1.
Taxation of capital gains from the alienation of shares or similar
interests of entities deriving their value principally from
immovable property located in Portugal

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Date: April 5, 2018
Information Note
From: Ricardo da Palma Borges / José Pedro Barros
Date: April 5, 2018
Subject: 2018 changes to the Portuguese taxation of capital gains from alienation of shares
or similar interests of entities deriving their value principally from immovable property
located in Portugal
Index
I. Scope of the Information Note.................................................................................................2
II. Portuguese Personal Income Tax Code and Corporate Income Tax Code.......................2
III. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base
Erosion and Profit Shifting (“MLI”)........................................................................................4
IV. Different scenarios regarding the application of the MLI and the Portuguese option of
for rule application....................................................................................................................6
Scenario 1 — DTT in force will not undergo any change..........................................................7
1.1 — Exclusive taxation in the State of residence of the alienator ......................................7
1.2 —Taxation in the State where the immovable property is located ................................7
Scenario 2 — DTT in force already had a similar rule but it will be changed........................8
Scenario 3 – DTT in force did not have a similar rule and a new rule will be introduced...9

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Date: April 5, 2018
I. Scope of the Information Note
On January 1, 2018, the taxation of capital gains from the alienation of shares or similar
interests of entities deriving their value principally from immovable property located in
Portugal has changed due to the introduction of new rules in the Portuguese Personal Income
Tax (“PIT) Code and in the Portuguese Corporate Income Tax (“CIT”) Code, together with
the future entering into force of the Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting (“MLI”).
These PIT and CIT changes have an impact on the Portuguese domestic taxation of such
capital gains derived by non-Portuguese tax residents with shares or similar interests in non-
Portuguese tax resident entities, while the MLI will modify the international taxation of such
item of income also for Portuguese tax residents with shares or similar interests in non-
Portuguese tax resident entities likely affecting the beneficiaries of the non-habitual resident
tax regime.
In this Information Note we will start by explaining the domestic law changes. We will also
provide a brief introduction of what the MLI is and focus on the specific rule that relates to
capital gains from alienation of shares or similar interests of entities deriving their value
principally from immovable property and its impact on cross-border taxation of investments.
II. Portuguese Personal Income Tax Code and Corporate Income Tax Code
The PIT Code already had a rule that enabled the taxation of capital gains from alienation of
shares in a company that was tax resident in Portugal, whether its value principally derived
from immovable property or not.
The Portuguese State Budget Law for 2018 has introduced a rule whereby the alienation of
shares or similar rights of participation in a non-resident company is now liable to taxation

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Date: April 5, 2018
in Portugal as long as their value is principally derived, directly or indirectly, in more than
50%, from immovable property situated in Portugal, if such relevant value threshold is met
at any time during the 365 days preceding the alienation. An exception applies to companies
that have such immovable property allocated to agricultural, industrial or commercial
activities, in the latter case, provided that it does not consist in the purchase and sale of such
property.
Portuguese tax residents are taxed on their worldwide income and therefore also on capital
gains obtained from the sale of shares or other rights of participation in non-resident
companies. Therefore, the real impact of this measure will be on non-Portuguese tax
residents that sell shares or other rights of participation in non-Portuguese tax resident
companies which are “Portuguese real estate rich”. Using an example to illustrate this,
imagine an individual that is a tax resident in the United Kingdom and sells shares in a
company incorporated in the United Kingdom but whose assets consist of immovable
property located in Portugal. Such operation will now be liable to capital gain taxation in
Portugal, even though neither the seller, nor the company itself, nor even its eventual buyer,
are resident in Portugal.
A similar provision was introduced in the Portuguese CIT Code, targeting the non-
Portuguese tax resident sellers which are not individuals but entities.
Many issues arise from such a rule and its enforcement will surely create a lot of discussion
and litigation. For instance, will the selling price for purposes of taxation be the total sale

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value or just the one imputable to the immovable property value? Additionally, will the
acquisition cost for purposes of taxation be the full price paid for the acquisition of the
corresponding shares or other interest participation or just the one imputable to the
immovable property? Moreover, there is no de minimis threshold for the taxation on the sale
of the shareholdings, so any 1% investor in a “Portuguese real estate rich” foreign company
may be affected.
These and other issues will require a more in-depth study on a case-by-case basis, and one
will have to monitor how the Portuguese Tax Authority itself will interpret and provide for
taxpayer compliance with such a rule.
III. Multilateral Convention to Implement Tax Treaty Related Measures to Prevent
Base Erosion and Profit Shifting (“MLI”)
The new rule introduced in the Portuguese PIT Code is very much inspired by a similar one
included in the Multilateral Convention to Implement Tax Treaty Related Measures to
Prevent Base Erosion and Profit Shifting (“MLI”). This international tax instrument is one of
the outcomes of the OECD/G20 Project to tackle Base Erosion and Profit Shifting (“BEPS”),
that are basically tax planning strategies that exploit gaps and mismatches in tax rules to
artificially shift profits to low or no-tax jurisdictions where there is little or no economic
activity, resulting in little or no overall corporate tax being paid.
The OECD Committee on Fiscal Affairs developed an Action Plan, identified 15 actions to
address BEPS on a comprehensive manner and set out deadlines to implement those actions.
Action 15 provided for a possible multilateral instrument enabling committing jurisdictions
the opportunity to implement the BEPS measures with a widespread reform and
coordination within the existing network of double tax treaties (“DTT”), without requiring
separate bilateral negotiations between them.

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The MLI has mandatory and optional parts for every signatory State. Each of them has to
mention what are the optional rules it will apply, and if two States have opted for the same
rule on the MLI such rule will become applicable in a specific DTT, automatically changing
it without a bilateral negotiation.
Regarding the optional part of the MLI, Portugal opted in for its Article 9, a rule similar to
the one of the Portuguese PIT Code, previously described. Such rule states that “gains derived
by a resident of a Contracting State from the alienation of shares or comparable interests, such as
interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during
the 365 days preceding the alienation, these shares or comparable interests derived more than 50 per
cent of their value directly or indirectly from immovable property, as defined in Article 6, situated in
that other State.”
The outcome of this provision is that capital gains on the alienation of shares or comparable
interests, which used to be taxed only in the State of residence of the selling taxpayer, will
now be liable to taxation also in the State of source where the immovable property from
which those shares or comparable interests potentially derive their value is located.
Consequently, in case any other State, that is a MLI signatory, has also opted in to introduce
such a rule then this provision will bind both Portugal and that State under their respective
DTT.
The entering into force of the MLI will occur on July 1, 2018. Afterwards, the entering into effect,
in relation to each State, will occur after that State deposits its instrument of ratification,
acceptance or approval (i) for taxes withheld at source on the 1st day of the calendar year
subsequent to the one where the MLI has entered into force for the latest signing party; and
(ii) regarding all other taxes levied, on the taxable period beginning 6 months after the MLI
entered into force for the latest signing party.

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Date: April 5, 2018
It is expected that the MLI will enter into effect by late 2018 for some States and during 2019
for the remaining ones.
IV. Different scenarios regarding the application of the MLI and the Portuguese option
for rule application
As explained above, Portugal opted in for Article 9 of the MLI and in such case the outcome
will depend on the options of the other States regarding the same rule. Those outcomes can
be (i) that no change to the respective DTT will occur, (ii) a change will occur in a DTT that
already had a similar rule or (iii) a new rule will be introduced in the DTT. We analyzed
several scenarios depending on the matches and mismatches of such rule application
between Portugal and other States, namely Belgium, Luxembourg, Malta, The Netherlands,
Poland, Switzerland and the United Kingdom.
Our analysis will always assume Portugal as the State of source where the immovable
property is located. Nevertheless, the seller´s State of residence may also have jurisdiction to
tax because tax residents in OECD countries are generally taxed on such State on their
worldwide income. Our analysis does not encompass such potential taxation on the State of
residence. In particular, it does not deal with the potential application of specific tax regimes
of such State of residence, for example participation exemption regimes on capital gains in
shareholdings.
Even though our analysis is based on potential changes to the DTT`s between the referred
States, it also does not encompass the analysis of measures to eliminate double taxation that
are regulated in each of the DTT`s. When the State where the immovable property is located
can tax the capital gains on the alienation of the shares in the entity holding such real estate,
the State of residence must provide an exemption or a credit for the tax levied in the State of
source, but such rules are not examined in this Information Note.

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The focus of our analysis is therefore to understand if a tax resident of Belgium, Luxembourg,
Malta, The Netherlands, Poland, Switzerland or the United Kingdom having shares in a
company with real estate in Portugal may now become taxable herein for the capital gains
on the alienation of such shares.
Scenario 1 — DTT in force will not undergo any change
1.1 — Exclusive taxation in the State of residence of the alienator
This case occurs when the other State opted out of Article 9 of the MLI, hence no change to
the DTT taking place. Such mismatch with the Portuguese option implies that, regarding the
taxation of capital gains by a seller that is a tax resident in that other State from the alienation
of shares or comparable interests of entities deriving their value principally from immovable
property located in Portugal, no change will occur in the DTT between Portugal and that
other State, an exclusive right to tax such income lasting for the State of residence of the
alienator.
This is the case of the DTT between Portugal and each of the following States: Belgium,
Luxembourg, Netherlands and the United Kingdom.
1.2 —Taxation in the State where the immovable property is located

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This case occurs when the other State opted out of Article 9 of the MLI, hence no change to
the DTT taking place, but a similar rule was already in place in the respective DTT. Some of
the DTT’s entered into by Portugal already followed Article 13 (4) of the OECD Model Tax
Convention with respect to Taxes on Income and Capital (“OECD-MC”) which stated “Gains
derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per
cent of their value directly or indirectly from immovable property situated in the other Contracting
State may be taxed in that other State”.
Such mismatch with the Portuguese option implies that, regarding the taxation of capital
gains by a seller that is a tax resident in that other State from the alienation of shares deriving
their value principally from immovable property located in Portugal, no change will occur
in the DTT between Portugal and that other State.
However, the fact that the respective DTT already encompasses a provision that follows
Article 13 (4) of the OECD-MC allows for both States to tax such income.
This is the case of the DTT between Portugal and Switzerland. An example of this situation
is where a tax resident in Switzerland holds shares in a company (incorporated in
Switzerland, Portugal or in another State) and such company derives its value principally
from immovable property situated in Portugal. When the Swiss tax resident sells shares in
that company he/she/it will be taxed in Portugal for the capital gains so obtained.
Scenario 2 — DTT in force already had a similar rule but it will be changed

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This scenario occurs when the other State opted in to apply Article 9 of the MLI but a similar
rule was already in place in the respective DTT, in general similar to the above-mentioned
Article 13 (4) of the OECD-MC.
Such match with the Portuguese option implies that, regarding the taxation of such capital
gains, a change will occur in the DTT between these two States. The differences of Article 9
of the MLI vis-à-vis Article 13 (4) of the OECD Model Tax Convention consist (i) in the
broadening of the provision to cover not only shares but also comparable interests and (ii) in
the introduction of a testing period of 365 days preceding the alienation for determining
whether the condition on the immovable property 50% value threshold is met.
This is the case of the DTT between Portugal and Malta. An example of this situation is where
a tax resident in Malta holds shares in a company (incorporated in Malta, Portugal or even
in another State) and such company derives its value principally from immovable property
situated in Portugal. When the Maltese tax resident sells those shares he/she/it will be taxed
in Portugal for the capital gains so obtained.
Scenario 3 – DTT in force did not have a similar rule and a new rule will be introduced
This scenario occurs when the other State opted in to apply Article 9 of the MLI and such
match with the Portuguese option implies that, regarding the taxation of capital gains from
the alienation of shares of entities deriving their value principally from immovable property,
a change will occur in the DTT between these States.

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This change will mean that the DTT between Portugal and the other State will now have a
rule whereby either State can tax a person resident in the other State for income obtained
from capital gains from alienation of shares or comparable interests of entities (irrespective
of the State where this entity is incorporated or tax resident) if its value principally derives
from immovable property situated in the first mentioned State.
This is the case of the DTT between Portugal and Poland. An example of this situation is
where a tax resident in Poland holds shares in a company (incorporated in Poland, Portugal
or in another State) and such company derives its value principally from immovable
property situated in Portugal. When the Polish resident sells those shares he/she/it will be
taxed in Portugal for the capital gains so obtained.
***

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Date: April 5, 2018
Existing Portuguese real estate investment structures should be reassessed now. There may
restructuring alternatives, involving Portuguese or foreign companies, that avoid the potential
taxation of capital gains both in Portugal and in the country of residence of the shareholder.
RPBA has an in-depth knowledge of these new regimes. Should you require further
information on this issue please do not hesitate to contact us.
Ricardo da Palma Borges
Lawyer (Specialist in Tax Law by the Portuguese Bar Association)
LL.M. (2003)
ricardo@rpba.pt
José Pedro Barros
Lawyer
jose@rpba.pt