Ideal for digital nomads: Portugal’s crypto asset taxation and regulation

Source: TaxDAO

1. Introduction

Portugal is an ideal destination in Europe for digital nomads and businesses seeking a light tax burden. Among European countries, Portugal used to be one of the countries that provided a favorable tax system for crypto assets, but with the update of the tax policy in 2023, Portugal also ended the relatively tax-free status of crypto asset transactions and began to tax crypto asset gains. According to the Portuguese Personal Income Tax Law, income from crypto assets can be divided into three categories: capital (Class E), capital gains (Class G) or self-employment income (Class B), and different tax systems are applicable according to different incomes. This article will analyze Portugal's tax and regulatory system in detail.

2. Overview of Portugal's Basic Tax System

2.1 Portugal's Tax System

The Portugal tax system consists of personal income tax, corporate income tax, value-added tax, etc. The social security fund is also an integral part of the Portugal tax system. There are 7 types of taxes in Portugal, namely: corporate income tax, personal income tax, value-added tax, real estate transaction tax, real estate tax, stamp duty and other taxes. 2.2 Main types of taxes 2.2.1 Corporate income tax Companies registered in Portugal and engaged in commercial, industrial or agricultural activities shall pay corporate income tax to the Portuguese tax authorities. The income tax rate for large companies (with a turnover of more than 50 million euros) is 21%; the tax rate for small and medium-sized enterprises is 17% for the income below 15,000 euros and 21% for the income above 15,000 euros. Starting from 2019, on the basis of the current surcharge rate, a national surcharge of 3%, 5% and 9% will be added for the annual profits of companies between 1.5 million and 7.5 million euros, 7.5 million and 35 million euros, and more than 35 million euros, respectively.

2.2.2 Personal income tax

The personal income tax base for Portuguese residents includes all personal income earned in and outside Portugal, and the tax rate is 14.5% to 48%; non-Portuguese residents only use income earned in Portugal as the tax base, and the uniform tax rate is 25%. Personal income includes: wages, income from business operations or service provision, capital gains, rental income, investment income, pensions (partial tax exemption below 4,104 euros), directors' fees, etc. Personal income tax is paid according to the total annual income in a gradient ratio.

2.2.3 Value Added Tax

Value Added Tax is a tax that Portugal began to levy after joining the European Community in 1986. All transactions of goods and services in Portugal, as well as goods imported from outside the EU, are subject to VAT. Portugal adopts three VAT rates: general rate, preferential rate and preferential rate. The general rate in mainland Portugal is 23%, the preferential rate is 13% and the preferential rate is 6%. The rates in Madeira Autonomous Region are 22%, 12% and 5% respectively. The rates in Azores Autonomous Region are 16%, 9% and 4% respectively.

2.2.4 Real Estate Transaction Tax

All properties and real estate in Portugal are subject to real estate transaction tax when they are bought and sold. The tax base is the higher of the real estate transaction price or the real estate registration price. For rural real estate, the transaction tax is 5% of the transaction price. For real estate located in towns, the transaction tax rate varies according to the transaction price: real estate transaction tax is exempted for contracts with a value below 92,407 euros; a floating tax rate of 2% to 8% is applied for contracts with a value between 92,407 and 574,323 euros; and a fixed tax rate of 6% is applied for contracts with a value above 574,323 euros. Real estate transaction tax is paid by the buyer of the house, usually at the same time as the house payment or on the first working day after the payment. Real estate transactions conducted abroad must be paid within the next month after the real estate transaction.

2.2.5 Stamp Duty

Stamp duty is a tax levied on various contracts, property transfer documents, business books, and books signed in economic activities. There are two ways to collect stamp duty in Portugal: one is a fixed tax rate, such as checks, business books, wills, real estate registrations, etc., with fees ranging from 5 cents to 25 euros; the other is to collect stamp duty based on a certain percentage of the total contract amount, with a tax rate ranging from 0.04% to 10%. Such contracts include real estate sales, donations, letters of guarantee, mortgages, insurance policies, etc.

3. Portugal's Crypto Tax Policy

3.1 Qualitative Analysis of Crypto Assets

In Portugal, crypto assets do not have legal tender status, are not classified as legal tender, and are not considered "currency" or "electronic money". However, a 2019 statement by the European Banking Authority (EBA) indicated that crypto-assets could be considered “electronic money” in limited circumstances under Directive 2009/110/EC (EMD2)[1]. Crypto-assets are defined in the EU Regulation on Markets in Crypto-Assets (MiCA) as “any digital representation of value or rights that can be transferred or stored electronically using distributed ledger technology or similar technology”, excluding single crypto-assets and non-fungible crypto-assets. Crypto-assets are largely seen as an alternative means of payment that are contractual in nature, the result of private agreements between participants in crypto-asset transactions, and have inherent characteristics that replicate the main features of traditional currencies to a certain extent: store of value, unit of account, medium of exchange.

For personal income tax purposes, under the Portuguese Personal Income Tax Code (Código do Imposto sobre o Rendimento das Pessoas Singulares, CIRS), gains from the disposal of crypto assets shall be considered capital gains, and the standard tax rate of 28% will apply to capital gains arising from the disposal of the above assets, unless these assets are held for more than 365 days, in which case an exemption will be granted (but not applicable to crypto assets classified as securities).

3.2 Crypto Asset Taxation System

The Portuguese Personal Income Tax Code was amended in 2023 to include crypto assets in the tax scope. A 28% capital gains tax (CGT) is levied on short-term held crypto assets (held for less than one year). Long-term held crypto assets (more than one year) are tax-free. In addition, non-fungible tokens (NFTs) are excluded from taxation and enjoy tax exemption. Portugal has a progressive tax system with tax rates ranging from 14.5% to 53%, depending on the category of income. According to the revision, income from crypto assets is classified into the following three types: capital (category E), capital gains (category G) or self-employment income (category B).

(1) Capital income: PIT category E

Category E refers to the taxation of capital income (Rendimentos de Capitais). For crypto assets, this category of taxation mainly applies to passive income, such as investment income. In addition, physical crypto payments (such as using crypto assets to pay for goods or services) should also be taxed accordingly.

(2) Capital Gains Income: PIT Category G

Category G refers to gains from buying and selling crypto assets, and applies to capital gains from selling crypto assets after holding them for less than 365 days. If the holding period exceeds 365 days, the capital gains from the sale are tax-free (but still need to be reported). Gains from the sale of crypto assets held for less than 365 days are subject to a flat tax rate of 28%. However, investors can also choose to include these gains in general taxable income, which is then taxed at progressive rates ranging from 14.5% to 53% based on total income. There are exceptions: certain crypto assets are considered securities and are subject to tax regardless of the holding period.

(3) Self-employment income: PIT category B

Income from crypto-asset issuance business (such as mining or validating crypto transactions) falls into category B. Such income is taxed at progressive rates ranging from 14.5% to 53%. For professional traders, cryptocurrency profits can generally be considered as self-employment income and taxed accordingly.

The main features of the tax system include: 1. Individual investors do not need to pay capital gains tax as long as they do not engage in professional activities related to crypto-assets and hold them for more than 365 days. This means that income from buying and selling crypto-assets for personal investment is generally not subject to taxation. 2. If these transactions are not business activities, value-added tax and income tax are not applicable to crypto-asset transactions. 3. Taxation of professional activities: Income from activities related to crypto-assets that are considered professional or entrepreneurial activities may be taxed according to the general provisions of income tax.

4. The establishment and improvement of Portugal's crypto regulatory framework

The Portuguese Securities Market Commission (CMVM) and the Bank of Portugal (Banco de Portugal) are the main regulatory agencies responsible for supervising virtual asset exchanges, custody services, and preventing money laundering and terrorist financing.

Portuguese regulators have formulated relevant regulations to classify crypto asset exchanges as operating under a licensing system operated by the central bank. CMVM is responsible for directly supervising the "tokenized" asset market, that is, digitally representing stocks or bonds in a decentralized database through crypto assets. As the main law enforcement agency for anti-money laundering (AML) and counter-terrorism financing (CFT), the Bank of Portugal has implemented strict supervision on crypto asset exchanges. In 2022, the European Parliament's Economic and Monetary Affairs Committee approved the provisions of the Crypto-Assets Markets Act (MiCA), which will be submitted to the European Parliament and EU member states for a vote. The provisions of MiCA should come into force by the end of 2024 and are intended to provide legal clarity, prevent the abuse of crypto assets, and encourage the development of crypto asset innovation. At present, MiCA also has certain limitations, such as it does not include decentralized finance (DeFi) and non-fungible tokens (NFT).

In terms of compliance requirements, digital asset exchanges operating in Portugal must be registered with the Bank of Portugal to ensure compliance with legal standards and increase market transparency. Crypto asset businesses in Portugal need to comply with AML/CFT rules in accordance with EU directives, which include the authentication, verification, reputation and reliability of customers. In addition, crypto asset service providers (CASPs) engaged in the following activities need to obtain a crypto asset license: exchanging crypto assets for another crypto asset or fiat currency, and vice versa; providing convenient transfer services between crypto asset addresses or crypto asset wallets; providing and maintaining crypto asset wallets. The application period is usually five months.

5. Summary and Outlook

The Portuguese government has a relatively open attitude towards crypto assets and has adopted a balanced strategy in the taxation and regulation of crypto assets, aiming to protect the interests of investors, prevent illegal financial activities, and promote the healthy development of the market. With the increasing popularity and adoption of crypto assets around the world, Portugal's crypto asset market is also booming. There are 108 companies in Portugal that accept crypto assets, showing the market's friendly attitude towards crypto assets. In 2023, Portugal included crypto assets in the tax scope, ending the status of being considered a "tax-free" zone for crypto assets. The short-term capital gains tax is as high as 28%, but the relatively favorable conditions provided to long-term investors are used to encourage more long-term investment, thereby promoting the stable development of the market. One of the important changes in the MiCA regulations is the emphasis on environmental responsibility, which requires crypto asset companies to have the responsibility to reduce the high carbon emissions of crypto assets. Important crypto asset service providers need to publish energy consumption on their websites and share this information with national authorities. Another change is the regulation of stablecoins, which is now the responsibility of the European Banking Authority (EBA). Stablecoin issuers operating in the EU are required to establish sufficient reserves with a 1:1 reserve ratio, part of which is in the form of deposits. These reserves ensure that all stablecoin holders can make claims against the issuer at any time and free of charge.

As the global crypto-asset market continues to evolve, Portugal is likely to continue to adjust its tax and regulatory policies to adapt to new market conditions and international standards.

References

[1].Portuguese National Budget 2023: The End of the Crypto Golden Country? (2024) TaxDAO.

[2].Crypto Taxes in Portugal 2024: Your Complete Guide for Hassle-Free Compliance. https://mcs.pt/crypto-taxes-in-portugal-2024/

[3].https://www.internationaltaxreview.com/article/2b3n19bqkr4qdpq7jdm2o/sponsored/2023-portuguese-state-budget-the-end-of-crypto-el-dorado

[4].https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32009L0110