On May 27 2022, the Portuguese Parliament approved the Budget Law for 2022 and significant changes, with effect from January 1 2023, are foreseen on the taxation of capital gains from the sale of shares or other securities, such as participation units.
According to the rules in force up to December 31 2022, the positive balance of any capital gains and losses from the sale of shares or other securities is taxed, for personal income tax purposes, at a flat rate of 28%. This is irrespective of the total amount of other income earned by the individual, or the holding period of the shares or securities.
The provisions that will come into effect on January 1 2023 introduce a sharp increase in the taxation of capital gains when, cumulatively, the total taxable income of the individual, including the capital gains, equals or exceeds €75,009 ($75,902) and the shares or securities have been held for less than 365 days before the sale. In these situations, the positive balance of the capital gains and losses will be necessarily taxed by aggregation at the general and progressive personal income tax rates.
Given that the progressive rates are up to 48% (for taxable income exceeding €75,009) and surtax will also be levied (at the rate of 2.5% for taxable income higher than €80,000 and 5% for taxable income above €250,000), the aggregate tax rate in Portugal applicable to those capital gains may reach 53%, which will be the highest tax rate when compared with the most relevant jurisdictions of the EU.
This measure illustrates once again that the Portuguese tax regime aims to heavily tax individuals with higher incomes and, in particular, investors and speculative transactions.
If the increase of the taxation has its raison d´être in a speculative market, Portugal does not grant any exemption or substantial reduction on the taxation of gains on the sale of shares held for a medium or long term. With regard to non-speculative transactions, special rules are not set forth in the tax code.
Several matters were not duly planned when this measure was approved.
On the one hand, the Portuguese capital market will possibly be affected by investors that will have the need to freeze certain transactions (to reach the 365-day holding threshold).
On the other hand, the new rule may increase the taxation of some capital gains even though that was not the intention of the legislator. This will be the case for some equity incentive plans when employees sell company shares in the short term (where they hold the shares or securities for less than 365 days) and the company’s market value has had a significant increase.
Therefore, it is safe to conclude that Portugal insists on heavy taxation of individuals and shows no intention of changing course.
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