Tax revenues on capital gains have fallen in Portugal over the past 20 years

Tax revenues on capital gains in Portugal have fallen over the past two decades according to a European Commission quarterly report.

The report has an entire section on the trends and implications of taxation on capital income (companies and families) in EU countries and concludes that “with demographic changes, national tax systems may need to reduce the tax burden on employment and instead shift some of the emphasis on capital gains – especially personal gains – which could be seen as an alternative”, states the report.

At issue are aging populations and the consequent reduction in the tax base from employment, affecting revenues and exacerbating the lack of labour.

The OECD forecasts a loss of 8% in revenues by 2040, putting pressure on Member-States to diversify their sources of tax revenue.

Currently, income tax is the main tax on individuals in the Euro Zone, but over the past 20 years the majority of countries in the Euro Zone have increased taxes on capital gains, albeit these taxes are lower than on labour. (salaries)

Portugal, on the other hand, has bucked this trend. Between 2002 and 2022 it has adopted a similar strategy to Luxembourg and Cyprus by making taxes on instruments that provide capital gains more attractive and competitive in terms of tax incentives.

Income tax revenues have increased in importance while taxes levied on capital gains has fallen.

In Portugal, tax revenue on capital gains represents almost 8% of GDP and around 24% of total tax revenues according to statistics from Brussels.

From the total, around 50% of tax needs comes from companies and just 1% comes from families. Income tax revenues from employment amounts to 40% of tax revenues.

Portugal is below the European Union average across the various indicators regarding capital gains and levies the least taxes.

Brussels suggests that countries like Portugal could increase capital gains taxes rather than having to increase basic income tax and would have a more “distributive effect” since families with the largest incomes have a greater proportion of their income sources from capital gains.

It argues that it could be “a strategy to increase tax revenues on capital gains without increasing taxes”.

However, it is unlikely to be music to the ears of Portugal’s Association of  Investment Funds, Pensions and Patrimony (Associação Portuguesa de Fundos de Investimento, Pensões e Patrimónios) which had been pushing for and welcomed lower taxes levied on capital gains in the country.

Capital gains tax in Portugal is charged on the sale of property or investment gains at a rate of 28%  for individuals and 25% for companies. Residents pay 28% percent on just 50 percent of their capital gains, while non-residents pay tax on the full gain amount.