Funds and ETFs in IRS: accumulating or distributing?

How are funds and ETFs taxed?

Investment funds and ETFs (exchange-traded funds) pay IRS at the same rate as shares: the 28% autonomous/flat rate (Art. 72 of the IRS Code)². That rate falls on two kinds of gain:

• the income distributed by the fund (dividends and interest it pays you), which is capital income (Category E);
• the gain on redemption or sale of the units, the difference between what you sold for and what you paid, which is a capital gain (Category G).

As a Portuguese tax resident you can always opt for aggregation and pay the progressive IRS rates instead of the 28%, which only pays off if your marginal rate is below 28% (the same test explained in how IRS is calculated).

So far, this is identical to shares. What sets funds apart is when you pay the tax, and that depends on two choices: whether the fund accumulates or distributes the income, and whether it is national or foreign.

Accumulating or distributing: the difference that changes the tax

Most funds and ETFs exist in two versions, and the choice between them changes the moment you pay tax:

• An accumulating fund reinvests internally the income it generates (the dividends from the shares it holds, for example) and distributes nothing to the investor. Because you receive no income over time, there is nothing to tax until the moment you sell. When you sell, you pay 28% on the total gain, which already includes everything that was reinvested. The tax is therefore deferred to redemption.
• A distributing fund hands you the income periodically. That distributed income is taxed at 28% in the year you receive it (even if you reinvest it manually), and the gain on sale is taxed separately, when you sell.

The practical difference is the deferral: in the accumulating fund the tax on the income only arrives at the end, leaving the amount to grow in the meantime; in the distributing fund you pay tax every year on what you receive. Accumulating does not mean exempt, it just means deferring the tax to redemption.

National funds: the tax has already been withheld

In a fund set up and registered in Portugal (a national collective investment undertaking, under the regime of Art. 22-A of the Tax Benefits Statute)¹, it is the bank or manager that withholds the 28% at source, as a final tax, both on the income distributed and on the gain when you redeem.

So, as a rule, you have nothing to do on your return: the tax has already been handed to the State for you. Declaration is optional, you only fill in Anexo E (income) or Anexo G (redemptions) if you want to opt for aggregation, which, as described, only pays off with a marginal rate below 28%.

Foreign funds and ETFs: you declare them in Anexo J

In a foreign fund or ETF (a collective investment undertaking domiciled outside Portugal, typically in Ireland or Luxembourg), there is no Portuguese withholding at source. That is exactly why the duty to declare becomes yours: foreign-source income is declared in Anexo J (not Anexo G, which is for Portuguese-source income).

Within Anexo J, each gain has its place:

• the gain on redemption or sale goes in the securities-disposal section;
• the distributed income (for distributing funds) goes in the capital-income section.

The logic for working out the gain is exactly the same as the domestic market, what you see in the capital-gains calculator, and amounts in foreign currency are converted to euros at the exchange rate on the date of each transaction. If you invest through a foreign platform, the step by step is in the foreign brokers and IRS guide; for dividends specifically, see how dividends are taxed.

Most ETFs are foreign

This point is worth holding onto, because it catches many investors: the overwhelming majority of ETFs available to the Portuguese investor are foreign (UCITS domiciled in Ireland or Luxembourg). That is, even if you buy the ETF through a Portuguese bank, there is no withholding at source and it is you who must declare it in Anexo J. There is no "Portuguese" ETF for the mainstream international indices, so in practice anyone investing in ETFs is almost always in the self-declaration regime, not the final-withholding one.

The rate: 28% or aggregation

In every case, accumulating or distributing, national or foreign, the base rate is the same: 28% (Art. 72 of the IRS Code)². You can opt for aggregation and add this income to the rest of your IRS, paying the progressive rates; it only pays off if your marginal rate is below 28%. For foreign funds, any tax withheld abroad is offset by the foreign-tax credit for international double taxation (Art. 81 of the IRS Code)³, up to the Portuguese tax on that income.

A worked example

Suppose you invested €10,000 in a foreign accumulating ETF and, years later, sold it for €15,000.

• Because it is accumulating, you paid no tax over the years: the fund reinvested everything internally.
• On selling, the gain is 15,000 − 10,000 = €5,000.
• At the 28% autonomous rate, the IRS is 5,000 × 28% = €1,400, declared in Anexo J.

If the same ETF were distributing and had paid out, say, €200 in one year, those €200 would have been taxed at 28% (€56) that year, and the gain on sale would be taxed separately (on a slightly smaller gain, since part of the income left as a distribution). You can estimate the tax on the redemption gain with the capital-gains calculator.

What to take away

Funds and ETFs pay IRS at 28% (with the option of aggregation), like shares. The difference is when: an accumulating fund defers the tax to the sale; a distributing one pays every year on what it pays out. With national funds, the tax is withheld at source and, as a rule, you have nothing to declare; with foreign funds and ETFs (most ETFs), you declare them in Anexo J. Run your numbers in the capital-gains calculator and, if in doubt on the return, confirm with the tax authority or an accountant.