Capital Gains: are there benefits under the NHR tax regime?

3 September 2021

Carolina Vieira

Nowadays Capital gains are a very common income type, as more and more taxpayers decide to carry out investments to increase their income and assets.

As an overview, we intend to clarify the typical generic rules applicable to most cases, without prejudice to the individual tax advice, always crucial when it comes to tax matters.

Capital gains may arise from the sale of either immovable or movable property and it is always crucial to ascertain the following:

The country of source of the gain;
The type of gain in question;
The calculation of the capital gain, which may differ between countries.

Under the Non-Habitual Resident (NHR) regime, one can benefit from a tax exemption, or preferable tax rates, on qualified non-Portuguese sourced income, as long as considered eligible to benefit from tax status (please find more details here).

Under the NHR tax regime, Capital Gains may only be exempt of taxation in Portugal if this income may be taxed back in its country of source:

According to the Double taxation agreement (DTA) between Portugal and that country; or
According to the OECD Model Tax Convention (when there is no DTA between Portugal and the country of source), provided that the income is not received from a black-listed country, and is not deemed to have been obtained in Portugal.

As for Capital Gains from the disposal of immovable property (“real estate”):

Portugal has signed around 90 Double taxation agreements over the years and most of them provide that capital gains obtained from the sale of an immovable property may be taxed at the country where the property is located.

According to the NHR rules, Portugal shall exempt this income from any further taxation.

The OECD Model Tax Convention also provides that the country of source may tax the capital gains income arising from the alienation of immovable property.

Regarding Capital Gains from the disposal of movable property (“bonds, securities, stocks, etc.”):

As for movable property, almost all Double taxation agreements signed by Portugal provide that these capital gains may only be taxed in the country of residency. In the same line, the OECD Model Tax Convention also provides that the country of residency is the one entitled to tax income from capital gains. The fact that this income may only be taxed by the country of residency, will not allow Portugal to exempt this income from further taxation, according to the NHR rules (above). Capital gains in Portugal are generally taxed in Portugal at a flat tax rate of 28%, however, in some cases 35% may be applicable.

In certain rather exceptional cases, however, the exemption method may apply, under specific conditions.

A Capital gain may also arise from the compensation to restore non-material damages, unjustified asset increases, compensation due for the termination of contractual positions in real estate contracts, the value attributed as a result of the division, liquidation, revocation or termination of trust structures to the taxpayers who set them up, reimbursement of bonds and other debt securities, redemption of participation units in investment funds and liquidation of such funds, etc.

Given the above, it is vital to assess each specific case before deciding to become a tax resident in Portugal because, although the NHR tax rules themselves are the same as for other sources of income such as dividend income or interest, which frequently leads to a hurried conclusion that with Capital Gains there will be the same result, an exemption, this understanding may turn out to be a considerable mistake and, therefore, specific legal advice is always advisable.

We remain available to assist you with the tax treatment of your capital gains under the well-known NHR regime, as well as with any other types of income where legal advice is required.