Capital Gains Tax (CGT)

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On 18 March 2021, the Court of Justice of the European Union (CJEU) delivered its judgement in the MK case (C-388/19) referred by the Portuguese tax arbitration tribunal. The CJEU decided that the Portuguese taxation regime applicable to capital gains realized by nonresident individuals is contrary to EU law and that the discriminatory tax treatment of nonresidents cannot be aligned with EU law by granting nonresidents the option to be treated as resident taxpayers. The CJEU’s decision is contrary to the opinion of the Advocate General (AG) delivered in November 2020.

Facts of the case

The taxpayer is a French resident individual who realized a capital gain on the resale of a property located in Portugal. For the relevant tax year, the Portuguese legislation specifies a different regime for taxation of the gain for resident and nonresident individual taxpayers. Resident taxpayers are taxed on a reduced taxable base of 50% at progressive tax rates of up to 48%, whereas nonresident taxpayers are taxed on the full amount of the capital gain at a flat rate of 28%. Following the CJEU’s previous judgement in Hollmann (C-443/06), the Portuguese legislation for the relevant tax year allows nonresidents to opt for the regime applicable to residents if beneficial.

The nonresident taxpayer reported the capital gain in his Portuguese personal income tax return and applied the tax regime for nonresidents. The tax assessment was issued on this basis, not applying the 50% reduction in the taxable base available only to Portuguese resident taxpayers. The taxpayer appealed the tax assessment before Portugal’s Tribunal Arbitral Tributário (tax arbitration tribunal), arguing that the taxation regime for nonresidents constitutes a restriction on the free movement of capital, prohibited by article 63 TFEU. The tribunal referred the case to the CJEU.

Decision of the CJEU

The CJEU emphasized that it had already ruled in Hollmann that a tax base reduction of 50% that applies only to capital gains realized by Portuguese residents and not to nonresident taxpayers constitutes a restriction on the movement of capital. Given that the differential tax system at issue results in nonresidents being systematically taxed more heavily than residents on capital gains from the sale of real estate, the system constitutes a prohibited restriction on the movement of capital that cannot be justified.

Most importantly, the CJEU ruled that the option for a nonresident taxpayer to be treated as a resident taxpayer cannot compensate for infringements of EU law. Allowing taxpayers to choose the applicable tax regime merely enables a nonresident taxpayer to choose between a discriminatory tax regime and a regime that would not be discriminatory; it does not eliminate the discriminatory nature or consequences of the discriminatory regime. As a result, a nonresident taxpayer would have no choice in practice but to opt to be treated as a resident taxpayer and according to the CJEU, the option to be treated as a resident taxpayer does not compensate for the discriminatory nature of the tax treatment of nonresidents. It follows that national legislation which restricts a fundamental freedom, in the present case the free movement of capital, remains incompatible with EU law even if its application can be avoided by opting for the resident taxpayer’s regime.


This judgement confirms the CJEU’s previous 2010 judgement in Gielen (C-440/08) but does not follow the opinion of the AG in the case at hand. The AG had opined that the Portuguese taxation regime applicable to capital gains is not necessarily contrary to EU law since the option to be treated as a resident taxpayer eliminates any discriminatory tax treatment, provided that taxpayers have been informed of this option in a timely and effective manner.

Content provided by Deloitte Portugal

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