Portugal is regularly considered a tax haven within Europe for crypto-currency entrepreneurs and users. However, this framework could be challenged by a tax proposal unveiled by the Portuguese government last week.
According to the Minister of Finance, this project is motivated by a desire to fill a legal void around crypto-currencies. Indeed, personal income tax in Portugal does not allow for the taxation of income obtained from capital gains made on crypto-currencies.
Specifically, rumours have been circulating for a year about the future of crypto currency taxation in Portugal. The previous government, as of March 2021, already had in its political programme the objective of creating a tax framework. Nevertheless, the dissolution of the Parliament had put the brakes on this initiative now taken up by the new Minister of Finance.
In this regard, Portugal wanted to carry out an analysis of the taxation proposed by other countries in relation to crypto currencies.
Portugal wants to learn from other countries’ tax systems
During a working session related to the discussion of the state budget for 2022, the Minister of Finance, Fernando Medina, did not commit to a date for unveiling this new legislation. Nevertheless, he is aware that other countries already have a tax system and that it is becoming necessary for Portugal to adapt their regulatory framework in this area.
The Minister of Finance sees this as an advantage in creating an attractive framework. He believes that “this is an area in which there is a lot of knowledge and progress and Portugal must seize the opportunity to learn from these international experiences”.
Nevertheless, the Portuguese government is aware of the great difficulty of actually defining what crypto-currencies are. To illustrate this, it is sufficient to analyse the divergent views of the European Court of Justice and the European Central Bank’s working group on the subject.
Global taxation of crypto currencies
Secretary of State and Fiscal Affairs Mendonça Mendes believes that Portugal would be limiting the potential of taxation if the bill is limited to capital gains taxation.
Indeed, according to him, “crypto currencies represent a much more complex reality than just the taxation of profits. There is also the issue of use as a means of payment and its treatment for VAT purposes, but also the treatment of crypto currencies with respect to wealth tax.”
In fact, the tax and customs administration must succeed in proposing a text that includes as much as possible the plural use of these new instruments while taking into account the necessary balance between a fair distribution of income and wealth and the attraction of foreign investments.
A project criticised by a Portuguese unicorn
The project is being heavily criticised by the founder of a Portuguese crypto-currency unicorn. Diogo Mónica, founder of Anchorage Digital, is critical of the government’s storytelling around the loss of revenue due to the lack of a tax framework.
He explains that “the narrative that Portugal is losing potential revenue by not taxing crypto is short-sighted and ignores the obvious economic value created by the entrepreneurs and businesses that are setting up shop here”.
However, he qualifies his speech as he considers that Portugal’s attractiveness could continue if the regulation is well thought out and if it offers clarity, stability and competitiveness to the country. The drafting of the bill will therefore be undeniably strategic.