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10

JAN 2024

NHR - Termination and Replacement regimes - Interested parties list - Outcome

The Portuguese Budget Law for 2024 was approved on 30 November 2023.
We can now confirm that the Non-habitual tax resident (NHR) regime was indeed revoked starting January 1, 2024.
A grandfathering regime was approved to cover some special situations.
Concerning the new proposed material incentive regime there were a few adjustments. The ex-residents regime was also clarified.
KEY TAKEAWAYS
Individuals becoming tax residents of Portugal until December 31, 2023, can apply for the NHR regime until March 31, 2024.
Individuals who become tax resident of Portugal until December 31, 2024 can apply for the NHR regime until March 31, 2025, provided they meet the grandfathering regime requirements.
Due to the approved amendments to the grandfathering regime those who are interested to move to Portugal under the NHR regime with effect to 2023 must take immediate action NOW:
For Non-EU nationals, initiate of your immigration process still in 2023.
For EU nationals (and Iceland, Liechtenstein, Norway, Principality of Andorra and Switzerland nationals):
Check the criteria of the grandfathering regime and see what you can still meet (e.g. promise or employment contract, promise or secondment agreement signed by December 31, 2023, whose duties must take place within national territory). Failing those criteria,
Obtain (i) now, asap, in December 2023, a Portuguese tax number and an access to the Portuguese tax web portal (even as non-Portuguese tax resident; several online service providers do this for a small fee), (ii) secure permanent housing in Portugal via a documented agreement (namely a standard lease – not a short-term rental – lasting for at least one year) with a starting date in December 2023, (iii) register in person in Portugal in December 2023 at the municipality of chosen residence (some require booking and slots for this are disappearing fast), (iv) request online the tax number status change to that of a Portuguese tax resident still in December 2023 (otherwise more complex procedures to retroact the requested change to 2023 will occur) and (v) apply online for the NHR regime until 30 March 2024.
Retired / pensioners and high net worth individuals living from their savings and deriving passive income only do not qualify for the new regime.
Due to the significant number of uncertainties surrounding the new material incentive regime (dubious legal wording, need for Tax Authorities’ IT updates and a clarifying Administrative Ruling, need for Ministerial Orders, Government dismissal with limited powers, political climate in Portugal with parliamentary elections in March 2024), we recommend that, if the NHR is beneficial to you, please opt for it and do not “gamble” with this new regime.
GRANDFATHERING REGIME
The existing regime continues to be applicable, until the end of the initial 10-year period set out in the Portuguese Personal Income Tax (IRS) Code, counting from the date on which the taxpayer became resident in Portuguese territory:
a) To the taxpayer who, on December 31, 2023, is already registered as a non-habitual resident in the taxpayer register;
b) To the taxpayer who, on December 31, 2023, meets the conditions to qualify as a resident for tax purposes in the Portuguese territory;
c) To the taxpayer who becomes a resident for tax purposes by December 31, 2024 and who declares, for the purposes of registering as a non-habitual resident, to have one of the following elements:
Promise or employment contract, promise or secondment agreement signed by December 31, 2023, whose duties must take place within national territory;
or,
Lease contract or other contract granting the use or possession of property in Portuguese territory concluded until October 10, 2023;
or,
Reservation contract or promissory contract for the acquisition of real rights over property in Portuguese territory concluded by October 10, 2023;
or,
Enrollment or registration for dependents, at an educational establishment domiciled in Portuguese territory, completed by October 10, 2023;
or,
Residence visa or residence permit valid until December 31, 2023;
or,
Procedure, initiated by December 31, 2023, of granting a residence visa or residence permit, with the competent entities, in accordance with the current legislation applicable to immigration matters, namely through the request for an appointment or actual appointment for submission of the request for the granting of a residence visa or residence permit or, also, by submitting the request for the granting of a residence visa or residence permit.
To the taxpayer who is a member of the household of the taxpayers referred to in the previous paragraphs.
For the purposes of the provisions of paragraphs c) and d) of the previous paragraph, the taxpayer must request registration as a non-habitual resident, electronically, on the Portuguese Tax Web Portal, after the act of registration as a resident in Portuguese territory, until March 31 of the following year, by reference to the year in which he became resident in that territory.
NEW REGIME
In what concerns the new proposed material regime, there are a few adjustments, but we highlight, as of now, the following features:
Taxpayers who, by becoming tax residents in 2024 under the terms of paragraphs 1 and 2 of article 16 of the IRS Code, and who have not been resident in Portuguese territory in any of the five previous years, can benefit from a tax incentive regime which allows them to be taxed, at a special rate of 20% on net income of categories A and B (in general; specific distinctions exist which may not allow self-employed income in certain cases) earned within the scope of the specific activities detailed in the regime, for a period of 10 consecutive years from the year of registration as a resident in Portuguese territory, without prejudice to the option for the aggregation of income to the progressive brackets.
The right to be taxed under the terms of this regime, in each year of the period referred to, depends on the taxpayer being considered tax resident in Portuguese territory, at any time during that year and continuing to earn, each year, income included in the exercise of one of the specific activities listed.
For the purposes of the provisions of the previous paragraph, it is considered that the taxpayer continues to earn income included in one of the activities listed, whenever the beginning of the exercise of the new activity occurs within a maximum period of six months after the end of the activity previously carried out.
The taxpayer who has not enjoyed the right to be taxed in one or more years of the 10-year period may resume enjoyment of the regime in any of the remaining years of that period, from the year, including, in which he is once again considered a resident for tax purposes in Portuguese territory and once again receives income from the exercise of one of the activities listed.
Cannot benefit from the provisions of this regime the taxpayers which:
Benefit or have benefited from the non-habitual resident regime;
Have opted for taxation under article 12-A (Program Return / Regressar) of the IRS Code.
In cases where registration is carried out outside the period defined in a Ministerial Order, the special taxation takes effect from the year in which registration is carried out and is in force for the remaining legal period provided for.
This regime is not applicable to income received in relation to jobs covered by subparagraph c) of paragraph 2 of article 22 of the Investment Tax Code.
This new regime provided can only be used once.
These listed activities qualify for the regime:
Teaching in higher education and scientific research, including scientific employment in entities, structures and networks dedicated to the production, dissemination and transmission of knowledge, integrated into the national science and technology system, as well as jobs and members of governing bodies in entities recognized as technology and innovation centers, within the scope of Decree-Law no. 126-B/2021, of December 31; or
Research and development of personnel whose costs are eligible for the purposes of the tax incentive system in research and business development, in accordance with subparagraph b) of paragraph 1 of article 37 of the Investment Tax Code; or
Qualified jobs posts and members of Statutory Bodies, in entities that carry out economic activities recognized by the Agency for Investment and Foreign Trade of Portugal, E. P. E. or by IAPMEI - Agency for Competitiveness and Innovation, I.P. as relevant to the national economy, particularly in the context of attracting productive investment, as well as reducing regional asymmetries.
These other listed activities, that we view as particularly relevant, also qualify:
Highly qualified professions, to be defined by Ministerial Order issued by the members of the Government responsible for the areas of finances and economy. As per a transitional Ministerial Order the current activity list of the NHR applies. Please check FAQ5 on www.nonhabitualtaxresident.com
a)I) developed in industrial and service companies, whose main activity corresponds to one of the CAE codes defined in a Ministerial Order and which export at least 50% of their turnover, in the year in which the corresponding duties started or in any of the two previous years.
The following activities (as an example) are encompassed as per a transitional Ministerial Order; i) IT consultancy and programming and related activities, ii) Information services activities (ex. data processing and web sites), iii) administrative and support service activities provided to companies.
a)II) developed in companies with relevant applications, in the year in which the corresponding duties started or in the five previous ones, which benefit or have benefitted from the ”Regime Fiscal de Apoio ao Investimento” (RFAI), in accordance with chapter III of the Investment Tax Code.
The RFAI is a tax benefit that allows companies to deduct from the tax collected a percentage of the investment made in fixed assets (tangible and intangible). However, the percentage allowed to be deducted differs according to the region in which the investment is made (Lisbon and Algarve are less attractive in this regard).
Jobs posts and members of statutory bodies in entities certified as start-ups, under the terms of Law no. 21/2023, of May 25.
The mentioned legal regime defines the concept of startup as any company that; i) has been in operation for less than 10 years, ii) employs under 250 employees, iii) has an annual turnover of less than €50 million, iv) is not the result of a transformation or split from a large company, and no large company holds a direct or indirect majority stake in its capital, v) has its headquarters or permanent representation office in Portugal, or it employs at least 25 employees in Portugal, and vi) meets one of the following conditions: 1) It is an innovative company with high growth potential, innovative business models, products or services, and falls within the scope of Ordinance 195/2018 of July 5, or has been recognized as suitable for research and development (“R&D”) activities by the Portuguese National Innovation Agency or certified through the recognition process for technology sector companies, except for promotional, intermediation, investment, or real estate development companies; or 2) It has successfully completed at least one round of venture capital financing from a legally qualified venture capital investment entity supervised by the Portuguese Securities Market Commission (CMVM) or a similar international authority, or through equity or mezzanine instruments provided by investors who are not founding shareholders of the company; or 3) It has received investment from Banco Português de Fomento, S. A., or from funds managed by it, or from its subsidiaries, or from one of its equity or mezzanine instruments.
Jobs posts or other activities carried out by tax residents in the autonomous regions of the Azores and Madeira, under terms to be defined by regional legislative decree. It is expected that the Madeira regime, which is ruled by the center-right wing party, may be significantly more favorable than the national one, something which was already publicly announced by the head of the Madeira Government. Please be reminded that Madeira also benefits from a Free Zone with a 5% Corporate Income Tax rate regime, among other tax benefits.
Additionally, taxpayers who can benefit from this tax incentive regime regarding their Portuguese employment or self-employment activities (income categories A and B), also benefit from a tax exemption (with progression) on several sources of non-Portuguese income: employment/self-employment income, capital income, capital gains, and rental income.
Ironically, the new regime set in the Proposal can potentially be more advantageous than the previous one for the qualified and employed groups of people that can benefit from it as foreign income is always exempt for all categories of income (i.e., employment income performed abroad, self-employment income performed abroad, foreign rental income, capital gains in foreign assets), with the exception of pension income, which is never exempt and will be taxed progressively up to a 53% tax rate.
As an exception, the law states that qualifying taxpayers that derive foreign income from a non-resident entity without a permanent establishment in Portugal, located in a country, territory, or region subject to a “favorable more advantageous tax regime” (i.e., a blacklisted tax haven) are subject to certain tax rules (for capital income and capital gains) that envisage an autonomous 35% rate.
This provision is not fully clear: i) does it disqualify all the non-blacklisted income from taxpayers that have blacklisted income from the benefit regime and taxes all the income of the taxpayers at 35%? ii) does it tax all the blacklisted income from taxpayers at 35%? iii) does it tax only the blacklisted capital income and gains from taxpayers at 35%? This point needs clarification.
In any case, the 35% autonomous tax rate conflicts with the Double Taxation Conventions entered into by Portugal with blacklisted tax havens, which force Portugal, at least, to grant a credit for the foreign tax paid. And, in our view, also conflicts with the European Union free movement of capital provisions, which should not enable a tax rate higher than 28%.
Since non-blacklisted foreign income is automatically exempt:
there should no longer be the need to interpret the Double Tax Treaties concluded between Portugal and the source country or the OECD Model Tax Convention and intertwine it with Portuguese source and NHR rules – which could potentially jeopardize the exemption. Portuguese domestic rules on income sourcing will determine what is foreign source income, which is a paradigm shift. This is currently a relevant issue when it comes to capital gains on securities as Portugal usually taxes such income – but with the approved amendments it will no longer do so;
the scope of the exempted self-employment income is no longer limited as it does not need to derive from a High Value-Added activity. Of course, the scope of the beneficiaries was also narrowed, but this does not change the fact that any self-employment income earned performed abroad is exempt, while it currently has to derive from a High Value-Added activity to be so;
employment income no longer needs to be subject to taxation in the source country in order for the exemption to apply.
The access to this regime implies previous registration with the Tax Authorities regarding 10. a) above; with Start-up Portugal regarding 10. b) above; with the Agency for Investment and Foreign Trade of Portugal, E. P. E. or IAPMEI - Agency for Competitiveness and Innovation regarding 10. c) above; and with the autonomous regions of the Azores or Madeira regarding 10. d) above.
This mandatory registration procedure will be regulated by a Ministerial Order that does not yet exist. Notwithstanding, regarding a) above, the new legal regime expressly states that, until the relevant Ministerial Order is approved, the mandatory registration should be made with the Tax Authorities via the Portuguese Tax Web Portal (“Portal das Finanças”); this will still imply small adjustments to it in order to be put it in practice, but the online registration procedure should be as streamlined as that of the current NHR regime. We are hopeful that this IT issue will be solved in January 2024.
Several additional layers of uncertainty exist:
The fulfillment of the necessary conditions for the individual to get a special rate of 20% on net income from categories A and B is, in some cases, out of his/her control (e.g. the company exporting at least 50% of the turnover or making certain investments).Employers will be reluctant to withhold tax at 20% on conditions that are uncertain and so employees may face excess withholdings before they can claim the tax back on their tax returns, after monitoring their employers’ performance / accounts.
The concept of “export” needs to be clarified.
The indirect link to “export” is concerning for companies given EU State Aid and WTO rules on export subsidies.
In some of the listed activities it is doubtful if a self-employed service provider can be encompassed in the regime or if only an employee can.
AMENDMENTS TO THE “EX-RESIDENTS” REGIME
Currently, there is a tax benefit in place for people who (i) became/become tax resident in Portugal from 2019 to 2023 (ii) have been previously tax resident in Portugal and left before a certain date; (iii) have not been tax resident in Portugal during the 3 years prior to the new residence; (iv) have their Portuguese tax obligations in good standing and (v) have not applied for the NHR regime.
Other current main features are:
The benefit corresponds to a cut in half of the tax base (not to be confused with tax rates) applicable to all employment and self-employment income earned (from foreign and Portuguese source);
No reduced rate as the general and progressive rates apply instead;
No need to register for it. One can apply for its benefits while filling the tax return;
No need to perform a specific activity to be eligible.
The benefit changed with the Budget Law approval: (a) it lasts during a period of 5 years and (b) the 50% exclusion of the taxable base is limited to the first € 250,000 of income from employment and self-employment income. This means that if an individual has € 500,000 of such income € 250,000 will go untaxed, the other € 250,000 being subject to the progressive tax brackets.
It is still necessary to have the Portuguese tax obligations in good standing and not apply for the NHR. A Parliamentary amendment clarified that it is still necessary to have been resident in Portugal before; on the other hand, the applicant must not have been resident in Portugal during the 5 years prior to entry into this regime.
The Proposal foresees that the regime will only apply for those who move until the end of 2026.
With this being said, the “ex-residents” regime may be a viable option for newcomers that were formerly Portuguese tax residents obtaining employment or self-employment income either abroad or in Portugal.
Keeping the ex-residents regime without the old NHR risks EU non-discrimination challenges (as ex-residents are most likely Portuguese nationals, and covertly reserving a tax regime for those is a violation of the EU free movement of citizens, and an horizontal discrimination between ex-residents and never before residents; the new Italian inpatriate regime is conscious of this problem). We expect that there will be never-before tax residents in Portugal that will challenge this issue.

21

NOV 2023

EMPLOYEE STOCK OPTIONS: NEW TAX REGIME

The Portuguese Government has enacted a set of rules intended to foster and ease housing in Portugal, commonly known as “Mais Habitação” (“More Housing”), that entered into force on 7th October 2023. This Law nr. 56/2023, of 6th October, brought some important novelties. Please find below the most significant changes regarding real estate taxation:
Property Municipal Transfer Tax (“PTT”) and Property Municipal Ownership Tax (“POT”)
PPT exemption on the acquisition of property for resale
The PTT exemption on the acquisition of property for resale can be granted when the property is acquired (ab initio) or afterwards (by refund). In any case, this exemption depends on the fulfillment of requirements.
This new law introduces two changes on those requirements:
(i) the resale must now be carried out within 1 year from the acquisition (previously, the law stated a period of 3 years);
(ii) the previous law already stated that the resold property could not have a different purpose, but the legislator now specified that will be deemed to happen when construction works performed on the property determine a variation in its tax property value (“VPT”).
All the other requirements remain the same:
(i) the intention to resell must be declared at the time of acquisition and the property has to be registered in inventories;
(ii) the property has to be resold without it being declared as purchased for resale again;
(iii) the taxpayer must have the activity of purchase for resale as part of its corporate purpose and tax enrollment with the Portuguese Tax Authorities.
Compensatory interest is now due when the tax exemption ceases its application, counting from the date of the acquisition of the property.
Those two changes may damage legitimate expectations based on the past law, especially in what concerns acquisitions for resale that occurred before 7th October, 2023. In an incomprehensive solution, the legislator has not established a transition period for their implementation.
Urban buildings or autonomous units allocated to “rental support program” and land for construction of residential.
Urban buildings or autonomous units acquired, rehabilitated, or built to be subject to the “rental support program”, will be exempt from PTT and from POT. The latter applies for 3 years counting from the year of the acquisition and may be renovated, through taxpayer’s request, for 5 more years.
Land for construction of residential properties may also be exempt from PPT and POT, upon the fulfillment of some legal requirements namely regarding the municipal approval of the construction.
The legislator revoked (i) the POT exemption during 3 years in case of purchase for resale, and (ii) the POT exemption during 4 years for plot construction in those cases where the company had such an activity (set in the social object, in case of a commercial company).
Value added Tax (“VAT”)
Reduced VAT rate of 6% applicable on rehabilitation of properties (items 2.18 and 2.23, list I, of the VAT Code)
Item 2.18 now includes construction or rehabilitation contracts for affordable housing, controlled-cost housing, or properties on the rental support program.
On item 2.23, the concept of “urban rehabilitation works” was replaced by “building rehabilitation works”, with the purpose of excluding new construction from the reduced VAT rate of 6% (except new construction of public facilities for collective use or operations of recognized national public interest).
Ongoing rehabilitation works at the time the new law came into force can still benefit from the previous wording of the law in some cases, namely (i) in case of licensing processes submitted to a Municipal Council before 7th October, and (ii) in case of licensing processes submitted later than 7th October, but that benefit from a favorable prior information request (“pedido de informação prévia”) in force.
The Portuguese Tax Authorities have recently published an administrative order (Ofício Circulado nr. 25003) clarifying these changes and their application to ongoing rehabilitation works, under the terms mentioned before.
Personal Income Tax (“PIT”)
Exclusion of taxation on the capital gain deriving from the sale of the permanent residence
From 7th October, 2023, onwards, to benefit from PIT exclusion, the property sold (permanent residence) must have been also inscribed as the tax domicile of the taxpayer or its family, during the 2 years prior to the sale.
The exclusion no longer applies if the taxpayer benefited from it in the year of the sale or in the three preceding years. Nevertheless, it may still apply if verified by the Portuguese Tax Authorities that it occurred due to exceptional circumstances.
The other requirements established in the PIT Code (that the sale proceeds must be reinvested in another permanent residence in the Portuguese, European Union or European Economic Area territory, within certain deadlines, and/or in contributions to the public capitalization regime or in a life insurance policy / open pension fund that generates periodic payments, within certain conditions), remain the same.
Once again, these two changes may damage legitimate expectations based on past law, especially in what concerns to permanent residences acquired before 7th October, 2023, and that will be sold before the mentioned period of 2 years. Again, in an incomprehensive solution, the legislator has not established a transition period for their application.
Lastly, this new law states that the gain derived from the sale of land for construction or residential property that is not intended for the taxpayer's or its family's permanent residence may also be exempt, provided that the following conditions are cumulatively met: (i) the proceeds of the sale are used to amortize the remaining capital on mortgage loans for the taxpayer or his descendants' permanent residence; and (ii) the amortization takes place within three months from the sale.
This exceptional exemption applies to sales made between 1st January, 2022 and 31st December, 2024.
The legislator also stated that the deadline for reinvestment was suspended between 1st January, 2020, and 31st December, 2021.
Taxation of rental income
This law under analysis introduced a difference between rental income deriving from housing and non-housing rentals. The former will be subject to a flat tax rate of 25%, and the latter maintains the tax rate of 28%.
This rate for housing rentals may also change in accordance with the duration of the rental agreement. Therefore, as illustrated below:
(i) a reduction of ten percentage points (and a 15% tax rate) will be applied to income from rental contracts for permanent residence, with a duration of 5 years or more and less than 10 years; for each renewal with the same duration, a reduction of two percentage points will be applied up to a limit of ten percentage points (and a minimum tax rate of 5%);
(ii) a reduction of fifteen percentage points (and a 10% tax rate) will be applied to income from rental contracts for permanent residence with a duration of 10 years or more and less than 20 years;
(iii) a reduction of twenty percentage points (and a 5% tax rate) will be applied to income from rental contracts for permanent residence with a duration of 20 years or more.
The legislator clarified that the mentioned changes will be applicable to new rental contracts or renovations, entered into after the law enters into force.
There are also some limitations on the amount of the monthly rent applicable to new contracts. In this case, besides the deductions of expenses already stated in the PIT Code, the taxpayers may also benefit from the application of coefficients inferior to 1, on the determination of the rental income subject to tax.
Also, the rental income derived from municipal programs may benefit from PIT and Corporate Income Tax exemptions upon the fulfillment of some conditions.
Lastly, rental income deriving from properties rented for permanent residence purposes, that used to be allocated to short-term accommodation (“alojamento local”), will be exempt from PIT and Corporate Income Tax, if: (i) the short-term accommodation has been registered and used until 31 December 2022 and (ii) the conclusion of the rental contract and respective inscription in the Portuguese Tax Authorities website takes place until 31st December 2024. The exemption will apply for rental income obtained until 31st December, 2029.
The taxpayers that had deducted VAT on the acquisition of the properties, under their activity of short-term accommodation, and that now rent them out, must analyze and apply the rules on VAT regularization.
Sale of real estate to public entities
Gains derived from the sale of real estate for housing purposes to the State, Autonomous Regions, public corporate entities from the housing sector or municipal authorities, are exempt from PIT (and Corporate Income Tax), except: (i) in the case of residents in a country, territory or region subject to a more favorable tax regime, included on the Portuguese tax haven backlist; or (ii) in case of exercise of pre-emptive rights.
Tax benefits
Revocation of tax benefits on rehabilitation of properties
Investment funds that rehabilitate properties in “rehabilitation areas” will no longer enjoy Corporate Income Tax benefits.
Moreover, taxpayers that rehabilitate properties in “rehabilitation areas” will no longer enjoy PIT benefits on, such as: (i) the reduced rate of 5% on rental income arising from leasing and (ii) the reduced rate of 5% on capital gain arising from the first transfer of such properties following intervention.
Once again, these changes may damage legitimate expectations based on past law, especially of acquisitions for rehabilitation purposes in “rehabilitation areas” that occurred until 7th October, 2023. Once more, the legislator has not established any transition period.
***
We have the know-how to assist and support our Clients on matters of real estate taxation, namely on the application of the changes mentioned above. In case you would like to discuss the details of your specific situation please contact: rita@rpba.pt.

6

JUN 2023

EMPLOYEE STOCK OPTIONS: NEW TAX REGIME

Law no. 21/2023, of May 25, entered into force and the new rules regarding stocks options apply as from January 1st 2023.
Main features of the new tax incentive
These are:
1. the deferral of the taxable event until the sale of such options;
2. effective tax rate of 14%.
Scope
The new tax incentive covers option plans, subscription plans, attribution plans or other plans with equivalent effects attributed by the following entities, whether they are startups or not, (the requirements must be verified in the year preceding the approval of the plan):
• Small and medium-sized companies, as defined by Portuguese domestic legislation with reference to EC Recommendation No. 2003/361/EC, of May 6 (companies with less than 250 employees and annual turnover not exceeding €50.000.000 or total balance sheet not exceeding €43.000.000);
• Small mid-cap companies (fewer than 500 employees); and
• Any other entity that develops its business through innovation, which is deemed to occur whenever an entity invests at least 10% of its costs or turnover in R&D, patents, brands, drawings, industrial models, or software.
Application in time
The Law raises a few doubts. If there were no transitional rules, we would be able to argue that all taxable events occurring in the future would be covered by the new regime.
However, the intention of the legislator, expressed in a dubious way, is to cover only new stock plans and older stock plans (prior to 2023) as long as approved by startups.
In fact, the transitional rule states that the new regime also extends to plans approved by December 31, 2022, provided that they are assigned by entities that, until May 26 of 2024, are recognized as a startup, or can demonstrate that in the date of approval of the plan were qualified as a startup.
Definition of Start-up companies
Start-up companies, as defined by this regime, cumulatively have to meet the following requirements:
i. less than 250 employees;
ii. turnover not higher than €50.000.000;
iii. no more than 10 years of activity;
iv. headquarters or at least 25 employees in Portugal;
v. incorporation is not the result of a demerger of a large company and does not have in its capital any majority share directly or indirectly held by a large company (a large company is any company not encompassed in the definition of micro, small and medium company);
vi. fulfill one of the following:
a. being an innovative company with a high development potential, with a business model, innovative products or services fitting the terms defined by Ministerial Order no. 195/2018, of July 5th, or to which it has been recognized suitability by the National Innovation Agency (ANI) in the practice of R&D activities or in certification of the recognition process of companies in the technology sector;
b. has completed at least one round of venture capital financing by an entity legally qualified to invest in venture capital and subject to supervision by the Securities Market Commission (CMVM) or similar international authority, or by providing equity or quasi-equity instruments by investors who are not founding shareholders of the company, namely by business angels, certified by IAPMEI - the agency for competitiveness and innovation (real estate promotion, mediation, investment or development companies are not encompassed in this option);
c. having received investment from “Banco Português de Fomento, S.A.” or by funds managed by this entity, or by one of its equity or quasi-equity capital instruments;
d. prior declaration issued by Startup Portugal - Associação Portuguesa para a Promoção do Empreendedorismo - SPAPPE (Startup Portugal) with grounds and evidence that the applicant owns a business model, innovative products or services or a rapidly scalable business with high potential for growth.
Exclusions from the regime
Partners/shareholders holding directly or indirectly not less than 20% of the share capital or voting rights of the entity attributing the plan are excluded from the incentive. The same applies to members of corporate bodies of the entity awarding the plan. Nevertheless, these exclusions do not apply when the entity is considered a startup or a micro or small company in the year prior to the attribution of the plan (i.e., with less than 50 employees and with an annual turnover or total balance sheet not exceeding €10.000.000).
Restriction period
Employees who were granted stock options by eligible entities and hold such rights or shares for a minimum period of one year are granted the benefit of applying a 28% tax rate levied on only 50% of the taxable base (i.e., an effective tax rate of 14%), with option for aggregation to the progressive tax rates (that, conversely, allow for more personal deductions).
Income is subject to tax the earliest of the following moments:
• Sale of shares - the tax base is the positive difference between the sale price and the strike price, plus whatever may have been paid for the acquisition of the option or right.
• Loss of tax residence (exit tax) - the tax base is the positive difference between the fair market value at the time of exit and the strike price, plus whatever may have been paid for the acquisition of the option or right. This rule may be in breach of EU Law.
• Free transfer - the tax base is the positive difference between the value determined under the terms of the Stamp Duty Code and the exercise price or subscription, plus whatever may have been paid for the acquisition of the option or right.
How can RPBA help
It will be important for employers and employees to be aware of when and if these new rules apply to their stock option agreements. If you think these rules might apply to your business or have any related tax inquiries RPBA can help answer your questions.

7

MAR 2023

STATE BUDGET FOR 2023: REAL ESTATE TAXATION DEVELOPMENTS

The State Budget for 2023 entered into force in Portugal on the 1st January of 2023 and brought some important novelties. Please find below the most significant matters regarding real estate taxation.
Taxation of the capital gain arising from the sale of immovable property or the assignment of the contractual position in a contract related to real estate.
1. Taxation of the capital gain arising from the sale of immovable property or the assignment of the contractual position in a contract related to real estate
Until 31st December of 2022, the tax rate due on the sale of immovable property and on the capital gain deriving from the assignment of the contractual position, for a non-Portuguese tax resident, would be 50% of 28%, even for a non-EU resident, meaning an effective tax rate of 14%. By default, the Portuguese Tax Authorities could assess the capital gain at a 28% tax rate but, a not very complex administrative appeal, would allow the refund of 14%.
Since the 1st January of 2023, the capital gain arising from the sale of immovable property or deriving from the assignment of the contractual position is subject to taxation on 50% of its value, but it is subject to compulsory aggregation (i.e. the flat-rate tax of 28% no longer applies). In other words, the income derived from such disposals will be mandatorily “aggregated” to any other annual income, and subject to the progressive and general tax rates (starting from 14,50% up to 48% - the higher bracket being applicable to income above € 78.834 -, plus an additional solidarity rate of 2,5% on taxable income above € 80.000 and up to € 250.000, and of 5% on taxable income above €250.000).
2. Property Transfer Tax (“PTT”) exemption on the acquisition of property for resale
The PTT exemption on the acquisition of property for resale can be granted when the property is acquired (ab initio) or afterwards (by refund) depending on when the relevant requirements are fulfilled.
Regarding the recognition of this exemption ab initio, it is required that the taxpayer “normally and habitually exercise an activity of buyer of property for resale”.
For such purposes, and until 31st December of 2022, the taxpayer had to present a certificate issued by the Portuguese Tax Authorities ascertaining that, in the previous year, at least one property had been acquired or resold after having been acquired with such purpose.
Since the 1st January of 2023, only taxpayers who can prove that they have resold real estate previously acquired for that purpose, in each of the last two years, can benefit from the PTT exemption.
Please note that a double limitation for taxpayers was introduced:
i. Firstly, the exemption ab initio requires that the taxpayer must have resold real estate previously acquired for resale in both last two previous years, instead of having resold in just one year.
ii. Secondly, the possibility of proving the activity through the mere acquisition of property for (future) resale has been eliminated, and now it is only relevant if the taxpayer can prove that he resold the acquired properties.
The Portuguese Tax Authorities have not established a transition period for the implementation of these changes. However, it may be discussed if they will create a problem of retrospectivity in the tax law, which means that the latter, despite providing for future facts (acquisitions for resale as of 2023), has damaged legitimate expectations based on the past law. Please note that, in our opinion, the Portuguese Constitutional Court will not declare these changes unconstitutional, because the PTT exemption can always operate subsequently (by refund, after the resale), if all the requirements below are met:
i. The resold property does not have a different purpose;
ii. The intention to resell was declared at the time of acquisition and the property was registered in inventories;
iii. The property has been resold within 3 years, without being resold again;
iv. The taxpayer has the activity of purchase for resale as part of its corporate purpose and tax enrollment with the Portuguese Tax Authorities.
3. Basis of PTT calculation on exchange of properties
Until the 31st December of 2022, the PTT was always computed on the difference of the taxable value (“VPT”) of the exchanged properties, or on the difference of the market value of the exchanged properties, if higher, regardless of any possible future transfers.
However, since the 1st January of 2023, this basis of PTT computation can no longer be applied if the real estate acquired by exchange is sold within one year from the date of that exchange. In such a case, the taxpayer will have to pay PTT on the full taxable value of the real estate acquired by exchange, or on its market value, if higher, within 30 days of the transfer.
*
The Portuguese Government announced the intention to introduce some important amendments on real estate taxation to promote the return to the long-term rental regime of more housing properties. That proposal is still under discussion and has not yet been concluded. We will wait for its approval before providing more output on this matter.
We have the know-how to assist and support our clients on matters of real estate taxation. In case you would like to discuss the details of your specific situation please contact: rita@rpba.pt**

4

OUT 2022

WHY A PORTUGUESE WILL MAY BE RELEVANT FOR FOREIGN NATIONALS, RESIDENT IN PORTUGAL

In the last two years we have received many inquiries or demands of Clients concerned with their succession planning.
Wills were always considered an important and urgent act that Portuguese notaries, according to our experience, still performed during the Covid 19 restriction periods.
We would like to highlight the key topics on this subject:
Tax
• Inheritance and gifts are subject to Stamp Tax in Portugal. However, inheritance and gifts between close family (spouses, living partners, children, grandchildren, parents and grandparents) are exempt and assets outside Portugal are not even territoriality liable to Stamp Tax. Only in the case of gifts of Portuguese real estate between close family is there a 0,8% tax on its taxable value. Even when tax is due on the Portuguese assets (between siblings, cousins, uncle and nephew, etc.) it is so at a low rate - 10% in the case of an inheritance / 10%, plus 0,8% in the case a gift of Portuguese real estate is concerned.
Legal
• By default, Portuguese inheritance law applies to Portuguese residents, irrespective of the place where they decease. Portugal has forced heirship provisions and, for e.g., the reserved share of a spouse and children is two thirds of the estate. However, it is possible to voluntarily opt-out from this rule and choose the law of ones' nationality to govern one's succession.
RPBA's Information Note below may be of interest to you concerning the choice of law governing succession in case of death. It provides you a quick overview of the applicable rules as well as your options as a resident of Portugal. Although this is not a tax issue there may be tax implications of the law chosen to govern your succession. For instance, in a case where a person that has recently left his State of nationality and became a Portuguese resident dies, choosing the law of his/her nationality to govern his/her succession may be an indication of subjective attachment to that prior State, which may be viewed as relevant for inheritance tax purposes in some jurisdictions.
We have the know-how to assist and support our private clients on this matter. Partition of assets during one’s lifetime, wills, life insurance with or without death coverage, family foundations and trusts are the main instruments that can be used.
To read our Information Note, please click here
In case you would like to discuss the details of your specific situation please contact:ana.patricio@rpba.pt

1

SET 2022

STATE BUDGET LAW FOR 2022 - KEY TAX CHANGES IN PRIVATE WEALTH TAXATION

The Portuguese State Budget Law for 2022, published on June 27th, introduced some tax changes, namely in respect to short term capital gains on securities, trusts, exempt gifts of securities and gifts in investment fund units.
These changes are not directly linked to the Non-habitual tax resident (NHR) regime. They will affect both standard Portuguese tax residents and NHRs, except for the rule stated in point 3 below, which only targets non-Portuguese tax residents.
Below are the aspects that, in our opinion, are worth highlighting:
1. Short-term capital gains arising, generally, from the sale/redemption/amortization of shares, reimbursement of bonds or other debt securities and redemption or sale of participation units in investment funds or the liquidation of such funds, will be taxed under the general and progressive IRS rates.
According to the former regime, the balance of capital gains and losses (when positive) arising from these types of operations was, in principle, taxed at a 28% tax rate (but capital gains deriving from the reimbursement of bonds or other debt securities and from the redemption of participation units in investment funds or the liquidation of such funds, when the securities’ issuer is in a blacklisted jurisdiction, were taxed at a 35% tax rate). However, the taxpayer might opt to subject the referred capital gains to the progressive tax rates.
Under the State Budget Law for 2022, the balance of capital gains and losses (when positive) on these types of operations (including those when the issuer is in a blacklisted jurisdiction) should be mandatorily taxed under the progressive tax rates if:
• The securities are held for a period of less than 365 days; and
• The taxable income (namely pensions which are not NHR exempt or NHR taxed under the 10% tax flat rate and employment or self-employment income not subject to the special NHR tax rate of 20% for high value added activities), including the balance of capital gains and losses itself (when positive) on these securities held for a period of less than 365 days, is € 75.009 or higher.These new rules will take effect as from 1 January 2023, i.e., they will apply to capital gains and losses obtained in the calendar and fiscal year of 2023.
The progressive tax rates now vary from 14,5% (for income up to € 7.116) to 48% (for income above € 75.009). Additional “solidarity” rates of 2,5% and 5% are applicable to taxable income above € 80.000 and in excess of € 250.000, respectively. However, the income brackets to which these progressive tax rates apply may still be amended in the context of current inflation and ultimately during the Budget Law for 2023, which shall be presented next October.
In this sense, the taxpayer will lose the option to maintain taxation at the 28% tax rate (or the 35% tax rate in the cases detailed above of blacklisted jurisdictions) on short-term gains relating to sale/redemption/amortization of shares, reimbursement of bonds or other debt securities and redemption or sale of participation units in investment funds or the liquidation of such funds.
Notwithstanding the above, if the realized balance from the above listed operations results in a global capital loss, such amount may still be carried forward for 5 years to offset future capital gains.
The above does not apply to derivatives, warrants and certificates that grant the holder the right to receive a value of a certain underlying asset. Therefore, capital gains arising from these transactions will maintain taxation at the 28% tax rate.
Before 1 January 2023, Clients should either adjust their investment profile or educate their wealth managers on these changes or consider setting up alternative arrangements to manage their investment portfolios (e.g. unit-linked life insurance policies).
2. The amount attributed to the settlor as a result of the liquidation, revocation, or extinction of a trust, as well as the gains resulting from the onerous assignment of rights, including the onerous assignment of the trust beneficiary's position, become liable to a flat rate of 35% provided that the trust is domiciled in a jurisdiction included in the Portuguese tax havens' blacklist.
Under a new tax rule, the trust is deemed to be domiciled in a blacklisted jurisdiction if the registered office or place of effective management of the trustee is located there or, if the trustee is an individual, is considered resident there for tax purposes (as opposed to a possible alternative view: the trust being domiciled in a blacklisted jurisdiction on the basis of the settlor's choice of governing law).
3. Also within the scope of trusts, an anti-abuse rule was introduced, according to which there is taxation of capital gains arising from the onerous assignment of rights in trusts (including the assignment of the beneficiary's position) in case, at any time in the 365 days prior to the assignment, the value of the trust at hand results in more than 50% of real estate or real rights over real estate located in Portuguese territory. This rule will only affect non-Portuguese tax residents.
4. The gratuitous transfers of amounts invested in securities and real estate investment funds or in securities and real estate investment companies are liable to Stamp tax. Up to now, these operations were excluded from the scope of the Stamp tax. Nevertheless, these free transfers, despite being subject to tax, may benefit from the exemptions foreseen in the Stamp tax Code.
The Stamp tax on inheritances and gifts is levied at a flat rate of 10%. However, inheritance and gifts between close family (spouses, living partners, children, grandchildren, parents and grandparents) are exempt and assets outside Portugal are not even territoriality taxable.
5. For the purposes of capital gains on securities (e.g., shares, bonds) acquired through donations exempt from Portuguese Stamp tax, the acquisition value is the amount that would be the basis for Stamp tax assessment purposes (e.g. in case of exchange-traded shares, the relevant figure is the listed value), should this be due, up to two years prior to the donation.
The Law does not mention the date of entry into force of the above mentioned rule and, in case of absence of an express provision, the change will come into force on the day following its publication, i.e. on June 28th of 2022.
It may be contentious whether such rule applies, ex post, in the case of donations having taken place before June 28th of 2022, to the valuation of securities acquired before that date of entry into force of the Law but which have not yet been sold, and therefore have not yet generated taxable capital gains.
6. Contrary to existing speculation, the Law did not introduce tax changes at the level of certain topics, such as crypto-assets, although the Portuguese Tax Authority is actively studying this matter.
Hence, the general guidelines for taxation of crypto-assets remain in line with the following insights:• The Portuguese Tax Authority acknowledged via binding ruling that the gains derived from the trading of cryptocurrency are not taxable either as capital income or capital gains, as long as the trading of cryptocurrency is not frequent.
• Only if the trading of cryptocurrency is frequent would it be considered a self-employment / business activity and subject to the general progressive tax rates.
• This feature (non-taxation of capital gains of sale of certain assets held in a private capacity, even if “digital”, or of gains on foreign exchange), is a general feature of the Portuguese IRS, and not particular to the NHR regime.
• Apparently, even if the trading is frequent but only involves crypto for crypto (and not crypto for fiat), the Portuguese Tax Authority does not consider it taxable.
Income from depositing, lending or temporarily providing liquidity in cryptocurrencies in principle is a taxable and reportable capital income in Portugal but if such income qualifies as an “interest” it may be tax exempt for the NHR individual.

15

ABR 2022

USA NATIONALS AND THE PORTUGUESE NON-HABITUAL TAX RESIDENT (NHR) REGIME

RPBA has recently obtained a pioneer and landmark decision from a Portuguese Tax Arbitration Court organized at the Administrative Arbitration Center (“Centro de Arbitragem Administrativa”) regarding United States of America (US) nationals residing in Portugal for tax purposes and benefiting from the Non-Habitual Resident (“NHR”) regime who derive non-Portuguese-sourced capital gains on securities.
According to the applicable NHR regime rule, such foreign-sourced capital gains on securities derived by NHRs (as well as any other foreign-sourced capital income or gains) are Personal Income Tax exempt in Portugal provided that the income is liable to taxation (no effective taxation required) in the other Contracting State under the rules of an existing Double Tax Treaty (“DTT”).
In the vast majority of the DTTs entered into by Portugal the potential taxation of this type of income in the other (foreign) Contracting State is not possible, as the DTTs attribute exclusive taxing rights to the State of Residence of the securities’ alienator – i.e., Portugal, in the case at hand. This is why, in most cases, such capital gains are taxed in Portugal at a flat rate of 28%, instead of obtaining an exemption.
However, article 1(b) of the Protocol in annex to the DTT between Portugal and the United States establishes a “saving clause” according to which the United States may always tax its nationals on their worldwide income.
In RPBA's opinion, the aforementioned article of the DTT Protocol enabled potential taxation of the income in a foreign State (even if this State was not the State of source of the income, but only that of nationality of the alienator) which qualified it for an exemption under the Portuguese NHR regime. In our view, the said DTT “saving clause” was sufficient to determine the NHR exemption from Portuguese Personal Income Tax in a triangular case of capital gains on French securities derived by a US national residing in Portugal. The Portuguese Tax Authority took the opposite view, sustaining that the “other Contracting State” that qualified income for a NHR exemption had to be the State of source, and not that of nationality, and that the capital gains on the French securities were taxable in Portugal.
The Portuguese Arbitration Court, composed of a panel of three independently appointed arbitrators, decided totally in favor of RPBA's Client, in the first known decision (to the best of our knowledge) on this topic.
The decision may still be appealed, and there is no formal precedent deriving from it. In other words, the Portuguese Tax Authority is not legally bound by it in similar future situations. Nevertheless, the Court ruling is quite persuasive since it provides very strong arguments to prevent the taxation of any type of non-Portuguese sourced capital income or gains at the level of United States nationals residing in Portugal and benefitting from the NHR regime.
Portugal has been on the spotlight recently as a favored immigration destiny for US national expats and the view stemming from this Court ruling is a welcome clarification on their always complex tax situation.

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