Some legal questions

 

Some legal questions that often concern foreign owners of a property in Portugal – part II


In our previous articles in this magazine I have covered the main points regarding the process of buying and selling property in Portugal where I tried to clarify some of the most common queries regarding this matter. On one of them I have used the same structure that I will use on the present article – question/answer - about matters that usually are the ones that people ask more frequently. I received very good reactions from several people using this structure. Considering this, in this article I will try to answer the most frequent questions about property related legal taxes in Portugal:

ONE

NON RESIDENTS NEED A FISCAL REPRESENTATIVE

Question: I’m not resident in Portugal and I would like to buy a property in Portugal. Do I need a Portuguese fiscal number?

Answer: Yes, all owners and/or co-owners of a property located in Portugal need to have a fiscal number that identifies the person and/or company at the tax department. You cannot buy a property in Portugal without obtaining your fiscal number previously. An important matter to consider is that all non residents (fiscally speaking) in Portugal who owns property here are required to have a fiscal representative in Portugal, who would have to check if its representative meets compulsory compliance commitments.

 

TWO

IMI – IMPOSTO MUNICIPAL SOBRE IMÓVEIS

Question: IMI – Imposto Municipal sobre Imóveis – Property tax or rates. How it is calculated, when and how shall it be payable?

Answer: Any property owner in Portugal must pay the annual property tax – IMI. The person or entity that shall pay it is the one that owns the property on the last day of the respective tax year. This tax is calculated on the VPT (Valor Patrimonial Tributário). On the 4th «Passion for Property»’s edition I have described on a very detailed way the formula to calculate the VPT of each property in Portugal (which consider constructed area, type of usage, age of the property, location and quality of construction). A property owner may go onto the Finanças webside – www.e-financas.gov.pt/SIGIMI/default.jsp - and make the calculation on himself. Loulé this year will charge 0.4% calculated on the rateable value for new properties (meaning properties valuated on 2004 and upwards. The other ones will be charged 0.72%). This tax is payable in two equal instalments: April and September. The IMI is the same for individuals or companies (like companies based in UK, Malta or Delaware). The only exceptions are individuals or companies based in one of the 83 jurisdictions consider by Portugal as countries, territories or regions with clearly more benefic fiscal regimes comparing with the European ones. In these later situations the tax is 1% of the rateable value. The bills are sent to the fiscal representative.

 
THREE
IMT – IMPOSTO MUNICIPAL SOBRE TRANSMISSÃO DE IMÓVEIS. On a free translation to English – Property Acquisition Tax

Question: I buy a property in Portugal that would imply a transfer of the property title into my name. Shall I expect any special tax?

Answer: Yes, the IMT, which shall not be confused with the stamp duty (which is also payable upon the acquisition of the property. I will deal with this on a separate query). Formally this tax was known has SISA tax. It is a property purchase tax for any property located in Portugal and is calculated using either the value on the deeds or either on the rateable value – the higher of which is used. The rate varies according to the type and value of the property. As a general rule we may say that the houses for habitation are taxed in 6% of the price above Euros 521,700.00. The land for construction, industry and commercial property are taxed 6.5% of the price and the rural properties 5%. If the price for a property for habitation (the sliding scale it is just applicable for property for habitation) varies between Euros 87,500.00 and Euros 521,700.00 a sliding scale is applicable as per the graphic below.

 

(To determine IMT, multiply the property value by the percentual rate indicated «taxa marginal» and subtract the respective amount «valor a abater»)

This tax applies when an individual or a company buys a property. In the event that for the purchase of a Portuguese property is used a company that are included on the abovementioned list of 83 jurisdictions, there is a punitive tax for IMT of 8%.

The IMT shall be paid prior to the signature of the deeds of conveyance of purchase and sale.


FOUR

STAMP DUTY – IMPOSTO DE SELO

Question: I buy a property in Portugal that would imply a transfer of the property title into my name. Shall I expect, on top of the IMT, a stamp duty tax?

Answer: Yes. Stamp Duty is paid on deeds, contracts, documents, titles, financial operations (like bank mortgages and loans). This is the purchaser’s responsibility. This tax is levied on the value of each taxable deed or operation at a tax rate which varies according to the type of the deed or operation. For buying a property is at the present moment assessed at 0.8%. The stamp duty tax for finance contracts can vary from 0.4% and 0.6% depending on the term. A gift of a property is also taxed as stamp duty of 0.8% of the property taxable value. The stamp duty tax is due by the person or entity that as economical interest in the deeds or contract. Also see question 5 for more information.


FIVE

INHERITANCE TAX AND GIFT TAX

Question: How it is applied the Inheritance tax or gift tax in Portugal?

Answer: Portugal abolished Inheritance tax as of 2004. Transfers to immediate relatives (spouses, children, grandchildren, parents and grandparents) are tax-exempt. However from 2009, will be applied in this situations a stamp duty tax of 0.8%. All the others situations will be taxed as stamp duty tax on 10%.

Regarding the «Gift tax» for donation of a property is fixed on 0.8% of the property taxable value as stamp duty tax. For more information please see question 4.



SIX

RENTAL INCOME

Question: I have let my property in Portugal. Shall I pay rental income?

Answer: Any rental income arising from a property located in Portugal owned by a non resident is subject to the payment of IRS (applicable to individuals) or IRC (applicable to companies). On the annual income it is possible to deduct some expenses as IMI tax, condominium charges, building insurance, basic services and maintenance expenses. After this deduction, the tax is 15% on the balance. For the non resident, depending on his jurisdiction, may be possible to claim a tax credit in their home jurisdiction. Tax payers must file a tax return without being required to do so by the Portuguese Revenue.


SEVEN

Capital Gains Tax (CGT)

Question: I sell my property in Portugal through deeds of conveyance of purchase and sale. Am I subject to CGT?

Answer: You shall always reportthe capital gain or loss from a sale of a property to the Portuguese Revenue. Usually through your fiscal representative. CGT is payable on the profit earned on the sale of a property. There are a few exceptions:

  1. If the property was first acquire prior to January 1989;

  2. If you are Portuguese fiscally domiciled and you sell your main residential habitation and you buy another main residential house in Portugal within 2 years counting from the selling or one year before it (from 2009 this will be three years after or two years before) or you move to another UE country and you reinvest the income from the sale of it in the next main residence, then you will be able to roll over the costs.

The CGT is generally determinate as follows for non residents: 1) We start from the original purchase price which it is multiplied by the indexation relief coefficient; 2) To this amount we shall add qualifying expenses (closing costs, real estate’s commission, and registration fees); 3) Also you may add to the purchase price any documented capital improvements in your property in the past 5 years; 4) Then we shall subtract from the selling price the amount achieved on the previous points and; 5) on the difference apply the flat rate tax of 25%.

In conclusion the CGT is 25% between the adjusted purchase price and sales price, which is your net taxable profit.

There is a small difference in CGT depending if you are tax resident or non tax resident in Portugal. For residents there is a 50% exemption before the gain is added to their other income and is taxed at marginal rates. In practical terms, and considering that the highest bracket for individual income in Portugal is nowadays 42% that means that on the highest marginal rate a resident pays 21% at the end on the net table profit. 

 
 

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Buying & Selling Property in Portugal  Algarve, South of Portugal, has been for several years one of the most desirable places in Western Europe to buy Property for holidays or to live permanently by foreign citizens. The buying and selling of a Property in Portugal is relatively straightforward providing the ownership of the property is clear and the purchase laws are strictly adhered to. However it is advisable that both parties appoint a Lawyer to prepare and execute all the process. The main stages of the process are: 1 – Negotiation; 2 – Signature of the Promissory Contract; 3 – Final Deeds; 4 – Registration of the new ownership; There is a further way to buy property in Portugal, which is buying the Shares/interest of a Company that owns the property. 1 – NEGOTIATION As soon as the purchaser finds a property that he would like to purchase (usually through a real estate agent or other contacts that he may have) negotiations with the Vendor start. At this stage the most important issues to be discussed is price and deposit to pay at the time of the signature of the Promissory contract together with any special clauses that parties would like to see in the promissory contract. Afterwards should instruct your lawyer, to whom you may grant a Power of Attorney to allow him to act in its behalf, to undertake thorough pre-contract enquiries and all the needed searches on the legal paperwork. In addition to this searches, the legal representative will also ensure that there are no outstanding charges against the property for maintenance costs as Infrastructure charges, Property tax, Condominium fees, etc. The Vendor should have a complete set of Title Deeds showing that he is the person legally entitled to sell and the property details. It is also important at this stage to check if there is any charge, mortgage, encumbrance etc registered on the property. The property, if the construction is made after 1950, 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.  2 – SIGNATURE OF THE PROMISSORY CONTRACT Usually the appointed Purchaser’s lawyer will prepare a draft of a Promissory Contract of Purchase and Sale of the property, which is signed by the Purchaser and the Vendor. The contract will show the price, the price’s terms of payment, completion date, details of the property including the clear title of the ownership, penalty clauses in the event that any of the parties do not fulfil the contract (by default under the Portuguese Law if the Vendor does not fulfil the contract he is liable to pay back the deposit in double to the Purchaser. If the Purchaser does not fulfil the contract he forfeit deposit in favour to the Vendor), any other special clauses, etc. On the signature of the Promissory Contract the Purchaser will pay the agreed deposit (normally 10% of the agreed purchase price). During this first two stages some important legal documents have to be checked by the lawyers and used to draft the contracts. The most relevant ones are: a) - Land Registry The Land Registry is a public record. Each property has a unique certificate. On it you may find the details of Ownership – (contains the property’s legal history); Title – (Identifies the current legal ownership); Description of property; Mortgages; Charges; Third party interests. b) - Caderneta Predial Every property has also to have a Caderneta Predial, which is a taxation identification and sets, among other things, the rateable valuation. This valuation is important for the determination of local property tax (IMI payable every year) and, if the property is owned by an offshore company, it is also important to calculate the presumed net income of the offshore company that owns Property in Portugal, as better explained below. c) - Habitation Licence All residential properties constructed since 1951 need a Habitation Licence, which confirms that the Câmara (Council) has inspected the property and that it complies with planning permission and building regulations.  3 – FINAL DEEDS The period between Promissory Contract and completion will vary from purchase to purchase and depends on the particular circumstances of the parties. At this stage and before the signature of the deeds of conveyance at a public Notary, the Purchaser should have a Portuguese Fiscal number, and if he does not have one already, he should appoint a fiscal representative (usually an accountant) in order to him get one and represent him in future for all taxes payments affairs. Just before the deeds the Purchaser should pay the IMT - this is the Portuguese Property Acquisition Tax. The amount payable varies with the value of the property on a sliding scale up to 6% (this rate is applicable to all properties with a price higher then €500,000.00 – value referred to the year 2004. From €80,000.00 to €500,000.00 a sliding scale is applicable and it will always be lower then 6%. This amount increases every year on a very similar percentage of the inflation). Your Lawyer will advise you of this figure before you incur any expenditure. The Purchaser, on the signature of the deeds of conveyance of purchase and sale at the public Notary, has to pay the notary expenses and stamp duty and afterwards Land Registry costs when the registration of the transfer of the ownership of the Property is applied for. As a rule, these fees will be approximately 1.8% of the purchase price. 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. From this moment onwards the Purchaser is the owner of the property and may take possession of the property. 4 - REGISTRATION After completion the transfer of ownership has to be registered at the Land Registry. This formally notes the Purchaser’s legal ownership of the property in a public record. The completion of the registration may take several months from its application depending how busy the local Land Registry is.COMPANY ONWERSHIP In circumstances where a company already owns the property, your lawyer will certify the title of the company to the property in the usual way. He/She 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 will not have changed, only the ownership of the company. Of course that the Purchaser is able to decide to purchase the property in his/her individual name from a Company. In this eventuality all the issues above mentioned are applicable. The Portuguese laws enforceable from 2002 have changed considerably the situations where a property is owned by an offshore company (meaning companies incorporated in a list of 83 countries/jurisdictions) penalizing this structure. Therefore It is strongly recommended to get professional advise prior to agree in buying Shares of an offshore company that owns property in Portugal.   Details...