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Capital Gains with Related Parties in Portugal: The Arm’s Length Rule in IRS
📜 The Rule
When calculating capital gains or losses in operations between a taxpayer and an entity with which they have special relations (as defined in Article 63(4) of the IRC Code), the parties must agree and apply terms and conditions substantially identical to those that independent entities would agree in comparable operations. The transfer pricing regime of Article 63 of the IRC Code applies, with the necessary adaptations.
The current wording was introduced by Law 31/2024, of 28 June.
👥 What Are Special Relations?
There are special relations when one party can exercise, directly or indirectly, a significant influence over the other’s decisions. For example:
- An individual and a company in which they hold 20% or more of the capital or voting rights
- An individual and a company where they (or relatives) are board members
- Companies controlled by the same person or family
- Relationships with entities in tax havens
Family ties (spouses, ascendants, descendants) can also create special relations through the companies involved.
🔍 What Does It Mean in Practice?
- Selling an asset to your company below market value → the tax authority can increase the sale value to the market value, increasing your gain
- Selling at an inflated price to generate a loss or extract cash → the value can be corrected
- Contributing assets to a company (in kind) → the value must be consistent with the market
📊 How to Prove the Market Value
- Independent valuations (for property, by a certified appraiser; for shares, by a qualified expert)
- Comparable transactions (similar sales between independent parties)
- Recognised valuation methods (discounted cash flows, multiples, net assets)
Keep the documentation — the burden of showing the terms are arm’s length is, in practice, on the taxpayer.
⚠️ Common Situations
- Transferring a property you own personally to your company
- Selling quotas to a company owned by family members
- Restructuring a group before a sale or before moving to Portugal
- Buy-backs of shares by the company from a shareholder
🔗 Related Rules
- Divergence of values (Article 52): the tax authority can correct the declared value when it has well-founded reasons to believe it doesn’t match the real value
- VPT as minimum for property: for real estate, the VPT used for IMT is the minimum sale value for IRS, unless you prove the actual price
- Losses with tax-haven entities aren’t deductible
💡 Practical Tips
- Get a valuation before any sale to a related party.
- Document the reasons for the price and the terms.
- Don’t use related-party sales to create losses — they can be disregarded.
- Plan restructurings with advice, especially before a change of residence.
🚀 Final Considerations
Since 2024, the arm’s length principle applies expressly to capital gains between related parties in IRS. Selling to your own company or family business is possible — but at a price you can justify as the market value.
📢 Expert Advice: Treat any sale to your own company as if the buyer were a stranger: get a valuation, document it and keep it. It’s your best defence in an audit.
Planning a sale or restructuring? Step Inside Portugal’s tax team can help you set and document the right price — find out more about our tax services here. ✨
This article is for general information only and doesn’t constitute tax or legal advice. Each operation should be analysed individually.
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