Portugal: Portugal's State Budget For 2023

Portugal's Draft Budget for 2023 was delivered by the Minister of Finance, Fernando Medina, on 10th October 2022. One of the key announcements was the proposed introduction of a new tax framework for crypto assets.

The Budget still needs to be approved by Parliament and therefore changes may be made before the Budget becomes law.

The key tax measures affecting private client individuals are summarised below.

Income Tax

The income tax bands will be increased by 5.1% and the tax rate on the second band reduced from 23% to 21%.

For 2023, the income scale rates will be:

Tax exemption for Young Persons

Young people who have completed secondary education and who are aged between 18 and 26 (or 30 if they have completed a doctorate) are entitled to a tax deduction against employment or self-employment income, for a maximum period of five years. The deductions are:

• 50% in the first year, up to a maximum of €5,983.75 (12.5 times the Social Support Index (Indexante dos Apoios Sociais (IAS)) for 2023.
• 40% in the second year, up to a maximum of €4,878 (10 times the Social Support Index)
• 30% in the third year, up to a maximum of €3,590.25 (7.5 times the Social Support Index)
• 20% in the second year, up to a maximum of €2,393.50 (5 times the Social Support Index)

Personal Tax Deductions for Dependants

Where there is more than one dependant child, the personal deduction for the second and subsequent dependants, who are under 6 years of age at 31^st December of the relevant tax year, will be increased to €300 (and to €150 in cases of shared custody).

Mandatory income tax scale rates

From 2023, individuals with gains arising on investments held for less than one year, which would normally be taxable at a flat rate of 28%, will be obliged to apply the scale rates of tax to such gains where their total income (including those gains) is equal to or exceeds the top income tax band (€78,834 for 2023). Gains arising on disposals of crypto assets held for more than one year are not taken into account when assessing income levels under this rule.

Crypto Assets

Income and Gains

The Budget introduces a new regime for the taxation of income and gains arising from crypto assets.

Under the current legislation, capital gains on crypto assets are generally outside the scope of tax in Portugal, unless the crypto activities are regarded as a trading activity.

Under the proposed rules, activities involving the creation and validation of crypto assets (mining and staking) will be categorised as Category B income (business and professional income) and will be taxed at the income tax scale rates. Under the simplified regime, where income is equal to or less than €200,000, only 15% of the income is subject to tax.

Gains arising on the sale of crypto assets held for less than one year will be taxed as capital gains at a flat rate of 28%. The gain is calculated as the difference between the sale proceeds and the cost, with acquisition and sale costs being tax deductible. The option for the income tax scale rates to apply instead is still available (under the 'englobamento' regime where the taxpayer can elect for all income to be taxed at the scale rates).

Gains are not taxable where the asset has been held for 365 days or more.

Losses on crypto assets can be carried forward and offset against gains of the five following years, but only where the taxpayer opts for the 'englobamento' regime.

Gifts and Inheritances

Gifts of crypto assets will be subject to Stamp Duty at a rate of 10% where the amounts are deposited into a Portuguese bank or other investment institution in Portugal.

In addition, a 10% Stamp Duty will arise in the following circumstances:

• For inheritances of crypto assets, where the deceased was tax resident in Portugal at the time of death, or
• For lifetime gifts of crypto assets, where the recipient is tax resident in Portugal.

Exemptions for spouses and direct line beneficiaries still apply as normal.

Portugal will also introduce a 4% tax charge on commissions charged by brokers involving crypto activities where the crypto provider or client is resident in Portugal; the tax being payable by the client in both cases.

Reporting Obligations for Crypto Asset Service Providers

Individuals or entities providing custodian and administrative services on behalf of third parties, or who manage one or more trading platforms, will be obliged to submit a declaration to the Portuguese tax authorities, by the end of January each year, providing information concerning the transactions carried out by Portuguese resident individuals that relate to crypto assets.

Corporation Tax

The reduced tax rate that applies to small and medium companies of 17% will now apply to the first €50,000 of taxable profits (currently only the first €25,000 of profits benefit from the reduced rate).

Corporation tax losses will be able to be carried forward indefinitely, but the amount of deduction will be capped at 65% of taxable profits (currently 70%).

IMT

In the case of urban residential properties to be used as a permanent residence, the tax bands will be increased by 4%, which means that IMT will only be payable on values over €97,064.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.