Property Taxes in Portugal – The Importance of Getting it Right
Popularity of Portuguese Property
Property has recorded double digit percentage growth in various sectors listed by numerous real estate service companies in recent years and the expectation is that this will continue – with an increased demand and reduced supply than previously seen.
What is an interesting misconception is that property prices are driven predominantly by the Golden Visa program – in actual fact, the Portuguese Golden Visa accounts for an insignificant portion of property purchases, when considered in comparison to total property purchases in Portugal.
This reflects that there are various factors in Portugal influencing properties prices, including: the fact that Portugal is the new acclaimed California, the new European Silicon Valley, it is ranked one of the best places to live and work in the world, it is an attraction magnet for digital nomads, as well as offering a 10-year tax holiday for the affluent, and there is more.
Property has always been a favourable investment class for many – and that is no different now. This raises the importance of understanding the related tax consequences of holding property in Portugal.
Dixcart have summarised below some of the tax implications applicable in Portugal.
Taxation Implications to Consider
- What are the Tax Consequences for My Rental Income?
Rental income, for individuals is taxed at a flat rate of 28% – for both resident and non-resident Portuguese holders of property
Qualifying expenses may be used to reduce the taxable income due – provided it forms part of the income producing activity.
Corporate tax rates for rental income depend on residency status: non-resident entities may be subject to 21% tax, whereas local Portuguese companies will be subject to tax at rates between 19% to 21% in mainland Portugal and 11.9% to 14.7% for properties located in the autonomous region of Madeira.
- When is Stamp Duty Applicable?
Stamp duty is applicable on a variety of transactions in Portugal – this may occur when a property is inherited or when a property is purchased. Please refer below for more details.
- What Inheritance Tax Implications Exist for Property (or is it Stamp Duty that Applies)?
Although inheritance tax is not applicable in Portugal, stamp duty does apply.
For the purposes of stamp duty, inheritance or gifts may fall into one of two categories – those which are exempt, and those taxed at a flat rate of 10%. Inheritances by close relatives, such as parents, children and spouses, are exempt from stamp duty. All other inheritances and gifts are taxed at a flat stamp duty rate of 10%.
Stamp duty is payable for the respective property, even if the recipient does not live in Portugal.
If you are a UK domicile, your Portugal property will form part of your UK estate for UK inheritance tax purposes.
- Stamp Duty on the Purchase of a Property
Stamp duty on the purchase of a property is charged at a rate of 0.8% on the higher of the purchase price or VPT (the rateable value, attributed by the tax authorities). The VPT in most cases is much lower than the actual purchase price of the property.
The purchaser must pay this duty, prior to signing the final deed, and proof of payment will need to be provided to the notary.
VAT may be applicable on the purchase of new builds, in particular situations.
- Property Transfer Tax
Property transfer tax, namely IMT (Imposto Municipal sobre Transmissões Onerosas de Imóveis), is applicable each time ownership is transferred. The tax is required to be paid by the purchaser prior to the final deed of sale being signed (as the original copy of proof of payment needs to be shown to the notary at the time of the property exchange).
The tax paid, is calculated on the higher of the purchase price or the VPT.
The property transfer tax rate is largely dependent on the ultimate use of the property and whether it is your first or second home, with the rates varying between 0% and 6%.
Companies, which have as their principal activity the purchase and sale of properties, enjoy an exemption from property transfer tax, if they can prove that they have sold other properties in the previous 2 years.
- Annual Municipal Property Tax (IMI)
Annual municipal property tax, or IMI (Imposto Municipal sobre Imóveis), is payable by the person who is the property owner as at 31 December of the previous year, and is based on the VPT. The rate applied ranges from 0.3% to 0.8%, and is dependent on whether the property type is classified as urban or rural (classified by the Portuguese tax authorities and based on the location of the property). Note that any investor or company located in a blacklisted tax jurisdiction, in accordance with the Portuguese tax authority, will be subject to a flat rate of 7.5% IMI.
An additional annual municipal property tax, namely AIMI (Adicional ao IMI), is chargeable for any VPT value exceeding €600,000, for all residential properties and construction plots. The rate will vary between 0.4% and 1.5% depending on if you are taxed as a single person, or as couple, or as a company.
Please note that AIMI is not only considered for a single property but is taken into account per owner. If more than one property is therefore held, the cumulative VPT needs to be considered. If the cumulative VPT value for all properties held by a single owner exceeds €600,000, AIMI will be applicable on the value of the properties held, exceeding this threshold.
If the property is being used to promote an activity, such as extending local, affordable accommodation, there will be no AIMI.
- What Tax Consequences are Applicable Upon the Sale of a Property?
Capital gains tax is applicable on the sale of a property, unless purchased before 1989.
The tax consequences vary dependent on whether you are resident or non-resident. In addition, the use of the property and the way that the proceeds from the sale are utilised are paramount, as this may have a significant impact on the related tax consequences applicable.
The tax is calculated on the difference between the selling price and the acquisition value (adjusted for inflation rates, net of documented costs incurred when the property was acquired, coupled with any capital improvements within the last 12 preceding years of the sale).
As a Portuguese tax resident, 50% of the gain is liable to tax. If the property was held for a period of two years or more, inflation relief may also be applicable. Capital gains, on your property, are added to your other annual income and are taxed at marginal tax rates of up to 48%.
It is worth noting that gains resulting from the sale of a primary residence are exempt for residents, if you reinvest all of the proceeds (net of any mortgage on the property), in another main home in Portugal or the EU/EEA, before the property is sold (a window of up to 24 months), or within 36 months of the disposal of the property, provided you live in the new property, within 6 months of the purchase.
Since 1st January 2023, capital gains tax for a non-resident, applies to 50% of the gain. The actual rate of tax will depend on the amount of other income earned across the world, by the non-resident.
Rates of capital gains tax are progressive, with the maximum rate being 48%.
The capital gains tax rate for non-residents companies is either 21% or 14.7%, depending on where the property is located.
However, the tax consequences in Portugal are not the only considerations to take into account. The specifics of the relevant double taxation treaty needs to be examined, as well as the local laws and regulations applicable in the country of tax residence.
A typical example of this for a UK resident, is the fact that UK tax residents also pay tax on the gain from the Portuguese property in the UK, however, under the double taxation treaty, any tax paid in Portugal may be credited against the tax due in the UK.
Is there a Preferred Structure to Hold Property in Portugal?
A topical query – what is the most preferred and tax efficient structure to hold property in Portugal?
- The answer may vary depending on the objectives and circumstances of each individual investor, as well as the proposed usage of such properties. It is however worth noting, that for a non-tax resident investor wishing to invest in property to earn rental income, holding such a structure through a Portuguese (resident) company may be beneficial, with tax rates varying between 17% to 21% for properties located on the Portuguese mainland and 11.9% to 14.7% for properties located in the autonomous region of Madeira, in comparison to the flat rate of 21% for non-resident entities.
- For residents, holding a primary residence in their personal capacity, may be more beneficial from a capital gain point of view. Thus, each situation needs to be considered on a case-by-case basis.
- Other considerations, however, need to be taken into account, such as the operational costs for running a company and ensuring appropriate substance exists. The cost of holding a property through a corporate structure may thus not exceed the benefit in all circumstances.
- Alternative qualitative benefits may include the fact that corporate structures provide an extra layer of asset protection, which may be considered invaluable for many individuals located in jurisdictions exposed to considerable financial and other types of risk.
Summary of Property Tax Consequences
To summarise the tax and costs applicable for purchasers, owners, sellers and others, as discussed above, please refer below:
|– IMT (Property Transfer Tax)
– Stamp Duty Notary/Registration Costs
– Legal expenses
|– IMI (Annual Municipal Tax)
– AIMI (in addition to IMI)
– Running costs (such as water and electricity)
|– Capital gains
– Commission to real estate agency
The related tax rates may be summarised as follows:
|Capital Gains Tax
|– Primary residence may be subject to exemption
– Second property will be taxed at 50% of the gain at progressive tax rates.
|50% of the gain will be taxed at progressive tax rates.
|– Lower of 28%; or
– Marginal tax rate.
|Capital Gains Tax
|Respective company tax rates:
– Portugal: 17% to 21%
– Madeira: 11.9% to 14.7%
– Azores: 14.7%
Why is it Important to Engage with Dixcart?
It is not just the Portuguese tax considerations on properties, largely outlined above, but also the impact from where you may be tax resident and/or domiciled, that need to be considered. Although property is typically taxed at source, double taxation treaties and double tax relief need to be considered.
A typical example is the fact that UK residents will also pay tax in the UK and this will be calculated based on UK property tax rules, which may be different to those in Portugal. They are likely to be able to offset the Portuguese tax actually paid against the UK liability to avoid double taxation, but if the UK tax is higher, further tax will be due in the UK. Dixcart will be able to assist in this regard and to help make sure you are aware of your obligations and filing requirements.
How else may Dixcart Assist?
Dixcart Portugal have a team of experienced professionals who may assist with various aspects regarding your property; efficient tax planning, legal support (for the sale or purchase of a property), accounting and tax support and the incorporation and maintenance of companies.
Further to this, if you would like a deemed tax calculation to be performed, you may reach out to our offices in Portugal and/or Madeira for this information: email@example.com
Dixcart have helped many with this service and look forward to assisting you with your next property advice and/or transaction.