Understanding the Taxation of Non-Residents Real Estate Capital Gains in 2022 and 2023:
In the year 2022, individual non-resident taxpayers may still face taxation on real estate capital gains at a rate of 28%. However, it’s worth noting that this rate applies to only half of the total income generated. However, for 2023, State Budget Law introduced changes to the taxation regime of capital gains obtained by non-residents from real estate transactions.
Stay informed about the latest tax regulations to navigate the real estate market as a non-resident taxpayer effectively. Having a comprehensive understanding of the tax rates and their applications can help you make informed decisions regarding real estate investments in 2022 and beyond.
Until 2023, in the case of a taxpayer with fiscal residence in Portugal selling a property located in Portugal, only 50% of the total capital gain was subject to taxation, at progressive rates ranging from 14.5% to 53% (including the solidarity surcharge rate).
On the other hand, non-residents were subject to taxation on 100% of the gain at a flat rate of 28%, except if they were residents in a European Union or European Economic Area Member State and if there was an exchange of tax information, they could opt for taxation at rates applicable to residents. However, in this scenario, when determining the applicable rate, the total income obtained worldwide, including income earned outside Portugal, was taken into account, under the same conditions applicable to a resident.
This optional regime was introduced into the Portuguese legal system following the Judgment of the Court of Justice of the European Union (CJEU) of October 11, 2007, in the case of Hollmann, which declared that the 50% deduction of the value, only in the case of gains realized by residents, resulted in a higher tax burden for non-resident taxpayers and, therefore, constituted a restriction on the movement of capital, expressly prohibited by the Treaty on the Functioning of the European Union (TFEU).
On March 18, 2021, the CJEU ruled again on this matter, considering that the existence of a choice between a discriminatory regime and a non-discriminatory one is not capable of excluding the discriminatory effects of the first tax regime. It states that recognizing such an effect on the choice implies validating a tax regime that, in itself, remains discriminatory. It further adds, in line with previous decisions, that any national regime that restricts fundamental freedom guaranteed by the TFEU, such as the free movement of capital, is incompatible with European Union law, even if its application is merely optional.
The CJEU’s judgment, by condemning the Portuguese State, leaves no room for doubt, correcting a serious situation of unjustified discrimination based on residence, perpetrated for many years by Portuguese legislation, which affects all citizens who have been improperly overcharged with taxes.
In this regard, amendments have been made to Article 43 of the IRS Code, which now expressly provides that the 50% reduction also applies to non-residents. However, non-residents are subject to progressive tax rates, and the option of a fixed tax rate of 28% has been eliminated. Furthermore, to determine the applicable tax rate, non-residents must fully declare their worldwide income to the Tax Authority, under the same conditions as a resident.
Therefore, due to the introduced changes, the criterion for taxing capital gains obtained by non-residents from real estate transactions is based on income obtained in other jurisdictions, without any connection to Portugal, and the mandatory application of progressive tax rates.
It is also important to note that non-resident taxpayers in Portugal who have sold properties located here and are faced with an IRS assessment for the year 2022 that considers the total capital gain for tax purposes have judicial and arbitration means available to contest and request the refund of the tax, so that the flat rate of 28% is only applied to 50% of the capital gain, resulting in an effective tax rate of 14%.
| Taxable Income | PIT Rate | |
| RE Capital gains obtained until 2022* | 50% | 28% (14% effective rate) |
| RE Capital gains obtained from 2023** | 50% | Progressive rates |
* Real estate capital gains obtained by non-resident taxpayers in the year 2022 may still be taxed at the rate of 28%, but for its application on only half of the income, the taxable person has to submit a claim of the IRS settlement within 120 days from the end of the deadline for payment.
** Real estate capital gains obtained by non-resident taxpayers in the year 2023 and the following will be taxed with mandatory encompassing of half of the balance calculated between capital gains and capital losses obtained in the year, to be subject to the progressive rates of article 68 of the IRS Code, but also with mandatory declaration of the value of income obtained abroad, for the purpose of determining the average rate to be applied to income obtained and taxed in Portugal.
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