In Portugal, the taxation of individual income derived from the transfer of real estate is subject to different regimes depending on whether the income is earned by residents or non-residents.
Under the regime in force until 2007, capital gains derived from immovable property, when earned by residents, were only considered at 50% of their value and subject to taxation by the application of the progressive rates provided for the taxation of individuals (ranging between 14% and 48%); whereas when earned by non-residents, this type of income was taxed in its entirety at a rate of 28%.
Thus, the question soon arose of whether this discrimination was compatible with the principle of the free movement of capital, enshrined in Article 63 of the Treaty on the Functioning of the European Union (TFEU), paragraph 1 of which states that "all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited".
When asked to rule on the matter, the Court of Justice of the European Union (CJEU) held that the regime was incompatible with EU law, since non-residents were taxed less favourably than residents (see the judgment in Case C-443/06, Hollmann v. Fazenda Pública).
As a result of this decision, the law was amended, providing, additionally, that "Residents of another member state of the EU or the EEA, provided that, in the latter case, there is an exchange of information in tax matters, may opt to have this income taxed at the rate that, according to the table provided for in Article 68(1), would be applicable if earned by residents in Portuguese territory" (taking into account the taxpayer’s global earnings).
However, since this amendment came into force, both judicial and arbitral national courts have ruled that the existence of this optional regime is not susceptible of remedying the discriminatory nature of the rule that determines that capital gains derived from the transfer of immovable property must be considered at 50% of their value only when earned by residents (see arbitral decisions rendered by the Center for Administrative Arbitration in Cases 762/2019-T and 664/2019-T, and also the ruling rendered by the Supreme Administrative Court in Case 075/20.6BALSB).
In some rulings, the courts have, inclusively, decreed the payment of compensatory interests over the amount of tax unduly paid (see the ruling by the Supreme Administrative Court in Case 01154/18.5BESNT and the ruling by the Center for Administrative Arbitration in Case 121/2020-T). Also, the Supreme Administrative Court has even recognised – following the CJEU ruling in Case C-184/18 – that equal treatment should also cover those residing outside the EU (see ruling rendered in Case 075/20.6BALSB).
In March 2021, the CJEU confirmed the understanding of national courts in Case C-388/19 (MK v. Autoridade Tributária e Aduaneira) in which it was held that "Article 63 TFEU, read in conjunction with Article 65 TFEU, must be interpreted as precluding the legislation of a member state which, in order to permit capital gains realised from the transfer of immovable property situated in that member state, by a taxable person resident in another member state, to not be subject to a tax burden greater than that which would be applied to capital gains realised from the same type of transaction by a person resident in the first member state, makes the taxation regime applicable dependent upon the choice made by that taxable person”.
This means that, for over a decade, the Portuguese tax authorities have ignored their obligation, pursuant to the principle of primacy, not to apply rules that are contrary to EU law (regarding this obligation, see the judgment rendered in Case C-378/17 and the judgments referenced therein). (As an aside: it seems noteworthy that, according to our jurisprudence, the tax authorities do not have the power to waive the application of rules on the grounds that they violate the Constitution; this might partially explain the lack of habit or will to assess the conformity of ordinary legislation with other higher sources of law).
Only following the CJEU’s latest decision, in June 2021, have the Portuguese tax authorities conceded to consider these gains at 50% of their value, subjecting them to a tax rate of 28%.
Thus, non-resident taxpayers that have been taxed on these gains for the entirety of their value should resort to the administrative (or judicial) procedures available to contest the respective assessments.
As for gains realised from 2021 onwards (until the necessary amendment comes into force), in principle, the consideration of only 50% of their value should be automatic once the assessment is submitted, but if not, the taxpayer should file an administrative claim so the tax authorities can proceed to rectify the amount of tax due.
Maria Pia SoutinhoAssociate, Morais LeitãoE: msoutinho@mlgts.pt
