Property tax laws in Portugal
Property tax laws in Portugal went through several and significant alterations during the past years. The rateable value of properties (VPT) being the value attributed by the tax authorities to properties for tax purposes is the base used to calculate property taxes or in certain cases determine the minimum taxes applicable to property transactions.
Previously the rateable value of the properties was very low and in general a huge discrepancy existed between the rateable and market values of the properties. To rectify this situation and increase tax revenues, the Portuguese tax authorities implemented in 2003 a deep reform to property tax laws which has resulted in the gradual increase to the rateable value, of all properties, bringing them more in line with actual market values and consequently increasing taxes payable and reducing and controlling tax evasion.
To update the rateable value of properties the legislator created a formula in which the new rateable value of the properties is more objectively calculated and achieved:
VPT = VC x A x Ca x CI x Cq x CV, where:
1 - VPT = Rateable value attributed by tax authorities to the property ;
2 - VC = Base value of properties built (value of construction per sq m fixed annually by tax authorities plus value of sq m of implantation ground 25% of such value) – presently 1603;
3 - A = Gross area of construction – sum of the total area of construction including terraces, garage, parking places and storages;
4 - Ca = Purpose of the property i.e. commerce, ser vices, residential;
5 - CI = Location – coefficient fixed ever y three years by the municipality and can vary between 0,4 and 3,5;
6 - Cq = Quality and comfort – factors that can increase or decrease the value like existence of swimming pool or non-existence of lift in a building with more than three floors;
7 - CV = (Vetustez) Age criteria applicable in accordance with age of the property. Older properties lower coefficient;
All properties that changed hands since 2003 have already been revalued in accordance with this new formula. All other properties not yet transacted are presently in the process of being revalued by the tax authorities and it is expected that this process will be completed by the end of 2013. In the vast majority of the situations this increase of the rateable value of the properties will lead to an increase in the IMI payable. It is important that when you receive the tax authority’s notification with the new valuation that you check the areas and coefficients applicable as mistakes do happen.
Please note that the 2012 IMI, payable in 2013 will already be based on this new rateable value. If the valuation of the property is not made in time the tax will be charged based on the old value and will later be adjusted accordingly. To avoid an abrupt increase in the tax payable the government has limited the increase of the tax for the next two years to either an extra 175 or 1/3 of the difference between the old and the new rateable value with the owners only starting to pay the total of the tax from 2015 onwards (relating to 2014)*.
Here is a summary of the taxes applicable to buying, owning, renting, selling or inheriting properties in Portugal:
IMT - Paid on the acquisition of a property
This tax is payable by the purchaser prior to completion of the transaction. On properties for habitation the rate varies according to the purchase price of the property and can go up to 6%. On rustic land, the rate applicable is 5% and on plots of land or other type of properties the applicable rate is always 6,5%*. The minimum amount on which the IMT can be paid is the VPT even if the sales price is lower.
Notary, stamp duty and registration fees
These have to be paid by the purchaser respectively prior to, at the time of signing the notarial deed and with subsequent registration of the property in the buyer’s name. The stamp duty on the purchase is 0,8% of the sales price; The minimum amount on which the stamp duty can be paid is the VPT even if the sales price is lower. Notary and registration fees and expenses will not exceed 11.000.
IMI - Annual Property Taxes
Payable yearly in arrears usually in two instalments although as from this year it can be paid in three instalments (April, July and November), depending on its value. This tax is based on the rateable value of the property (VPT) and can vary between 0,3% to 0,5%. Within this limit the rate is fixed annually by the council of the area where the property is located. In the Council of Loulé the rate presently applicable is 0,4%. The IMI for rustic properties remains at 0,8%*.
Stamp Tax - (IS)
To increase tax revenue and meet the impositions of international entities controlling Portugal’s economic restructuring, the Portuguese government has introduced temporarily a new annual tax on Portuguese properties with a rateable value (VPT) of over 1 million. These properties will be subject to the already existent IMI as above and to this new tax, on a maximum of 1,5% of its rateable value, which though high, is still substantially lower than other European countries like Spain, Greece and France, where annual property taxes can go up to 3,6%, 2,1% and 2,2% respectively**. This tax has already been applicable in 2012 and will also be applicable in 2013 at the rate of 1% of the VPT for all residential properties*. The payments of this tax will be made in 2013 simultaneously with the payment of the IMI and based on the same VPT used to calculate the IMI.
Capital Gains Tax
On a sale of a property there is capital gains tax to pay presently at a rate of 28% for individuals and 25% for companies (non-residents). This tax is calculated on the difference between the sales price and either the purchase and construction price of the property (if applicable) index linked or its first rateable value index linked whichever is the highest; for this reason it is important when building a property to make sure that you receive proper invoices from the builders of the amounts paid so that you have the possibility to offset these costs against capital gains tax payable when the property is sold. There are other costs that you can use to offset against this tax such as invoices of certain refurbishments made to the property in the past five years, taxes, notary and registration fees paid at the time of acquisition of the property, and the real estate agent fee. If the property you are selling is your main residence and if you reinvest the proceeds of the sale within 36 months of the sale, in the acquisition, construction or refurbishment of another property designated as your main residence, within the EU territory or in a territory belonging to the European economic area with whom Portugal has agreements for the exchange of information in tax matters, you can avoid the payment of this capital gains tax totally or partially depending on the value you reinvest.
This tax is not presently applicable in Portugal to inheritance or gifts occurring between close relatives i.e. parents/children and spouses although on gifts you have to count with a 0,8% stamp duty based on the VPT. Any other situations of inheritance or gift will be subject to stamp duty at a rate of 10% of the VPT.
All owners renting properties in Portugal should report these rents to the Portuguese authorities even if the payments haven’t been received here. From these rents you can deduct several costs and expenses, namely taxes (IMI and IS), insurance, maintenance and upkeep of the property and such costs can be offset against the gross rental income to calculate the profit obtained which will be taxed at a rate of 25% for companies and 28% for individuals (non-residents).
Please note the values mentioned above for IMT, IMI and IS will increase significantly and will not benefit from limitation of tax payable for the next two years if the property is located in a “blacklisted jurisdiction“.
** In Expresso - economy supplement 02/02/2013.
Please note this is general information and for specific advice you should contact a lawyer or tax advisor.