Personal Income Taxation in Portugal: Moving towards Tax Neutrality between Capital Gains and Dividends

Abstract

This article shows how the Portuguese tax reform of 1988 set up a non-neutral system for the taxation of dividends and capital gains. Capital gains had a much more generous treatment. The consequences of this lack of neutrality were immediately felt in two areas, with share buy-backs and the changing of legal status of firms coming to the forefront of individual tax planning. The system then enacted discriminated between holding periods for the same equity holders and also between gains realized by the sale of different types of equity instruments. In 2010, faced with a desperate public finance situation, the government finally changed the taxation of capital gains, making it similar to the one applied to dividends. This modification eliminated some important tax loopholes and made the tax system fairer and more efficient.