Capital Gains tax, selling in Portugal, buying in an EU country
- Written by Nelson Ramos, Lawyer
The other day I was sitting at a police station, and I noticed that one of the officers had a sign above his desk which said “do not steal, the government hates competition”. Indeed sometimes it seems that the Portuguese government acts in a way that does not seems very honest, and tries to find ways to deny people what they entitled to.
In these times of crisis some still are able to sell their house in Portugal, and some are even capable of selling and making a profit. Many choose to go back to UK, Ireland or elsewhere in Europe, and many have heard that if they buy a house there, by reinvesting the money they made on the sale of their house in Portugal, they will be exempt from paying Capital Gains Tax (Mais Valias) in Portugal.
Indeed the Court of Justice of the European Union in case C-345/05 (Commission of European Union vs. Portuguese Republic) imposed on the Portuguese State that the exemption from paying Capital Gains tax, if the profit resulting from the sale of a house was reinvested in buying another house, should not be limited to reinvesting in Portugal, but also if the profit resulting from the sale was reinvesting in any EU country in purchasing a new home, as that limitation violated the principle of free movement of people and capital.
The Portuguese state changed the law, but it did not make the exemption automatic, easy or simple in my view. Indeed paragraph 10 of the Code of IRS says in number 5 a) that if the capital gains arising from the sale are reinvested within 36 months on the acquisition of another home in another EU country, or a another country of the European Economic Area (Iceland, Liechtenstein and Norway) the buyer is exempt.
So it seems easy; you sell, take your money, buy a new house and inform the Portuguese tax authorities that you bought a new house, within the three years kindly given to you to do that, and you save yourself a lot of money, eventually up to 20% of what you gained with sale, if you were a resident (non residents pay a fixed percentage of 25% of the gains). But it is not so easy, and when the Portuguese authorities changed the law, taking into consideration that were in breach of several principles of EU law, they made sure in my view that made it as hard and as complicated as possible, but if you do manage to fulfill all the bureaucratic procedures, you can benefit from this exemption.
Firstly this is only applicable if the house you sell is your primary permanent residence, not declared at the tax department as a secondary residence.
Secondly in the year of sale you must present your tax return declaration and declare straight away that you intend to reinvest the gains you obtained on the sale.
Thirdly the property you acquire abroad must also be your primary residence.
These are just the main guidelines you must keep in mind, there obviously a lot more details and if you are planning on selling, before you put your house on the market for a certain price, my advice is that you consult a lawyer so that you are fully aware of the taxes and costs involved.
There are a lot of factors considered for Capital Gains tax calculations, including the year of acquisition, the value of the acquisition, costs in making the house more valuable (work on the house, duly documented), expenses made for acquisition and sale (notary, registration, real estate commission), the year of the sale, the value of the sale and others.
A lawyer should be able to make a simulation taking these elements into consideration, and when you sell, you’ll know what to expected as far as taxes are concerned.
Nelson Ramos
Lawyer – Portugal
Master in Int’l Law - USA
Email: nelson@nramoslawyers.com
