Buying a Property in Portugal

General Principles

The main principles of buying a property in other countries apply, in Portugal, but do not forget that you are in a foreign country, with specific laws different from your own country. So, after deciding on a property and before committing yourself to a binding contract, use the services of a reputable lawyer, preferably a lawyer who speaks English. He will act on your behalf carrying out searches to check ownership, title, description of the property, mortgages, charges and any third party interests. Never sign any contract without first consulting your lawyer. It is highly recommended that you use the service of a Government Licensed Real Estate Agent – Mediador Autorizado with a so called AMI number. If you are buying directly from a developer, check very carefully his reputation and financial standing, but still always use a local lawyer.

Private Ownership

When you buy a property in Portugal in your name, the first step is the Preliminary or Promissory Contract (Contrato Promessa de Compra e Venda). This is a legally binding contract between vendors and buyers signed before a Notary. Upon this signature the buyer generally pays a 10% to 30% non-refundable deposit. The contract usually states exactly who the buyers and vendors are, a description of the property, confirmation that there is clear title, and the terms of payment and completion. Both parties should be represented by a local lawyer.

Upon completion, the Escritura (Final Deed) is signed in front of the Notary who checks all the documentation and sees that the IMT (property transfer tax) has been paid. At this stage, the full purchase price is also paid. From time to time and with the agreement of both parties, a part of the purchase price may be withheld from the vendor until certain aspects of the deal are fulfilled. For example, there may be a snagging list to deal with. In these circumstances, the buyer’s lawyer generally holds the ‘retention’ until all paperwork and other outstanding issues are resolved.
Once the deed and all other associated transactions are completed, the buyer’s lawyer registers the new owner of the property in the Land Registry (Registo Predial). Buyers should request a copy of this registration for their files.

Corporate Ownership

Many properties in Portugal are owned by a corporate structure. Today these corporate structures are usually situated in the UK, Malta or Delaware. The property itself is an asset of the company and buyers purchase shares in the company. This transaction takes place under the jurisdiction of the area in which the company is based. Both parties do still require a local lawyer as the usual searches on the property here in Portugal must be carried out, and most local lawyers are familiar with this type of corporate transaction.
A Share Purchase Agreement is drawn up, the usual deposit paid and a completion date set in the usual manner. The immediate benefits of such a transaction are its simplicity and the fact that all documentation proceeds in the English language. And there are no local stamp duty or property transaction taxes to be paid.

Property taxation

Portugal, like any other country in Europe, has an array of taxes that relate to property. Some are connected to possession of the property, others to different forms of related income, while others refer to its transmission.

Non-Residents & Fiscal Representation

Under current Portuguese legislation, it is mandatory for non-residents owning property in Portugal to have Fiscal Representation. The Fiscal Representative is obliged to see that the non-resident meets compulsory compliance commitments. The Fiscal Representative can also act as a liaison between the taxpayer and the Finanças (Tax Authorities) and can also help guide the non-resident through Portuguese bureaucracy.
Using qualified professionals as your Fiscal Representative does much more than just provide you with the bare minimum. Whether helping you to get off to a good start, keeping you informed about important changes, or saving you tax in the long run, comprehensive Fiscal Representation Services add real value to your investment.

IMT Property Transfer Tax

This is the Portuguese Purchase Tax and will need to be paid prior to completion. The amount payable varies with the value of the property and your lawyer will always advise you of this figure before you incur any expenditure. Tax applied varies between 1% up to 6% on purchases above Euros 557.500. There is also a special rate if you are a registered tax resident and if it is your permanent residence. Different percentages are applicable on land or non-residential property and in those cases it is a fixed percentage, which does not vary with the price. Rural Land is 5% and for other non-residential purposes and urban land it is 6.5%. This tax is reviewed annually in the Portuguese Government Budget.

A very important exception has been introduced to the above figures in that whenever the purchasing entity is an offshore territory resident / company, the IMT Tax percentage will always be 8% regardless of the purchase price or the nature of the property.

Stamp Duty

Not to be confused with IMT, Stamp Duty must be paid on deeds, contracts, documents, titles, books, papers and financial operations. The purchaser pays this tax. The Stamp Duty is levied on the value of each taxable deed or operation at a tax rate which varies according to the type of deed or operation. For property, a Gift or Sale is assessed at 0.8% of the transaction price.

Notary & Registration Fees

These will have to be paid by you on completion and as a rule will be approximately 2% of the value of the transaction.

Property Tax – ‘IMI’

At the heart of the 2003 Property Tax Reform is the new ‘VPT’ Evaluation System (‘Valor Patrimonial Tributário’). This tax is the Portuguese equivalent of UK Council Tax or Rates. Comprised of five basic components, this calculation is based on ‘market value’ rather than ‘potential rental income’ as in the previous system. This ‘market value’ is calculated taking the following into consideration: Constructed Area and Implantation, Type of Usage, Age, Location, and Quality of Construction. The best and simplest way to estimate this is to use the Finanças simulator on the internet. As a guideline your annual property tax (IMI) may be levied at up to 0.5% of the rateable value for privately owned properties and properties registered in a white listed corporate structure, i.e. with domicile in Malta, Delaware or indeed the UK. For properties registered in a corporate structure, in one of the Black Listed jurisdictions, i.e. Gibraltar, the IMI will be levied at 1%) of the ratable value.

Please see document below for IMT and IMI rates

Capital Gains Tax for Individuals

When you sell a property in Portugal, the notary who performs the deed is required to report the transaction to Finanças.

Your Fiscal Representative or accountant will submit the calculations to the Finanças. Let’s suppose that you sold your home in 2005 that you originally purchased in 1994. Calculate your Capital Gains as follows:

Step 1: From the sale price, subtract any selling costs (commissions, notary fees etc).
Step 2: From the purchase price, add qualifying expenses (closing costs, legal fees etc.) and then multiply by the Inflation Adjustment Coefficient.
Step 3: Add to the purchase price any documented capital improvements in the past 5 years.

Conclusion: The difference between the adjusted purchase and sales prices is your net taxable profit. Proper invoices can be a major problem. Many contractors give only informal receipts that are not valid for tax purposes. If this dilemma reaches significant proportions in your instance, specific tax advice may be in order.

As with all aspects of taxation in most countries, tax breaks exist for residents that do not exist for non-residents. Those that make their permanent residence home outside of Portugal pay a flat tax of 25% of the net gain. Tax Residents in Portugal receive a 50% exemption before the gain is added to their other income and are taxed at marginal rates. If the property is your principal residence and you are tax resident in Portugal, then you can roll over your profit into a new property that must also become your principal residence. You have a three-year window to do so: up to one year before the sale and as much as two years after. If you re-invest less than the full amount, the exemption will be on a pro rata basis. In the event that you do not fulfill your declared intentions, an assessment will be made on the entire non-reinvested balance plus interest. Non-resident companies, whether ‘Black Listed’ or ‘White Listed’ are assessed at the flat rate of 25%.

Inheritance Tax

Worldwide individuals are taxed on death duties under the legislation where they are tax domiciled and all their worldwide assets fall under this jurisdiction. Portugal abolished Inheritance Tax as of 2004. Transfers to immediate relatives (spouse, children, grandchildren, parents and grandparents) are tax-exempt. All others pay 10% Stamp Duty. These and other benefits are entitlements under legislation. It is your right as a citizen and taxpayer to take maximum advantage of these tax breaks if you are tax domiciled in Portugal. If not the Death Duties will be those of the country in which you are tax domiciled regardless of where your assets are physically located.

Wills

It is always advisable to purchasers of the property that they immediately make a Will in Portugal dealing with the assets in Portugal. If this is not done, probate in the country of residence has to be taken out then transferred and translated into Portuguese. Making a Will in Portugal will reduce the expense and avoid time delays. The Portuguese Will is in addition to and not in place of your existing Will. Inheritance tax is zero-rated for residents tax domiciled in Portugal, leaving assets to immediate relatives.

Mortgages

A Euro mortgage can be obtained on the property that is purchased for about 75% (sometimes 85%) of the bank valuation. (Please note: As the bank valuations tend to be lower than the market value, the actual value lent does not often exceed 70% of the purchase price). Also basing a mortgage on the property in Portugal will slightly increase the registration and notary costs.
Both Portuguese and international banks offer a variety of mortgages for both individual and for companies owning properties. The mortgages can have a fixed rate or variable, they can be in euro or other main currencies and can even vary in length.

If one has equity in a property outside of Portugal then it can be easier to raise the funds based on this. Often it is safer to borrow the funds in the currency that one earns, so that exchange rate fluctuation won’t change the monthly payments.
In all property and financial related matters it is important to obtain independent advise from your lawyer or state authorized estate agent.
A new concept has recently been introduced by a number of banks. You can now “acquire” your property through leasing. The bank "de facto" owns the property and you pay a known leasing fee over the leasing period. At the end of this period you obtain ownership. The advantage of leasing is that it eases the transaction, with less legal involvement and expenses on future transactions and the amount is known during the leasing period.

Disclaimer

This is merely an indication of the buying process adn related issues. IRG International Realty Group are not legal, financial or tax advisers. For any professional advise IRG advises its clients to use a lawyer or financial and tax adviser.