How will Portugal's revised law on capital gains tax affect expats?

Expat news
  • property in Portugal
    Pierre-Olivier /
Published on 2023-05-08 at 13:00 by Asaël Häzaq
Good news for expatriates who own property in Portugal! The Portuguese tax authorities have finally ended a practice that was widely viewed as discriminatory and will now treat residents and non-residents equally. Here's what you need to know about the new tax rules on capital gains and how they will impact you.

New tax rules on capital gains

After much anticipation, the Portuguese tax authorities issued a new circular (no. 20255) to harmonize the capital gains tax rules for residents and non-residents in Portugal. The new rules distinguish between two scenarios: pre-December 31, 2022 and post-January 1, 2023.

Under the former scenario, only 50% of the net real estate capital gains value will be considered by the tax authorities and taxed at a special rate of 28%. Starting January 1, 2023, these capital gains have been added to the non-resident's other income at 50% of their value and are subject to the progressive tax scale.

This is a rectification rather than a new regulation. The Portuguese Constitutional Court had already declared the difference in treatment between residents and non-residents regarding capital gains on the sale of real estate as discriminatory. The European Court of Justice (ECJ) issued a similar ruling, but the Portuguese government did not revise its laws accordingly. Nevertheless, the authorities have now taken corrective action.

Measuring the impact on expatriates

The previous legislation on capital gains from property sales in Portugal treated residents and non-residents differently. 

For residents, only 50% of the gain was taxable, with the taxable amount added to their other income and taxed at a progressive rate. In addition, residents who had owned the property for two years or more could benefit from an inflation-adjusted relief, which was particularly valuable during periods of inflation.

On the other hand, non-residents were not entitled to any relief, and all gains were subject to a fixed 28% tax rate. The only exception was made for low-income earners, who could apply for gradual rates if they could prove they were citizens of an EU or EEA country.

It's worth noting that inflation rose to an average of 7.8% in 2022, peaking at over 10% in November, according to the Portuguese Statistical Office. Despite the drop in the inflation rate since March (to 7.4%), caution is still recommended.

Foreign investment and property boom

The revised circular aims to correct an imbalance by granting non-resident expatriates the same benefits as residents. Although expatriates had informally benefited from these advantages, Portuguese financial institutions had not complied with the law, which imposed a 100% capital gains tax on non-residents.

Recognizing the discriminatory nature of this differentiation, they allowed expatriates to benefit from the same framework as residents, where capital gains tax is only applied to 50% of the value of the property. The formalization of this practice not only provides a legal basis for it but also ensures that all parties comply with the law. For expatriates in Portugalthis change guarantees a reduction in financial losses.

The Portuguese property market continues to boom, with the National Statistics Institute (INE) reporting that the value of record-breaking transactions exceeded €30 billion in 2022. Property prices rose by more than 13% in the same year, making property an attractive investment option for expatriates in Portugal. According to the INE, there has been a 20.2% increase in the number of foreign buyers, with over 10,000 home sales worth €3.6 billion. This influx of foreign investment is driving up property prices in Portugal. To tackle the housing crisis, the government has introduced a new housing plan, which includes the surprising proposal to abolish the golden visa scheme.