Portuguese Budget Proposal for 2022 in 10 Measures
The Draft Law with the Budget for 2022 was released in the Parliament and will now enter a phase of discussion for the next weeks to arrive to a final text. We summarize the Kore Takeaways with specific impact for private clients, which, if approved, some are expected to apply as from 1 January 2022 onwards and other only as from 1 January 2023.
1. Personal Income Tax – Short Term Capital Gains Mandatory Inclusion
For income earned as from 1 January 2023, it is proposed that the positive balance between capital gains and losses arising from the transfer/disposal of shares and other type of securities shall be included and taxed at progressive rates, whenever, cumulatively:
the shares/securities in question have been held for a period of less than 365 days;
the taxable income, including the balance of said capital gains and losses, is equal to or greater than €75,009 (highest threshold).
The scope for short-term gains taxation is therefore limited to transactions with a holding period lower than 1 year and covers: (i) gains from sale, redemption and amortization of shares; (ii) gains from non-tax neutral mergers, demergers and exchange of shares; (iii) gains from repayment of bonds; (iv) gains from redemption of fund units or liquidation of funds (not taxed at flat rates); and (v) gains from liquidation, revocation or termination of fiduciary structures by the settlor. This mandatory inclusion rule also applies to the short-term capital gains currently subject to the increased rate of 35%, namely when derived from a blacklisted jurisdiction. Long term capital gains will remain taxable at flat 28% and losses may be carried forward for 5 years when the option to tax at progressive rates is exercised.
The mandatory inclusion comes with a first in, first out rule, commonly known as FIFO method, but when the securities are deposited in more than one financial institution, the FIFO rule is applicable by reference to each of the securities portfolios.
In Portugal, the top progressive rate of 48% currently applies to taxable income above €80.882 (to be lowered to €75.009) and an additional solidarity surtax is also levied at 2.5% on the annual taxable income between €80.000 and €250.000 and 5% on the annual taxable income exceeding €250.000. Therefore, technically for a short-term capital gain of €300.000 the maximum rate may change from 28% to an effective rate close to 48% (applying the progressive income and surtax). This represents an increase of almost 20% of the tax payable in comparison with the current flat rate of 28%.
The proposal, by changing the general tax regime of capital gains as from 1 January 2023, will impact both ordinary resident taxpayers and non-habitual residents deriving gains not taxable in other jurisdictions. Since most Portuguese tax treaties (with the exception, for example, of the tax treaty with Brazil or the US in case of US citizens) allocate exclusive taxing rights to Portugal when it comes to the disposal of shares, most NHR have already become familiar with capital gains and not need to review their structures or portfolio.
From a technical perspective this measure may also face some legal challenges that the taxpayers should remain attentive to. The impact measure may also be mitigated with adequate planning ahead. This will require a closer dialogue between tax counsel and financial advisors for year-end planning on short-term positions and consider possible financial products outside the progressive tax rule, such as distributing based funds instead of accumulating funds or reinforcing positions on favourably taxed financial products or unit-linked life insurances. Ultimately, this measure, should incentivize taxpayers to review from a holistic perspective their financial investments to better adjust to the tax changes.
2. Personal Income Tax - Extension of ex-residents tax regime until 2023
The special tax regime applicable to former Portuguese tax residents who returned to Portugal in 2019 and 2020 is proposed to be extended with retroactive effects.
This means the qualifying taxpayers may opt for the 50% exclusion during 5 years covering only income from employment or entrepreneurial income if they become or will become residents in Portuguese territory in the years 2021, 2022 or 2023. The 50% relief also applies on the PAYE withholding tax operated by the paying entities.
To apply for this special relief, those qualifying taxpayers must have been considered resident in Portuguese territory and cannot have been considered resident in Portuguese territory in any of the previous three years to their re-registration as residents and have their tax situation regularized.
As this rule will be retroactive in nature, for those ex-residents that have in the meantime enrolled in the (alternative) NHR regime there is a mechanism to allow them to opt for this regime on the 2021 Tax Return Model or on a replacement return by July 31 2022 and automatically cancel the NHR (as there is a rule that both regimes may not be applied concurrently).
3. Personal Income Tax – Acquisition Value by Exempt Donation
Portugal has a tax exemption applicable to donation either within the direct family or because they deal with foreign based assets. But a recurrent issue is therefore what is the acquisition value of such donated assets. For example, the acquisition value of the securities in case of donations and/or transfers mortis causa is determined based on the rules of the Stamp Tax Code. For quoted securities, the value of those securities is determined based on the listed value on the date of the transfer. For non-quoted, there are special formulas to determine the value.
The Budget proposal for 2022 includes a provision that in case of exempt donations, the acquisition value of the donated securities will be the value determined based on the rules of the Stamp Tax Code up to two years prior to the donation. This rule is intended to work as an anti-abuse rule for certain step-up driven transactions.
4. Personal Income Tax – Adjustments to general rates
The progressive rates applicable to Portuguese tax residents in Portugal remain relevant for situations of active income outside the flat tax rates (such as the 20% flat rate regime for high value activities derived by an NHR). The table is proposed to be slightly revised to add further brackets, which will now be made up of nine brackets, as follows:
The tax is determined by applying the tax rate to the income and deducting from the tax payable the portion to deduct on the right column of the table. Additional solidarity surtax remains in place and levied at: (i) 2.5% on the annual taxable income between €80.000 and €250.000; and (ii) 5% on the annual taxable income exceeding €250.000.
5. Personal Income Tax – Startups
The Budget proposal includes an authorization to legislate on the legal definition of startups, namely for the purposes of determining the financial thresholds governing the eligibility for granting of financial or tax related measures, as well as to establish a special tax regime applicable to capital gains from share plans (option plans, subscription plans or others with equivalent effect). This legislation is expected to be rolled-out still in 2022.
6. Corporate Income Tax - Patent Box Regime
The so called “patent box” is a regime designed to reward Portuguese-based innovative companies by providing tax reliefs, namely a reduction of the corporate tax on profits resulting from qualifying IP income and that is becoming increasingly important.
The Budget proposal includes a provision to increase from 50% to 85% the tax exemption on income derived from the transfer, use or exploitation of copyright from computer programs as well as registered patents, designs, and industrial models. The tax benefit is limited by a ratio considering eligible expenses and total expenses in developing or using IP protected assets. A 30% mark-up of the eligible expenses is available but is capped at the amount of the total expenses incurred with the development of those IP assets.
7. Corporate Income Tax - Tax Incentive to Recovery (IFR)
A new tax credit is proposed to be introduced for the benefit of corporate taxpayers incurring investment expenses namely in the acquisition as from 1 January to 30 June 2022 of tangible assets, non-consumable biological assets and intangibles. There is an overall cap of €5M for the eligible expenses and the tax credit will correspond to:
10% of the eligible expenses incurred in the tax year concerned capped at the average of the eligible expenses of the three previous tax years (or if the company started its activity after 1 January 2021); or
25% of the eligible expenses incurred in the tax year concerned, in the amount that exceeds the previous amount mentioned.
The taxpayers applying this tax credit cannot distribute profits or terminate labour contracts based on redundancy or layoff during 2022 plus a 3 year period. The tax credit is capped at 70% of the annual tax assessed with special rules taxed under the special regime of group taxation. The tax credit may be carried forward for 5 years in the case of tax losses.
Finally, this tax credit may not accumulate with other tax benefits of the same nature in respect of the same eligible expenses. It is worth mentioning that the contractual benefits and RFAI Tax credit are extended until December 31, 2027 awaiting the update of the new regional state aid map applicable by reference to January 1, 2022.
8. Corporate Income Tax – Promotion of Companies Set-up Inland
In the framework of the Government promotion of inland regions (“Programa de Valorização do Interior”), there is a proposal for an authorisation to introduce further tax benefits to promote inland regions that will involve a tax credit of 20% of the costs incurred with the creation of jobs in inland regions that exceed the national minimum wage, capped at the corporate tax assessed in the tax year concerned. These final rules await EU authorization to expand this withing the regional state aid scheme.
9. Annual Real Estate Tax (IMI) - Second evaluation of urban buildings
The cadastral tax value is used by the tax authorities to calculate the annual taxes payable (IMI) and takes into consideration several criteria such as property age, size, amenities, and location. The taxes are fixed and range from 0.3% to 0.5% depending on municipality and in practice, the cadastral tax value is generally lower than the market value.
Second valuations undertaken by the tax authorities after a purchase of a property for a significantly higher value than the cadastral tax value has been a focal point and the Budget proposal includes now a provision that when a second valuation of urban properties sets a new cadastral tax value, this value will become the reference value for the IMI purposes (rather than the one in place before acquisition).
10. Real Estate Transfer Tax - Exemption in the first transfer of rehabilitated properties
Applying for a full transfer tax exemption that may go up to 7.5% on the first acquisition of qualifying urban rehabilitated property when the property is allocated to long-term rental activity or permanent residence has been very popular in the major urban areas. The Budget proposal includes provisions to somewhat limit this exemption, which will no longer apply on the first transfer of rehabilitated real estate set for rental or permanent residence if:
Property is given a different use within 6 years following the transfer; or
Property was not allocated to permanent residence within six months following the transfer; or
Property was not subject to long-term rental within one year following the transfer.
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This briefing provides for general information and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, this should not replace legal advice tailored to your specific circumstances. This briefing is intended for the use of clients and selected recipients. Queries or comments regarding this including joining our mailing list can be directed to kore@korepartners.com