a flat rate of 20 per cent (instead of the general progressive tax rates).
In the specific case of fiduciary structures (e.g., trusts), we note that regular distributions qualify as capital income whereas proceeds resulting from the liquidation of foreign structures whose settlor is a third party are not subject to personal income tax.
It is also relevant to consider that Portugal does not impose an exit tax when a tax resident individual leaves. However, Portuguese tax residents who exchange shares or own shares in a company, which was subject to a merger or a division, and subsequently transfer their place of residence abroad, must include any capital gain or loss arising from the share exchange, merger or division in their taxable income for the year in which they cease to be resident in Portugal, and, consequently, be subject to tax.
The extensive network of double tax treaties (DTT) concluded by Portugal with other jurisdictions ensures that in the vast majority of cross-border transactions and income flows, an individual's income will not be subject to double taxation either through a tax exemption or a tax credit conferred by Portugal or the other relevant jurisdiction.ii The current status of new investment trendsCryptocurrency
Cryptocurrency transactions are not yet subject to a clear tax regime in Portugal as the PIT Code does not provide for specific rules on this matter. However, we understand that the taxation of cryptocurrency transactions could potentially fall under two main categories: capital income or net worth increases as capital gains. While the former is typically associated with a return on invested capital, the latter corresponds to the (taxable) difference on the trading of securities.
The trading of cryptocurrency should not be qualified as investment income, because the revenues derived by the investor are not a return on capital, but are rather the net proceeds from the disposal of cryptocurrency. Therefore, the most adequate framework would be the taxation of cryptocurrency trading under the category of capital gains.
Given that under Portuguese law, taxation depends on the qualification of an item of income under a specific category of taxable income, it should be noted, as a starting point, that currency gains are generally not taxable transactions, which could lead to the conclusion that cryptocurrency gains should also fall outside the scope of PIT. It should be pointed out, in any event, that gains resulting from currency-related transactions covering financial derivatives may be taxable. Nevertheless, cryptocurrency should better fall under the qualification of a true means of payment, pursuant to European Court of Justice case law, and therefore should be treated as currency and not a financial derivative.
Therefore, under the current Portuguese tax law, gains with cryptocurrency trading should not be taxable in Portugal.
Despite that cryptocurrency trading is an innovative type of investment and is not yet subject to a specific tax regime, we underline that the Portuguese tax authorities (PTA) have already issued guidance on the matter,2 confirming that gains arising from the trading of cryptocurrency do not fall under any of the PIT categories of income and are not subject to taxation. However, the PTA raised an additional option, in case the cryptocurrency trading is carried out on a recurrent manner (literally, with a 'habitual nature' and a 'profit-oriented manner'). The PTA consider that gains arising from the trading of cryptocurrency may qualify as business income if the taxpayer actively and habitually trades cryptocurrency.
This setting proposed by the PTA is not adequately supported from a technical standpoint. Indeed, the PTA argue that the habitual trading of cryptocurrency should be assimilated to a professional activity, such as the provision of services or the sale of goods. Such assimilation results from the 'habitual nature' and the 'profit-oriented manner' of the activity, although there is no further clarification on the characterisation of cryptocurrency trading as a business.
In addition, the Portuguese case law has recognised several times that the classification as commercial or business activity implies the existence of an increase in the value of the asset by virtue of the exercise of the activity, resulting in the creation of economic utility and also the existence of a relationship between the business agent and a third party. It is clear that the cryptocurrency trading neither implies any added value by the economic agent, nor a relationship between the holders and third parties (i.e., there is no act of commerce). In fact, the gains or losses result from the fluctuations on the value of the cryptocurrency.
Therefore, we take the view that cryptocurrency trading (like the management of a portfolio of financial assets for the personal benefit of the investor) should not qualify as business income as it is not a commercial activity.Gains with non-fungible tokens
According to the Portuguese tax law, income is only subject to PIT provided that it falls under one of the categories of income. Hence, no taxation will be levied on income that is not qualified as taxable income pursuant to the PIT Code.
To date, non-fungible token (NFT) transactions are not subject to a clear tax regime, as the PIT Code does not provide for specific rules on this matter. Given that taxation depends on the qualification of an item of income under a specific category, we note that, as a starting point, it is important to define if NFTs may be deemed as a financial investment or if their sale shall be considered a regular sale of goods.
Taking the above into consideration, the PTA may only consider NFTs a financial asset if the investment is made typically via an exchanged-traded fund (ETF) (or investment fund oriented to invest in NFTs). Being that the case, any gains resulting from the sale of the ETF or the units of the investment fund would qualify as capital gains.
On the other hand, the sale of NFTs as a regular sale of goods will not be subject to tax in Portugal because of the absence of a specific rule governing this type of gain.
However, if the sale of NFTs is carried out on a recurrent manner (i.e., with a habitual nature and a profit-oriented manner) the PTA's aforementioned position on the ruling of cryptocurrencies may lead to the qualification of this type of income as a business income derived from a commercial activity, even though, for the reasons explained above, the authors do not follow the position of the PTA.
With regard to NFTs., it is also worth mentioning that the Portuguese domestic tax law does not include any specific rules to address taxation of artworks. Indeed, as a general rule, capital gains derived from the sale of artworks are not subject to PIT and there is no obligation of declaring or disclosing private artworks to any Portuguese authority.
However, should an individual engage in a professional activity related to the sale of artworks, any capital gains derived from the sales will be qualified as business income.iii Amendments to tax law for 2022Capital gains
In what concerns relevant developments of the Portuguese tax system, the recently approved State Budget Law for 2022, which entered into force on 1 July, has introduced relevant amendments regarding the taxation of capital gains derived from the sale of assets, other than real estate.
As referred above, currently, capital gains with the sale of securities are subject to tax in Portugal, at a flat rate of 28 per cent levied on the year-end net capital gain (i.e., after offsetting losses). However, the State Budget Law for 2022 foresees that, from 1 January 2023 onwards, the positive balance between capital gains and capital losses arising from the transfer for consideration of shares and other securities, is mandatorily aggregated and taxed at progressive rates if the assets have been held for less than 365 days and the taxable income of the taxpayer, including the balance of the capital gains and capital losses, amounts to or exceeds €75,009.
The said amendment raises some questions regarding whether it is in breach of the Portuguese Constitution. Indeed, the Portuguese Constitution establishes that individuals should be taxed in accordance with their ability to pay taxes. Because the regime approved by the State Budget Law for 2022 allows individuals to be taxed under significantly different tax rates (28 per cent versus the progressive tax rates, which may go up to 48 per cent, accrued with solidarity surcharge), for the same item of income, solely on the basis of the period for which the asset has been held, it will not be surprising if the constitutionality of this amendment is challenged in the Portuguese courts.
Moreover, this amendment also reflects to some extent an incoherence regarding how the disposal of assets may lead to different outcomes: on the one hand, traditional financial assets (such as bonds or shares) lead necessarily to taxation, whereas gains from trading cryptocurrency or NFTs are yet to be subject to a clear tax regime and currently are left outside the scope of PIT.
The State Budget Law for 2022 includes another amendment related to the taxation of capital gains derived from the sale of assets other than real estate property (e.g., shares or any other financial assets), in a scenario where the taxpayer has acquired such assets by donation.
Under the regime in force previously to the approval of the State Budget Law for 2022, the taxable income derived from the sale of assets different than real estate, that had been acquired by the taxpayer through a donation made by a spouse, ascendant or descendant, was determined by offsetting the value of the asset in question (ascertained in the moment of the donation under the rules of the stamp duty code, applicable to gifts) to the proceeds obtained with the sale of the asset.
The State Budget Law for 2022 now determines that, in the above-mentioned scenario, the acquisition value of the donated assets should be the value that would be considered for stamp duty purposes until the two years prior to the donation. Such amendment can have a significant impact on the determination of the taxable income resulting from the sale of the assets and is intended to tackle situations where a latent gain is eliminated through a donation that would allow for a step-up in the acquisition value of the asset at the level of the beneficiary, in particular in those cases where a sudden appreciation in the value of the asset occurs.
However, again the ability to pay taxes principle seems somewhat to be jeopardised by a rule which establishes as the purchase price – key to the determination of the taxable capital gain – the value of the shares (as determined by the Portuguese Stamp Duty Code) by reference to a period of two years prior to the donation, which may lead to situations where the taxable gain will overcome the real gain of the individual. This rule also raises challenges as to its constitutionality.
One final note regarding the Portuguese Budget Law for 2022, as it includes a rule according to which any gains with the assignment of a contractual position in fiduciary structures (including the status of beneficiary) shall also qualify as capital gains. The authors find this rule quite peculiar, especially if we consider a situation of a trust, where, for instance, the position of beneficiary is not 'an asset' that may be subject to a transaction as it is usually defined by third parties, such as the settlor or the trustees.