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Portugal: A Crypto Tax Mess

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Portugal: A Crypto Tax Mess

by | Tuesday, 2 November 2021 | Corporate Income Tax, Cryptocurrency, Personal Income Tax

Portugal: A Crypto Tax Mess

Portugal has no tax legislation (crypto tax) nor provisions on cryptocurrencies and crypto-assets. Given this current absence of tax legislation on crypto assets, the Portuguese Tax and Customs Authority (AT) has issued a tax ruling on the taxation of cryptocurrencies at a taxpayer’s request.

Based on the tax-ruling mentioned above, the current understanding of the Portuguese Tax and Customs Authority is that: “cryptocurrencies are not technically considered “currency” because they do not have a legal tender or liberating power in Portugal, however, (…) they can be exchanged, with profit, for real currency (…), with specialized companies for the effect, with its value, compared to the real currency, being determined by the online demand for cryptocurrencies”.

Therefore, the position of the AT is in line with that of the Portuguese Central Bank, the latter recently tasked with licensing crypto-trading platforms in Portugal under EU-Law.

Given the above, income resulting from the sale of cryptocurrencies will not be taxable under the Portuguese Personal Income Tax Code, neither within the scope of category E (capital-gains income) nor subject to being taxed under category G (equity increases).

The AT understands that profits obtained from the sale of cryptocurrencies are not taxable under the Portuguese tax system. However, should the gain be regular, it will qualify as a professional or entrepreneurial income, and as such, taxed at the progressive tax rates that can go up to 48%.

However, the AT does not address in its ruling:

  • The concept of what it deems as the sale of a cryptocurrency or asset. Is it the sale of cryptocurrencies and crypto-assets for other cryptocurrencies and crypto-assets? The sale of cryptocurrencies and crypto-assets for fiat currency? Or both?
  • What qualifies as a regular activity, or how often must trading occur for the AT to deem it regular and taxable under the category B type of income.
  • The taxation, if any, of staking or mining.

Given the above, high-risk takers, based on their notions of what they wish to understand from the loose tax ruling, consider Portugal to be a crypto tax haven, where their income is not taxed (for the time being).

One can argue that the Portuguese Tax and Customs Authority would have difficulty proving regularity and income flow derived from trading.

On the other hand, the Supreme Administrative Court determines that freelancing implies the idea of stable or habitual exercise of commercial activity as a way of life, even if without perfect continuity, as happens with those activities which, by their very nature, can only be carried on at certain times or from time to time, and from time to time, but which still constitute a normal and regular performance of one or more commercial of one or more commercial or industrial activities”. In order words, one must look if one intends to generate income through the sale of cryptocurrencies and assets; and what is the percentage/weight of said activity in one’s income structure and how dependent is said individual on that income source and if said individual has costs in obtaining said income.

Under the current rules, those who are residents, for tax purposes, in Portugal can also have their income audited under “wealth manifestation” rules. The same is to say that if the taxpayer conducts high-profile/luxury purchases of property and vehicles, the Portuguese Tax and Customs Authority could request justification of how the income is generated and how often).

On the other side, low-risk takers opt to strictly follow the ruling and register themselves as free-lancers and subject their income to personal income tax and social security contributions based on how much they earn.

Considering the above, low-risk takers relocating to Portugal can still legally benefit from low taxation on their crypto income under the non-habitual resident (NHR) scheme. As such, before effective relocation to the country, restructure of crypto-income must occur. This restructuring must happen so that the income generated entirely abides by the NHR tax exemption rules. Such means that crypto income should be received in Portugal either as dividends or salaries paid by a foreign entity.

The mere holding of crypto does not generate, for the time being, a taxable event.

In short, Portugal is a crypto tax mess, if one is willing to take fully take the risk of non-reporting based on a 2016 loose tax ruling. If you are not willing to take the risk and expect zero taxation, then Portugal is not the place to relocate.

This article is provided for general information purposes only and is not intended to be, nor should it be construed as, legal or professional advice of any kind.

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