portuguese flag and IRS desk

The new Model 3, which has to be submitted between April and June, increases the tax on speculative income and eases the tax on rents from long-term housing contracts.

The changes introduced to the IRS Code in recent years, such as the increase in taxation on short-term capital gains, the obligation to report gains from the sale of crypto-assets or the tax relief on property income from long-term housing contracts, will begin to have an impact on the tax return that the Portuguese will have to fill out this year, between April 1 and June 30, and which concerns gains in 2023.

The new forms for model 3 of the IRS tax return were published this Friday in the Diário da República, two months before the deadline for submitting the document electronically to the tax authorities.

Inclusion of “speculative” capital gains

Among the main changes, tax expert Luís Nascimento highlights the mandatory inclusion of capital gains generated by the sale of assets such as shares, held for less than a year, when the taxpayer in question has very high income, falling into the last IRS bracket, i.e. with annual gains of more than 78,834 euros. In other words, the profit obtained from the sale of those securities “will no longer be taxed at the autonomous rate of 28% or 35%, in the case of tax havens, but at the maximum tax rate: 48%,” the Ilya consultancy partner told ECO.

The mandatory inclusion of short-term capital gains, known as “speculative” capital gains, which must be reported in Annex G of the personal income tax return, was a measure approved in the State Budget for 2022, with effect from January 1, 2023, and has now been translated into this year’s tax return, which refers to last year’s income.

The taxation of profits generated by the sale of assets held for more than a year remains unchanged: the rates of 28% or 35% are maintained if the income from securities is paid to residents in Portuguese territory by entities domiciled in offshore companies.

Compulsory declaration of gains from the sale of crypto-assets

On the other hand, as stated in the State Budget for 2023, gains from the sale of crypto-assets will have to be declared either in Annex G, relating to capital gains, or in Annex B, relating to self-employed income, aka green receipts.

“For crypto-assets sold and held for less than a year, the taxpayer pays a rate of 28%. If they have been held for more than a year, the taxpayer is exempt, but must still declare the capital gain in the Annex G field,” explains Luís Nascimento.

In the case of independent professionals, dedicated to buying and selling crypto-assets, they must not only have an open account with the tax office, but they must also declare the gains from the sale of these assets in Annex B, adds the tax expert.

Tax on landlords lowered for long-term leases

As far as property income is concerned, there are also new features that implement the measures approved in October last year as part of the Mais Habitação legislative package. Annex F now distinguishes between short and long-term rental contracts.

In general, the autonomous tax rate of 28% has been lowered to 25% for all rental income from contracts for permanent housing. But there are more tax benefits for contracts of more than five years, if the landlord does not choose to include the income.

Thus, for leases of five to 10 years, “a reduction of 10 percentage points is applied to the respective autonomous rate, and for each renewal of the same duration, a reduction of two percentage points is applied, with the reductions relating to the renewal of the contract being subject to a limit of 10 percentage points”, according to article 72 of the IRS Code.

For contracts with a duration of between 10 and 20 years, a reduction of 15 percentage points is applied, which means that the rate drops to 10%. If the duration is 20 years or more, the income is taxed at an autonomous rate of 5%.

Incentive for employees to buy shares in startups

Another novelty concerns the tax incentive for workers to buy shares in their employers, if they are micro, small or medium-sized startups. This measure was introduced in the State Budget for 2023 and then further developed in this year’s Budget, which equated such gains with employment income.

“In Annex A, there is now a field for the purchase of startup shares by their workers, who are exempt from the 28% tax until they are sold,” Luís Nascimento explained to ECO. It should also be noted that the tax to be paid when the asset is sold will only be on 50% of the income.

However, there are several conditions to this benefit. “The company must be a micro, small or medium-sized start-up. In other words, it can’t employ more than 250 workers or have a turnover of more than 50 million euros,” says the tax expert. And excluded from the possibility of buying shares are “workers who hold more than 20% of the share capital or voting rights, managers and directors, i.e. members of statutory bodies,” added the expert.

Foreign income from the sale of real estate

Finally, Luís Nascimento highlights the change in the tax framework for foreign income generated by the sale of real estate in Portugal, in Annex G capital gains. Until the 2023 tax return, 100% of these gains were taxed at 28%, while only half of Portuguese real estate capital gains were taxed, although they were subject to progressive IRS rates, which can go up to 53%.

“In this year’s tax return, income from the sale of real estate by non-resident foreigners will be subject to the same regime as that applicable to the Portuguese,” says Luís Nascimento.

For the tax expert, “this was the Tax Authority’s way of circumventing the litigation that foreigners brought against the tax authorities, which even led to the Court of Justice of the European Union ruling against discrimination in taxation between foreigners’ and Portuguese real estate capital gains”.

Assets in offshores and income from national capital escape declaration obligation

In this IRS declaration, an emblematic PS rule to combat tax evasion, which was approved in the State Budget for 2024 at the proposal of the Socialists, and which “required the declaration of all types of income, even those that are exempt from tax, and also assets in offshore companies, as long as they exceed 500 euros,” notes Luís Nascimento.

If this rule were applied, capital income, such as interest or dividends, from national entities, subject to the 28% tax rate and exempt from reporting, would have to be included in model 3. It should be remembered that, at the moment, only income from foreign capital has to be declared. Assets held in tax havens would also have to be itemized.

“In addition, exempt income such as food subsidies, allowances or social benefits that exceed 500 euros would also have to be declared,” says the tax expert.

ECO has asked the Ministry of Finance why it hasn’t yet applied this rule, which forces all types of income to be declared, and whether the aim is to only introduce this obligation in 2025, and is awaiting a response.