Portuguese Tax Authority condemned to Income Tax refund

​published on 25 October 2019 | reading time approx. 1 minute

The Portuguese real-estate market is in full steam, and shows no signal of slowing down. This represents for sellers significant gains by selling Portuguese real-estate. However, such topic has raised an interesting dispute between non resident taxpayers and the Portuguese Tax Authority before the Portuguese Tax Courts.  

Indeed, the Portuguese Tax Authority has been following strictly the dispositions contained in the Portuguese Personal Income Tax Code, that treat the gains in a different way according to the tax residency of the seller. If the seller is a Portuguese tax resident, only 50 percent of the total gains are taken into account for the calculations of the tax due, ranging from a progressive scale of rates currently from 14,5 percent to 48p ercent . On the other hand, in the case of foreign tax residents, the entirety of the gains are subject to taxation at an autonomous rate currently of 28 percent .

Many of the non-resident sellers claimed before the tax Courts that such discrepancy characterizes an unfounded discrimination between residents and non-residents (either EU and third country citizens) and therefore violating the Principle of the Free movement of Capital, established in article 63º of the EC Treaty.

This discriminatory tax policy has had a long history, and this question has been initially discussed by the ECJ, which decided in Case C-443/06 (Case Hollmann) that Article 56 EC (currently 63) must be interpreted as precluding national legislation, which subjects capital gains resulting from the transfer of immovable property situated in a Member State, in this case Portugal, where that transfer is made by a resident of another Member State, to a tax burden greater than that which would be applicable for the same type of transaction to capital gains realized by a resident of the State in which that immovable property is situated.

The national jurisprudence has been deciding in the same direction, either at the level of the Superior Courts and most recently also at the level of the Tax Arbitration Court, where several sentences on this subject have been issued in 2019.

As a result of these decisions, the Portuguese Tax Authority has been condemned to return 50 percent of the Personal Income tax paid by the non-resident claimant taxpayers, including interest.