Buying Process and Taxation

Property taxation Algarve

A Letter of Intent

Once your agent has successfully negotiated a deal on your chosen property, a professional agent will prepare a ´letter of intent´ for both buyer and vendor to sign. This important document outlines the details of the sale and purchase, which will include the price, date of exchange and completion of contract. It also states what is included in the sale (furniture and furnishings, golf membership etc) and any other conditions. This Letter of Intent is passed on to the legal representatives of both parties as a reference to the agreed terms for the preparation of the purchase contract.

Exchange of Contract

Both parties should be represented by a local lawyer and it is the buyers lawyer who prepares the Promissory Contract (Contrato Promessa de Compra e Venda). Before this is drafted the buyers lawyer will carry out all the necessary legal searches on the property. Finally the lawyer will ensure there are no outstanding charges against the property for utilities and maintenance costs such as infrastructure charges, property tax and condominium fees. The Promissory Contract, which is the legally binding contract and is signed by both parties in the presence of a notary. The Promissory Contract will confirm who the buyers and vendors are, details of the property including clear title of ownership, completion date, schedule of payments, and if applicable an inventory list will also be attached. It will also include standard penalty clauses in the event that any of the parties do not fulfill the contract. At exchange of contacts, it is common that the buyer pays a 10% non-refundable deposit which is transferred via the lawyers clients accounts to the vendor. Occasionally and depending on the terms of the contract, the lawyers withhold the deposit until all the conditions of the contract have been met. Under Portuguese Law if the Vendor does not fulfill the contract, they are liable to pay back the deposit in double to the Purchaser. If the Purchaser does not fulfill the contract their deposit is non-refundable.

Many properties are owned by companies usually domiciled in Malta or Delaware and the buyers will purchase the shares of said company. Although the transaction takes place under the jurisdiction of the company´s domicile both parties still require a local lawyer to carry out the searches on the property in the usual way. The lawyer will prepare a Share Purchase Agreement and a 10% deposit is paid to the vendors lawyer and a completion date agreed upon.

Completion

There is usually a period of time between the signature of the Promissory Contract and the signing of the title deeds. This will vary from purchase to purchase and depends on the agreed terms. At this stage, as a Purchaser you require a Portuguese Fiscal number, and your fiscal representative should apply for one. Your lawyer may help and advise you to obtain one.

The Escritura is the official Deed of Transfer from the vendor to you, the new owner. It is a document, which is signed either by you or your lawyer (if you have opted to give them Power of Attorney) at the Public Notary and stays in the hands of the Notary. The Notary reads aloud all the particulars of the deed before everyone signs it. If you do not speak Portuguese your lawyer will check that you understand exactly what is going on at each stage. Once signed, the Escritura gives you official ownership but the property still has to be registered under your name in the Land Registry (Registo Predial). Buyers should request a copy of this registration for their files, this is done by your lawyer. And finally on completion your lawyer will also change or organise new utility contacts from the old owners into your name.

If you a taking over the beneficial ownership of a company, no Portuguese Deeds are done. The process is simply completed by both parties fulfilling the terms described in the Share Purchase Agreement and Completion occurs with the buyers transferring the balance of the purchase price to the Vendors usually via the lawyers. This process is quick and simple and in English.

Legal Expenses

Lawyers fees vary anywhere from 1 to 2% of the purchase price. There are also additional legal expenses connected to the transfer of ownership at the land registry and fiscal department when buying a property in Portugal.

IMT - Property Purchase Tax

This is the Portuguese Property Acquisition Tax and should be paid by the Purchaser prior to completion. The amount payable varies according to the price of the property on a sliding scale up to 6%. If it is a plot for construction, the IMT applicable is always 6.5% of the price without any variation. Your lawyer will always advise you of these costs.

Notary, stamp duty and registration fees

These need to be paid by the Purchaser upon signature of the deeds at the public Notary and at the Land Registry when the registration of the transfer of the ownership of the property is applied for. Expect fees of approximately between 1.1% and 1.5% of the purchase price.

IMI - Annual Property Tax

Every year property owners are liable to pay IMI. This is calculated at present within the council of Loulé at 0.4% of the rateable value of the property for new properties (Valor Patrimonial Tributário). Usually, 50% is payable in April and the balance in September. Your fiscal representative will receive the respective payment notifications from the local tax department.

Portuguese Capital Gains Tax

On a transfer of the property ownership in Portugal, vendors pay Portuguese capital gains tax, which is 25% calculated on the difference between base costs (original price + original acquisition taxes + legal fees including notary expenses + agents fees + correction with inflation) and selling price. There are a few exceptions.

Inheritance tax

At present there is no Portuguese inheritance tax between immediate relatives (parents, children and spouses). In all other situations a 10% stamp duty applies. In the event of the death of an owner and in order for the inheritance process to run smoothly we strongly advise you to make a Portuguese will, after the purchase of the property.