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Changes to Portuguese real estate gains The Portuguese
government, in Decree-Law 361/2007 of November 2, has amended Portugal's
Personal Income Tax Code (IRS) to comply with the October 26, 2006,
judgment of the European Court of Justice in European Commission v.
Portugal.
Portugal now allows tax relief on capital gains realized on the sale of
a taxpayer's permanent residence if the sale proceeds are reinvested in
the purchase or construction of the taxpayer's permanent residence in
another European Union or European Economic Area member state. Previously,
the tax relief was available only if the sale proceeds were reinvested in
Portugal.
The European Commission -- after repeatedly asking the Portuguese
government since February 2003, to extend that tax relief to cases of
reinvestment within other EU and EEA member states -- on September 21,
2005, brought action against Portugal before the ECJ, citing Portugal's
failure to fulfill its obligations under articles 18, 39, 43, and 56(1) of
the EC Treaty, and under articles 28, 31, and 40 of the EEA Agreement of
May 2, 1992.
Now, more than a year later, Decree-Law 361/2007 amends articles 10(5)
and 57(3) of the IRS Code, adding to its condition of reinvestment within
Portuguese territory the expression "or the territory of another Member
state of the European Union or of the European economic area, provided, in
the last case, that there is exchange of tax information."
By making tax relief dependent on the exchange of tax information, the
new law appears intent on excluding relief if the reinvestment takes place
in the territory of Lichtenstein, the only EEA member state that does not
have a treaty with Portugal that provides for the exchange of tax
information. It also indicates that Portugal is only reluctantly complying
with the ECJ judgment, as the lack of exchange of tax information was not
invoked by Portugal, and was therefore not accepted by the ECJ, as a valid
justification for limiting reinvestment relief to the Portuguese
territory.
It has taken the European Commission almost five years to force
Portugal to comply with this seemingly minor adjustment to its tax laws,
but many other tax rules that contain unjustified restrictions on the
fundamental freedoms under the EC Treaty (mainly by discriminating between
residents and non-residents) remain in force.
08-11-2007
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