Offshore Property

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. What was that proverb about Death and Taxes?

Inheritance Tax

The good news: Portugal abolished Inheritance Tax as of 2004. Transfers to immediate relatives (spouse, children, grandchildren, parents and grandparents) are tax-exempt. All others pay only 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. Who knows, Portugal may prove to be a legal ‘tax haven’ for you within Europe.

IMT Imposto Municipal sobre Transmissões de Imóveis

Formally known as Sisa Tax, IMT is the Property Purchase Tax and is payable by the purchaser. IMT is calculated using either the value on the deeds or the VPT (Property Rateable Value) – the higher of which is used. The rate varies according to the type and value of the property but as a general rule, a holiday home valued at Euro 511.000 and above will be taxed at 6% and land for construction at 6.5%. 

If you incorporate a new Maltese or Delaware company and it then purchases a property, then 6% IMT is payable. However, if you purchase shares of a Maltese or Delaware company which already owns a property, there is no Property Purchase Tax payable in Portugal. When a company domiciled in one of the Black Listed jurisdictions acquires a property in Portugal, which is not recommended, there is a punitive tax rate of 8%. 

Assessment and Collection: Payment must be made prior to the Deed of Transfer (Escritura) at the local tax office.

Stamp Tax – Imposto de Selo

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 real estate, a Gift or Sale is assessed at 0.8%

Individual Income Tax – ‘IRS’ (Imposto sobre Rendimentos)

If you have income arising in Portugal related to your Property, you (or your fiscal representative) must report any earnings on an annual income tax declaration (‘IRS’). After possible deduction, non residents are taxed at 15% on rental income. Non-residents can then claim a foreign tax credit in their home jurisdiction, usually off-setting the Portuguese assessment.

Capital Gains Tax

CGT is payable on the profit earned on the sale of a property. There are a few exceptions; a) if the property was first acquired prior to January 1989. b) if you are a resident in Portugal and reinvest the income from a sale into the next main residence, then no CGT is payable. Although it is Finanças, not you, who does the actual calculation, it may be worthwhile knowing what you will have to pay. Let’s suppose that you sell your home in 2008 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. 

CGT – Resident vs. Non-Resident

For non-residents there is a flat rate of 25%. Residents receive a 50% exemption before the gain is added to their other income and are taxed at marginal rates. Furthermore, as a resident, if the property is your principalresidence, then you can roll over your profit into a new property. 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 invest less than the full amount, the exemption will be on a pro rata basis. In the event that you do not fulfil your declared intentions, an assessment will be made on the entire non-reinvested balance plus interest.

IMI Imposto Municipal sobre Imóveis

Any owner of property in Portugal must pay the annual property tax. This tax is calculated on the VPT (the property rateable value). This value is calculated by the local councils, but you can go onto the website of the Finanças (Finance Departments) and make the calculation yourself. The following is taken into consideration: Constructed Area and Implantation, Type of Usage, Age, Location, and Quality of Construction. As a guideline your annual property tax (IMI) may be levied at up to 0.8% 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 rateable value. 

Conclusion: It may come as a surprise that filing a correct tax return in Portugal can actually save you money. Submitting a tax declaration is not synonymous with paying tax. The Portuguese tax code has generous allowances and unexpected exclusions on certain forms of income, broad deductions for numerous types of expenses, and liberal tax credits for many common expenditures. Many people find their tax burden in Portugal to be significantly lower than in their country of origin.

Non-Residents need local Fiscal Representation

Under current Portuguese legislation, it is mandatory in most instances for non-residents who own property in Portugal (in their own name or through a corporate structure) to have Fiscal Representation. The Fiscal Representative is obliged to see that the non-resident meets compulsory compliance commitments. The liaison between the taxpayer and the Finanças (Fiscal Representative) can also help guide the non-resident through Portuguese bureaucracy.

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