Understanding the Taxation of Dividends Received in Shares in Portugal

Investors receiving dividends in shares instead of cash must understand how these earnings are taxed under Portuguese law. A recent binding ruling (“Informação Vinculativa”) clarifies the taxation of dividends received in shares and their implications upon future sale.

Key Points on Dividend Taxation in Portugal

1. Dividends as Capital Income (Category E):
   • Under Article 5(2)(h) of the Portuguese Personal Income Tax Code (CIRS), dividends are classified as capital income (Category E), regardless of whether they are received in cash or shares.
2. Immediate Taxation on Receipt of Shares:
   • According to Article 1(2) of the CIRS, income is subject to taxation upon availability to the taxpayer, whether in cash or in kind (e.g., shares).
   • The financial institution handling the distribution withholds 28% tax at source, as per Article 71(1)(a) of the CIRS.
3. Taxation at the Time of Sale (Capital Gains – Category G):
   • When the recipient sells the shares received as dividends, any gain is classified as a capital gain (Category G) under Article 10(1)(b) of the CIRS.
   • The taxable gain is determined as the difference between the sale price (“realization value”) and the acquisition value, per Articles 44 and 48 of the CIRS.
4. No Double Taxation:
   • The ruling confirms that no double taxation occurs in this scenario.
   • The 28% tax withheld on dividend distribution applies only to the capital income received, while the future capital gain taxation applies only to the profit realized upon sale of the newly acquired shares.
5. Declaration Requirement:
   • If the taxpayer sells the shares received as dividends, the capital gain must be reported in the IRS Model 3 for the relevant tax year.

Final Thoughts

This ruling clarifies that dividend income is subject to immediate taxation at a 28% withholding tax rate, even when received in shares. However, if those shares are later sold, any gain will be taxed as a capital gain under the Category G regime. Understanding these tax implications ensures compliance and prevents unexpected tax liabilities.

At GoalSeek, we provide expert tax guidance for investors and expatriates navigating the Portuguese tax system. If you need personalized advice on dividend taxation or investment strategies, contact us today!