The Algarve is one of the most desirable places to have a home for holidays, both for foreign and national citizens and as well, for an investment point of view in real estate one of the strongest area in Europe. Usually, foreign citizens either purchase a property in Portugal in their individual names (this requires to schedule deeds at a Notary and subsequent registration of the purchase at the local Land Registry and Tax Department) or through a company that already owns the property thus, buying the respective shares. The main reasons why people buy property owned by a Company that is not domiciled in Portugal, is connected with a much faster and less bureaucratic purchase process and also because of previous trust arrangements that the purchaser may have already in place.

A - In this article our aim is to give you a general idea about the main steps and phases involved in a Portuguese property purchase in an individual name. The main of it are:

1 – Before Contract / Negotiation / Relevant Documents;

2 – Exchange of Contract and Completion;

3 – Registration at the Land Registry.

B – Afterwards, some ideas are given regarding another possible method to purchase a property which is a purchase and sale of Shares/Interests of a company that already owns the property. Some lines about after completions matters, will be stated at the end of this article.

On any purchase and sale of a Property in Portugal it is strongly advisable that both parties appoint a lawyer to prepare and execute all the selling process.

A

1 - Before Contract / Negotiations

On negotiations phase the most important issues to be discussed between parties are the price, conditions of payment, deposit to pay simultaneously with the signature of the promissory contract of purchase and sale together with any special concern that any or both parties may like to see inserted in the promissory contract.

Another very important issue is to decide whether you would rather buy the property in your name or buy the Shares of the company that already owns the property (below better explained in B), if this is the case.

Prior to paying over any money or signing any agreement or Promissory Contract you, being the Purchaser should instruct your lawyer to undertake thorough pre-contract enquiries and all the needed searches on the legal paperwork, to whom you may as well give powers to purchase on your behalf, through a Power of Attorney for that purpose. The alternative is for you to attend at your lawyer's office and at the Notary's office to execute each document.

The Vendor should have a complete set of Title Deeds showing that he is the person legally entitled to sell. As well at this stage it is important to check if there is any charge, mortgage, encumbrance, etc, registered on and/or against the property.

In addition to the searches, your lawyer may ensure that there are no outstanding charges against the property for utilities and maintenance costs such as infrastructure charges, property tax, condominium fees, etc.

If the construction was made after 1950, the property should have a valid Habitation Licence, which is similar to planning permission and confirms that the local authorities have approved the construction of the property.

In this stage is important to check the following relevant documentation:

i) - Land Registry

This certificate is a public record. Each property has a unique certificate. The lawyer will make a search and acquire details of: Ownership – (contains the property’s legal history); Title – (Identifies the current legal ownership); Description of property; Mortgages or any third party interests;

ii) - Caderneta Predial

Every property needs to have a Caderneta Predial, which is a tax identification and sets, among other things, the rateable valuation. This valuation is important for the determination of local property tax (IMI – former contribuição autárquica payable every year – rates). Nowadays, the Portuguese government updates automatically the rateable values, that are subject to new criteria of valuation that makes the rateable value similar to the market price of the property. Any transaction implies the registration of the transfer of ownership of the property at the land registry office and tax department. Regarding the old properties, is also intention of the Portuguese government to re-valuate all of them. But this may take several years till being accomplished;

iii) - Habitation Licence

All residential properties constructed since 1951 need a Habitation Licence, which confirms that the Câmara (Town Council) has inspected the property and that it complies with planning permission and building regulations.

2 - Exchange of contract and completion

Usually, the appointed Purchaser’s lawyer will prepare a draft of a Contract of Purchase and Sale (the Promissory Contract) of the property, which will be signed by the Purchaser and the Vendor. At this point, the parties will agree namely on the price, details of the property including the clear title of the ownership, penalty clauses in the event that any of the parties do not fulfill the contract (under the Portuguese Law by default if the Vendor does not fulfill the contract will be liable to pay back the deposit in double to the Purchaser. If the Purchaser does not fulfill the contract will lose the deposit in favor to the Vendor), completion date, schedule of payments, etc. On the signature of the Promissory Contract the Purchaser will pay the agreed deposit (normally 10% of the agreed purchase price) and usually the contract is legally signed in the presence of a Notary.

There is usually a period of time between the signature of the Promissory Contract and the signing of the public title deeds. This will vary from purchase to purchase and depends on the particular circumstances of the parties e.g. Vendor wishes to retain the property for a further period of time or to obtain or get updated legal paperwork until signing of the deeds.

At this stage, the Purchaser should have a Portuguese Fiscal number, and if he does not have one already, his fiscal representative should apply for one.

Completion of a property purchase takes place at the offices of a Public Notary. The Notary records the transaction, which is often referred to as the «Escritura». The Purchaser will now take possession of the property.

Under the new Portuguese legislation regarding tax evasion and money laundering nowadays, all non residents or foreign companies that wish to purchase a property should appoint a fiscal representative resident in Portugal (usually, an accountant) in order to perform all the tax duties in Portugal. Your lawyer may help and advise you to obtain one.

At this moment, you should be aware of some legal expenses connected to the purchase of a property in Portugal that would involve a transfer of ownership at land registry and fiscal department. These are the following:

• IMT (former SISA)

This is the Portuguese Property Acquisition Tax and should be paid by the Purchaser prior to completion. The amount payable varies with the price of the property, if it is for habitation, on a sliding scale up to 6% (this rate is applicable to all properties with a price higher then €510,000.00 – value referred to the year 2005). If it is a plot for construction, the IMT applicable is always 6.5% of the price, and if it is a rustic plot the tax is 5%, in both cases without any variation. Your lawyer will advise of this figure before incurring any expenditure.

Notary and registration fees

These needs to be paid by the Purchaser upon signature of the deeds of conveyance of purchase and sale at the public Notary and on the Land Registry when the registration of the transfer of the ownership of the Property is applied for. These fees will be approximately between 1% and 1.5% of the purchase price.

• Yearly expenses

Per year you need to pay the rates of the property, calculated at the present for the council of Loulé in 0.72% of the rateable value of the property. Usually, 50% is payable in April and the balance in September. Your fiscal representative will receive the respective payment's notifications from the local tax department.

• Portuguese Capital Gains Tax

On a transfer of the property ownership in Portugal all Vendors must pay the Portuguese capital gains tax, which is 25% calculated on the difference between base costs (original price + original aquisition taxes + legal fees including notary expenses + correction with inflation) and selling price.

• Inheritance tax

At the present moment there is no Portuguese inheritance tax between parents/children and spouses. In all other situations is 10%.

In the event of one of the owners decease, and in order to the inheritance process be more flexible and quicker (which needs to be filed in any case, even without paying any taxes to transfer the title to the heirs) we strongly advise you to do a Portuguese Will, after the purchase of the property.

3 – Registration at the land registry office

After the transaction has been entered into the Notary’s records, a copy of the “Deeds” is registered at the land registry office. This formally notes the Purchaser’s legal ownership of the property in a public record. To get an update certified copy of the land registry certificate showing the new owner of the Property, duly registered, can take several weeks from the application of the said registration, depending how busy the local land registry office is.

B

Company owning a property

In circumstances where a company already owns the property and you decide to purchase the Shares of the Company, your lawyer will certify the title of the company to the property in the usual way. The lawyer will then prepare an agreement to transfer either the shares or the beneficial ownership in the company to the Purchaser. A conveyance on the company is carried out in addition to the property conveyance. On completion, the ownership of the property (namely but not limited to the land registry) will not have changed, only the ownership of the company. Depending on the location of the Company, some Portuguese taxes, like IMT or Portuguese Inheritance tax may or may not apply. However, we strongly advise the Purchaser to look for an opinion from a tax adviser in his country regarding the tax impact that purchasing through a company and the impact that this ownership structure could cause in his/her tax plan. Nowadays, it is important to check the jurisdiction where the company is incorporated as Portugal has produced a list of 83 jurisdictions that the Portuguese Government considers as «tax havens» and, therefore, apply much higher rates per year (almost 8 times more than other situations) – and taxes that are just applicable to this situation as company tax (IRC) – presumed rental income. Your lawyer in Portugal may help you to decide the best option to take.

After completion matters

When the legal ownership of the property is transferred from the Vendor to the Purchaser, new contracts will have to be submitted to the utility companies such as electricity, telephone etc.

Should you decide to purchase a Portuguese property, I recommend consulting a legal adviser so he/she can help you to decide the best structure that would serve your best interests and allow you to fully enjoy your property.