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.
There are three countries that we are aware of that currently may tax capital gains from securities:
Brazil - Brazil presents an interesting case because the Brazilian government informed the Portuguese government that the DTT between the countries is terminated. However, it is unclear whether the Portuguese government treats the agreement as terminated and so far as it is in force from the Portuguese side, it awards Brazil the right to tax capital gains.
United States - the United States has a unique tax policy of taxing citizens wherever they live and all the tax agreements that the US is party to allows the US government to tax its own citizens for all types of gain, including capital gains. This is called “the savings clause”.
Canada - Canada has a specific provision (Article 13.6 of the double taxation treaty) allowing it to tax its citizens or people who were residents for at least 15 years in Canada prior to moving to Portugal, for capital gains occurring up to 5 years after the move. There may be other agreements allowing taxation of capital gains so it’s always best to check the specific agreement, but normally double taxation treaties set out that taxation of capital gains occurs in the country of residency. In a comment to this article, a Canadian CPA noted that Canada does not in fact apply such tax, but the exemption in Portugal should nevertheless trigger.
The law is therefore clear that there are circumstances where capital gains will not be taxed in Portugal, whilst in most circumstances it will be taxed.
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.
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.