Portugal seems to be one of the most popular destinations for crypto lovers. But before a detailed analysis, it must be said that it is one of the few countries that is looking to the future and trying to strongly encourage the immigration of ultra and high net worth individuals.
Official statistics show an ever-increasing number of immigrants, most of whom are under the age of 40. This could have a positive impact on the local economy and increase the country’s international competitiveness.
The two pillars of this favourable legislative and fiscal framework are the following:
- The introduction of the non-habitual resident programme;
- The favourable regulations towards crypto investors.
Portugal and the NHR
The Non-Habitual Resident tax regime was first implemented in 2009 and its success is growing every year.
It is a scheme that offers advantageous tax benefits for foreign residents, more precisely it allows:
- Special tax treatment for 10 years.
- Possibility to receive passive income from foreign sources without incurring any taxation.
- Possibility to obtain exemption also on foreign income generated from employment or self-employment.
- Possibility for employees and self-employed persons to receive income from work in Portugal with a fixed tax rate of 20%, unlike the normal Portuguese income tax rates of up to 48%.
- No minimum residence requirement.
The NHR therefore allows the claimant to obtain favourable tax treatment for ten years and one of the most important advantages is certainly the absence of taxation on passive income from foreign sources.
Another interesting feature of the NHR status is the flat tax set at 20% for domestic income from self-employment or employment. The non-resident is entitled to this taxation as long as the income comes from “high value added” work.
In some cases, due to double taxation treaties and the principle of taxation on a territorial basis, foreign income generated from employment or self-employment is not taxed by Portugal but by the jurisdiction in which it was generated; provided that the income cannot be considered as generated in Portuguese territory.
When analyzing the advantages of the non-habitual resident regime, the first point to be considered is the possibility of receiving passive income from foreign sources without being taxed by the Portuguese state.
A company structure that could make this situation even more advantageous could be that of the LLP (Limited Liability Partnership) in British Columbia. However, it is worth making a small digression.
In some cases, while complying with double taxation treaties, companies that are involved in two different countries manage not to pay tax on certain elements of their income in either country. This may seem to be a defect, a problem, but in reality double taxation agreements regulate the right to tax.
This means that if the country that has the right decides not to claim it, it is free to do so, remaining completely within the boundaries of legality.
LLP British Columbia is an entity that offers several advantages:
- It can also be formed by only two partners and one of them can also have shares to the extent of 1%.
- There are no restrictions regarding the country of residence of the partners.
- During the incorporation of the LLP, a partnership agreement is written and signed, which does not need to be registered or filed and which does not need to be made public.
- The LLP is an entity with a legal personality separate from that of the partners.
- All partners have limited liability.
- The LLP is a fiscally transparent entity. This means that tax obligations in respect of tax payments are transferred directly to the partners. The latter will have tax obligations towards the country in which they have their tax residence, which is not Canada. Thus, a shareholder who does not have to pay taxes on foreign income because he is a tax resident in a country with territorial taxation – such as Portugal – will not have to pay taxes in any state.
- The LLP in British Columbia has no tax to pay and no special reporting or accounting requirements if there are no clients and no income generated in Canada and if none of the partners are Canadian or the number of partners is five or less.
- In the case of LLP British Columbia, there are also no limitations of any kind with respect to the nature of the business and activities carried on.
In summary, with such a corporate structure, tax obligations are transferred to the partners, which means that these obligations are towards the country in which they have their tax residence. This means that if one takes into account a country such as Portugal, where the taxpayer is not required to pay tax on foreign income because of the principle of territorial taxation, one is faced with double non-taxation.
This is absolutely within the boundaries of legality.
Tax benefits on crypto in Portugal
The main reason for the enthusiasm of people involved in the world of digital currencies for Portugal is the fact that gains from buying and selling crypto are tax-free.
However, it is good to clarify and go into detail on this issue.
All the most important information, which gives a good overview, is contained in a binding 2016 ruling by the Portuguese Tax Authority.
There, the Tax Authority sought to define a tax framework for the income that the applicant was obtaining from the purchase and sale of cryptocurrencies.
The order opens with a very clear statement:
“Cryptocurrencies or virtual currencies are not technically considered money due to not having legal tender in Portugal. However, they can be exchanged, with a resulting profit, for real currencies (euros, dollars, or other) at exchanges”.
It then goes on to expose the fact that cryptocurrencies can generate different types of taxable income.
These have been classified as follows:
- Earnings from the purchase and sale of virtual currencies.
- Fees on the provision of services related to obtaining cryptocurrencies.
- Gains from the sale of cryptocurrency products or services.
However, the Tax Authority only considers the first of the income-generating activities. It has analyzed the possibility of being able to include the case in question within the existing discipline concerning capital gains, income from capital or commercial activities, without creating an ad hoc discipline. The income categories that have been analyzed are the following:
- Capital gains – category G – e.g. sale of a flat or shares;
- Capital income – category E – e.g. rent of a flat, dividends;
- Professional income – category B – e.g. consultancy, self-employment.
The Tax Authority then continued its analysis by arguing that the gains from the purchase and sale of cryptocurrency can not fall into category G because the legislature in drafting the reference rule – Article 10 of the Tax Code – has used a closed typology. This implies that the taxation described is applied only to the gains resulting from the events described.
In the case of cryptocurrencies, these are not shares and do not even constitute a right to receive any sum.
On the other hand, the valuation of cryptocurrencies is not based on any underlying assets as their value is simply determined by supply and demand for them, so they cannot be considered a derivative financial product either.
Nor do they fall under category E.
Here the reference standard is constructed in an open manner, giving a general rule and giving examples.
In this category, income generated by the mere application of capital is taxed, i.e. the legal fruits are taxed. In this case, the income generated is obtained from the sale of the right.
The most relevant category is B. First, it should be pointed out that category B, if applicable concurrently with any of the preceding categories, takes precedence over them.
In this category, the income earned is taxed according to the exercise of an activity and not according to the origin of the income.
The exercise of the activity is determined by its habitual nature and the orientation of the activity towards obtaining profits.
If the existence of entrepreneurial or professional activity is verified, then the taxpayer is obliged to comply with the declaration obligations set out in paragraph 6 of Article 3 of the Tax Code, i.e. to issue an invoice or equivalent document each time it sells or provides a service.
In summary, cryptocurrencies are not considered “currencies” as they are not legal tender in Portugal and are not taxable by the Portuguese tax system. Unless the income derived from the purchase and sale of them, by their frequency, does not constitute a commercial professional activity of the taxpayer. In that case, they fall under category B, being subject to taxation.
Those operating in the world of decentralized finance must carefully consider whether their activities could be considered as professional income. The fine line between a professional trader and someone who is simply trying to optimize the management of his or her finances is not entirely clear. There is no case law on the subject in relation to cryptocurrencies. There are several factors that can help determine whether or not trading activity can be considered professional:
- The number of trades that are made daily, weekly, monthly, annually.
- The holding period of the financial products.
- The complexity of the financial products used.
- The number of trading platforms used.
- The level of profit and the relationship with other income.
Some legal advisors have suggested that these types of activities could potentially fall under category E, but this is not yet confirmed.
It is worth clarifying that what has been said so far is true for individuals but not applicable to corporate entities.
This means that if you hold your cryptocurrencies in a Portuguese company, all gains from cryptocurrency trading will be taxed along with any other profits of the company, regardless of whether the company is engaged in trading or has held cryptocurrencies as a long-term investment.
Another thorny issue when it comes to the world of cryptocurrencies is the cashout process, i.e. the conversion of virtual currency into fiat. Given the current regulatory landscape, this step is not so simple and without pitfalls, especially when it comes to converting large amounts.
So far, the Portuguese banks that seem to be most Crypto-friendly are:
However, when it comes to large transactions, it is advisable to consider a preliminary meeting with the bank, to be sure that it is comfortable with the amounts that will be deposited and the origin of the funds.
Otherwise, it may happen that the bank account is frozen to carry out internal investigations and compliance checks often tend to be very lengthy processes. Preparatory work can avoid this problem.
Portugal today seems to represent a great starting point for those working in the fintech and crypto environment.
Famous for being a sunny and safe country, in 2021 it is becoming even more relevant as more and more interesting people, determined to realise great work projects, have decided to call it home.