Cryptocurrencies – legal framework and taxation in Portugal
The popularity of bitcoin (cryptocurrency) has grown worldwide, being the currency that most valued in 2016 and 2017 compared to gold as a safe haven asset. In fact, in 2020, the value of this “currency” increased by around 150%, being used by several investors as protection against the expected devaluation of the dollar in the period of economic recovery. Increasingly, cryptocurrencies are considered as an investment to be taken into account, having a high financial return (and associated financial risk). Bitcoin is not the only cryptocurrency that exists, but it is the oldest and the one with the most weight in the market, its name being a true identifying mark of the globality of these assets.
Designed by Satoshi Nakamoto (pseudonym of the creator or team of Bitcoin creators) the cryptocurrency works as virtual money, made through codes and not paper. Bitcoin is an online currency with P2P payment traffic (peer to peer), that is, it does not need a central intermediary server, being controlled by an interconnected database system (peer-to-peer network) that hold a permanent transaction register (blockchain), protecting the cryptocurrency from counterfeiting or theft, as well as the identity of its holder.
In Portugal, last September, Banco de Portugal (BdP) announced that it would take over the supervision of entities that manage virtual assets, or cryptocurrencies, in compliance with the law that transposes the European directive on the prevention of money laundering and financing of terrorism.
Thus, Banco de Portugal becomes responsible for the registration of entities that exercise “exchange services between virtual assets and currencies or between one or more virtual assets”, “virtual asset transfer services” and / or “custody services or custody and administration of virtual assets or instruments that allow to control, hold, store or transfer these assets, including private cryptographic keys”, as announced.
The Central Bank clarifies, however, that its performance is limited to the prevention of the aforementioned crimes, “not extending to other domains, of a prudential, behavioural or other nature”.
In 2018, Banco de Portugal and the Securities Market Commission (CMVM) had already issued several alerts for risks related to the so-called virtual currencies, which can be consulted on the respective websites. Experts in the field advise to research these assets on sites that comply with the law, being registered with the Bank of Portugal (there is still no list of entities to consult).
Despite the above, more and more investors are looking to enter the cryptocurrency segment. One reason may be related to its great potential for short-term profitability, despite the risk, while still being a financial asset that can be revalued in the future. That is, we can sell these assets when they have appreciated in the market and thus obtain a financial return. Another advantage may be related to its liquidity, that is, it is possible to exchange these currencies for cash. Finally, the fact that they are not yet subject to any efficient government policy or control can be seen as a plus for some, and their value is only influenced by the basic rules of the supply and demand market.
In tax terms, cryptocurrencies have no legal framework in Portugal, however there is some binding information issued by the Tax Authority, at the request of specific taxpayers, who earn this type of income. At the moment, AT defended that these incomes should be taxed under the IRS code.
AT defends that these types of investments can be understood as income from capital obtained abroad, and therefore taxpayers in this condition should tick them in annex J, when delivering the IRS model 3 declaration. If the taxpayer chooses not to include this income, it will be taxed at the rate of 28% or 35%. If they choose to combine, such income will be included in the rest of the income and the rate applied in accordance with article 68 of the CIRS (Personal income Tax Code).
Nevertheless, this opinion (because it is an opinion) we believe that the Tax and Customs Authority seeks, through administrative means, to create a new Law.
The truth is that this reality – cryptocurrency – does not seem to fit into any of the rules governing the IRS Code (except if it is the taxpayer’s professional activity).
Thus, and since the determination of the incidence of taxes falls within the exclusive competence of the Assembly of the Republic, gains (non-professional) resulting from investments in cryptocurrency should be considered as not subject to taxation. This is, therefore, one more factor contributing to Portugal’s attractiveness for investors.
Despite these opinions so far, there is a lack of specific and clear regulation of the taxation of this income, but it is likely that this fact will change soon, similar to what happened in France, for example, in which this issue was definitively regulated. For now, this favourable fiscal situation, due to lack of regulation, can be seen as an opportunity for many cryptocurrency investors.
New Decree-Law – Golden Visas
The new Decree-Law was published on 12/02/2021 and proceeds to the eighth amendment to Law no. 23/2007, of 4thof July, amended by Laws number 29/2012, of 9th of August, 56/2015, from June 23rd, 63/2015, from June 30, 59/2017, from July 31, 102/2017, from August 28, 26/2018, from July 5, and 28/2019, from March 29, which approves the legal regime for the entry, stay, exit and withdrawal of foreigners from national territory.
After much discussion over the past year and an amendment to the Gold visa regime having been approved, we are now aware of the new rules published by the aforementioned DL – Decree-Law 14/2021.
Summary of major changes
In the case of investments in real estate for residential purposes, the granting of residence permits through an investment activity is limited to the areas of the territories of the Intermunicipal Communities of the Interior (CIM’s), as well as to the Islands, namely Madeira Island and Azores Island. Thus, investments in real estate for tourism, commerce and services purposes, as up to the present date, are excluded from the DL and may continue to be performed in the metropolitan areas of Lisbon and Porto, as well as in the Intermunicipal Communities of the Coast.
Therefore, there was no change in the values for the acquisition of real estate, as well as the values for the acquisition and performance of urban rehabilitation works, which are intended for housing purposes, continuing to allow access to this regime, but only when they are located in the autonomous regions of Azores and Madeira or in the interior territories. Soon we will publish the “allowed” areas for investment in real estate for housing purposes, which were also attached to this Ordinance.
There were also changes in the level of minimum investment amounts in some of the options already provided for in the law.
The possibility of applying for a Golden Visa by transferring capital equal to or greater than 1 million euros is now increased, making it possible to do so for an amount equal to or greater than 1.5 million euros.
In the same sense, investment in research activities carried out by public or private scientific research institutions, integrated into the national scientific and technological system, is now possible for an amount equal to or greater than 500,000.00 euros (previously, 350,000.00 euros).
The possibility of acquiring investment units in investment funds or venture capital funds dedicated to the capitalization of companies, which are constituted under Portuguese law, whose maturity, at the time of the investment, is at least five years and at least 60% of the value of the investments is made in commercial companies based in the national territory, now requires an investment amount equal to or greater than 500,000.00 euros (previously, 350,000.00 euros).
Finally, this revision of values also affects the possibility of applying through the constitution of a commercial company with headquarters in the national territory, combined with the creation of five permanent jobs, or to reinforce the social capital of a commercial company based in national territory, already constituted, with the creation or maintenance of jobs, with a minimum of five permanent, and for a minimum period of three years, possible with an investment amount equal to or greater than 500,000.00 euros (previously, 350,000, 00 euros).
When will the new changes come into force?
The new regime comes into force on January 1, 2022 and is applicable to all applications for Residence Permits trough an Investment Activity (ARI) presented from this date forward.
This new regime does not affect the processes in progress and which have been approved under the law currently in force. Meaning, existing renewal processes and granting /renewal processes for family reunification which associated investment has been made until the end of this year (still in the period of the current law).
Capital Gains | End IRS exemption in amortization of mortgage loans
In 2015, an exceptional regime was created (article 11 of Law no. 82-E/2014, of December 31), which provided for exemption from the payment of capital gains on property sales between 2015 and 2020, whose loan agreements had been signed until December 31, 2014. This regime was intended to help families in financial difficulties, who were unable to pay their mortgages or buy a new home even if they sold the house where they lived.
This exemption never applied to those who had more than one property and the legal normative was never transposed to the IRS Code, having ceased at the end of last year.
So, paying off the mortgage with the money from the sale of the house no longer gives IRS exemption on the capital gain, and furthermore in 2021 there is no exemption on the payment of capital gains if you sell the house and don’t reinvest in a new one.
In practical terms those who bought a house and took out a bank loan before 2014 could, if they only owned that house, until the end of 2020 sells it and repay the loan, without having to pay IRS on the capital gains, even if they did not buy a new home. However, as of this year this is no longer possible. With the end of the exceptional regime, the general rule has returned, so those who sell their house and pay off the debt (but do not buy another house) will see their capital gains taxed at 50%, and this amount will be included in the household’s other income and, subsequently, the progressive IRS rate will be applied in the following year.
Nevertheless, there are some exceptions foreseen in the IRS Code:
As mentioned, in situations where the property sold is the family’s home and where the capital gains are used to reinvest in another dwelling (purchase, construction or rehabilitation), also intended as the family’s home there is an exemption of capital gains.
Note, however, that this reinvestment must occur between 24 months prior to the sale and 36 months thereafter.
There is also an exemption of capital gains in cases where the taxpayers are in a retirement situation or are over 65 years of age. In these cases, the application of the capital gains value in the acquisition of an insurance contract, pension fund or contribution to the public capitalization regime is considered reinvestment.
Finally, for properties purchased before 1989 it is also possible to be exempt from paying capital gains.
For example, if in 2020 you bought a house for 100 thousand euros and now you have the opportunity to sell it for 150 thousand euros, that means you will have 50 thousand euros of profit and capital gains.
If you do not fit into any of the exceptions mentioned, you will pay taxes on 50% of the profit obtained, meaning, in this case hypothetically, over 25 thousand Euros.
Capital gains are foreseen in the IRS Code, Decree-Law 442-A/88, Section VI, and in the State Budget for 2021, Law 75-B/2020.
On 31 December 2020, the transitional period during which the European Union’s law continued to apply to the United Kingdom, after it ceased to be a member state of the European Union on 31 January 2020, came to an end.
A new agreement on the relationship between the European Union and the United Kingdom was reached on December 24 2020, entering into force on January 1, 2021 – called the Trade and Cooperation Agreement, consisting of 3 main pillars:
- Free trade agreement;
- New partnership for the security of citizens;
- A horizontal governance agreement in matters of governance.
It should be pointed out that, although the transitional period ended on 31 December 2020, UK citizens living in Portugal will see their right of residence protected by the “Exit Agreement”.
However, British citizens who intend to live in Portugal as from 1 January 2021 will be considered nationals of a third state country (Law number 23/2007 – Immigration Law).
With this in mind, and with the recognition that Portugal has the sixth strongest passport in the world, allowing visa-free access to more than 172 countries and the right to study, work and live in any country of the European Union, a British citizen who has had his right taken away with Brexit can once again have the right to travel freely through the Schengen area and enjoy the rights of a European Union national.
There are some ways to have this right redeemed, we highlight the most searched for and used by foreigners so far:
- First, there is the D2 visa, better known as the residence visa for entrepreneurs. It is an interesting visa for those who wish to start a business in Portugal or work as self-employed.
- Next, the D7 visa. This is an excellent option for citizens who have their own income from pensions, assets, property, intellectual property, or financial investments.
- Lastly, the famous Golden Visa programme, the five-year residency-by-investment scheme for non-EU nationals, which is a residence permit for a citizen outside the European Union intending to invest in Portugal. Main investments to proceed with this type of residence permit:
- Transfer of capital in an amount of 1 million euros, or more.
- Creation of, at least, 10 jobs and corresponding social security registration of workers.
- Acquisition of real estate with a value equal to or greater than five hundred thousand euros.
The major differences between the D2 visa, D7 visa and the Golden Visa are:
- The D2 visa and the D7 visa are part of the long-stay visa (visa for obtaining a residence permit) and are therefore a prerequisite for applying for a residence permit. By contrast, the Golden Visa is a residence permit which does not require a prior application for a residence visa.
- As for the D2 and D7 visa procedure, these are presented at the Portuguese Consulate/Embassy and, once approved, the visa is affixed to the applicant’s passport with a validity of 120 days, allowing up to two entries. During this period, the applicant must travel to Portugal to apply for the residence permit personally. On the contrary, the Golden Visa procedure starts at SEF (Immigration services) with the submission of the necessary documents for a pre-analysis, followed by a face-to-face interview for the residence permit application.
However, the validity of the residence permit is common to the D2 and D7 visas and the Golden Visa, being the first residence permit valid for 2 years and renewable for subsequent periods of 2 years.
- One of the biggest differences, lies in the minimum period of stay in Portugal, after obtaining the residence permit. Foreign citizens holding a D2 or D7 visa should not be absent from Portugal for more than 6 consecutive months or 8 interpolated months. The foreign national holding a residence permit based on the Golden Visa must be in Portugal for 7 days in the first year and for 14 days in the following two years.
- The last difference is in the exercise of professional activity. The D2 Visa and Golden Visa always allow its holder to work, unlike the D7 visa, which does not allow the holder to work during the validity of the visa. Only after obtaining residence card may a D7 visa holder carry out a professional activity, if that is the purpose.
Presented the major differences between these three methods, lets focus on the main benefits, common to the D2 and D7 visas and Golden Visa:
- Possibility of entering Portuguese territory without a visa;
- Moving freely within the Schengen area, made up of 26 European countries, also without a visa;
- Living and working in Portugal (having in mind that, in the case of the D7 visa, only after obtaining the residence permit);
- Benefit from family reunification, including spouse; minor children; adult unmarried children who are dependent and are studying in Portugal, except in the case of Golden Visa, in which the adult child may study anywhere in the world; first degree ascendants of the applicant or the spouse who is dependent; and minor siblings who are under the resident’s guardianship;
- Become eligible for permanent residence after five years of temporary residence, complying with the legal requirements in force;
- Become eligible for Portuguese nationality after five years of residence, complying with the legal requirements in force.
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