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Your most taxing questions answered
Property taxation 2007 |
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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? |
| Non-Residents & Fiscal Representation |
| Under current Portuguese legislation, it is
mandatory in most instances for
non-residents with income from Portugal 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. |
| I. Inheritance Tax |
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Let’s start with 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. |
| II: Municipal Property Transfer Tax |
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IMT, formerly called ‘Sisa’, is levied when
property is bought and sold: the transfer
for consideration of ownership rights or of
partial ownership on real estate
(immovable property). The taxable person
is the one who acquires the property.
(See chart below) |
Municipal Property Transfer Tax (IMT), formerly known as SISA
| Property transfer tax for buildings intended exclusively for housing purposes in 2007 |
Amount liable to Transfer Tax
(Euros) | Marginal Rate
(% of purchase price) | Tax Band Adjustment
(Reduced by) |
| up to | €85,500 | 0 | 0 |
| over | €85,500 - €117,200 | 2% | €0.5410 |
| over | €117,200 - €159,800 | 5% | €1.7297 |
| over | €159,800 - €266,400 | 7% | €3.8386 |
| over | €266,400 - €532,700 | 8% | |
| over | over €532,700 | single rate of 6% | - |
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Other Urban Property, such as building plots: 6.5%
‘Rustic’ Property (agricultural land): 5.0%
When a company listed in one of the Black-Listed jurisdictions
acquires a property in Portugal: punitive tax rate of 15%
When a company listed in a White-Listed jurisdiction acquires a
property in Portugal the same rates apply as shown in the table to the
left.
If one purchases the shares of a Maltese of Delaware company, there
is no property purchase tax in Portugal.
Assessment and Collection Payment must be made prior to the Deed of transfer at the local tax office.
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| III. Stamp Duty |
| 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
property, a Gift or Sale is assessed at 0.8%. |
| IV. Individual Income Tax – ‘IRS’ |
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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’).
Non-residents can then claim a foreign tax
credit in their home jurisdiction, usually offsetting
the Portuguese assessment. |
| Letting as a Business |
| Residents who engage in tourist-related
business activities are eligible for
privileged treatment under the
‘Simplified Regime’. If you let out
furnished accommodations to tourists on
a short-term basis, you are only taxable
on 20% of your invoiced income and
enjoy an 80% exclusion. Beware,
however, there are additional
requirements, such as licensing of
premises, VAT reporting when income
exceeds £610,000 per annum and Social
Security deductions as of the second year
of business. All in all, although there are
a few hurdles to overcome, this mode of
business operation can be highly
advantageous. Being fully compliant
usually means only a very modest tax
burden. |
| Rental Income and Non-Residents |
| Since non-residents are not eligible for
the ‘Simplified Regime’, the simplest
way to declare rental income is under
Category F, Rental Income. As of 2005,
non-residents benefit from a special tax
rate of 15% for this type of income. The
tax paid in Portugal should be eligible for
a foreign tax credit in the home
jurisdiction. If you rent out a house or an
apartment in Portugal, you will need to
declare the income first on a Portuguese
income tax return. Even if your ‘renters’
were foreign holidaymakers and you
were paid outside of Portugal, you still
need to declare the income to Finanças.
Tax paid in Portugal should be eligible for a foreign tax credit in the jurisdiction
of tax residence. Be sure to consult the
appropriate Double Taxation Treaty on
how to deal with any potential conflicts. |
| CGT for Individuals |
| When you sell a property in Portugal, the
notary who performs the deed is required
to report the transaction to Finanças. |
| How to calculate the gain |
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 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. |
| Taxation: Resident vs. Non-Resident |
| As with all aspects of taxation in most
countries, tax breaks exist for residents
(who are the voters) that do not exist for
non-residents (who cannot vote). Those
that make their permanent residence home
outside of Portugal pay a flat tax of 25%,
more than any resident higher rate taxpayer
would pay. Residents 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, 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 re-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. Non-resident companies,
whether ‘Black Listed’or ‘White Listed’ are
assessed at the flat rate of 25%. |
| V. Property Tax – ‘IMI’ |
| At the heart of the 2003 Property Tax
Reform is the new ‘VPT’ Evaluation
System (‘Valor Patrimonial Tributário’).
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 do this is to use the
Finanças simulator on the internet. As a
guideline your annual property tax (IMI)
may be levied at up to 0.72% of the ratable
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. Note these examples: |
| Note these examples: |
| 1 - Rental Income |
If a resident has a buy-to-let scheme, a
couple with €50,000 of income from
rentals to tourists would have less than
€1,000 of tax to pay. Non-residents enjoy
a flat rate on rental income of only 15%.
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| 2 - Roll-Over Relief |
If you, as a Portuguese resident, sell your
principal residence and fully reinvest the
proceeds in a new home, the capital gain is
exempt. This is to be extended eventually
to new home investment anywhere in the
European Union.
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Make an informed decision
Principal tax comparison between Spain and Portugal |
Unless you have specific links to Portugal, you may also be considering other countries for investment property options. While there
are innumerable criteria to take into consideration, a head-to-head comparison of eventual forms of taxation will prove to be one of
the key factors in making an informed decision. The following chart lists the principal taxes related to property in Spain and Portugal
and the respective rates of taxation last year. Not surprisingly, neither country would normally be classified as a “low-taxjurisdiction”.
However, with the exception of VAT, it is quite apparent that, of the two countries, Portugal is clearly the more favourable.
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| HIGHER TAX |
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| SIMILAR TAX |
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| LOWER TAX |
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| TAXES | SPAIN | PORTUGAL |
| Personal Income Tax (IRPF / IRS) | 15% – 45% (W46k) | 12% – 42% (W60k) |
| Tax on Non-Residents (IRNR) | 25% | 25% | (15% on lets) |
| Special Non-Resident Property Tax | 3% pa on property value | 0 |
| Real Estate Tax (Plusvalia / IMI) | 2% – 3.7% | 0.5% – 0.8% / 0.3% – 0.5% |
| Capital Gains Tax on Real Estate | Residents: 15%
Non-Residents: 35%
(+ 5% withholding) | Residents: 50% exemption;
balance at marginal rates /
Non-Residents: 25% |
| Wealth Tax (IP) | 0.2 % – 2.5% p.a. | 0 |
| VAT (IVA) | 4% / 7% / 16% | 5% / 12% / 21% |
| Inheritance Tax (ISD) | 7.65% – 34% | 0
(immediate family: exempt
Others: 10% Stamp Duty) |
| Property Transfer Tax | 7% (Stamp Duty) | 0 – 6% (IMT) |
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| EU takes Spain to Court |
| In January of 2006, the European
Commission decided to refer Spain to the
European Court of Justice over its
taxation of non-residents' capital gains
realised on the sale of Spanish property.
Under Spanish law, Capital Gains of
resident individuals derived from
immovable property are taxed at a rate
of 15%, whereas similar capital gains of
non-residents are assessed at 35%.
The Commission considers that Spanish
tax legislation in this area fails to conform
to the EC Treaty requirements, in particular
to the non-discrimination principle. Spain
has not changed its legislation despite a
formal request from the Commission.
The European Court of Justice has clearly
established in its rulings that it is
contrary to EU law (to the rules on free
movement of persons and free movement of
capital) to tax residents and non-residents
differently if there is no objective difference between their situations. |
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Why do I need a Fiscal
Representative?
by Dennis Swing Green
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| Many people buying property in Portugal
wonder why they must have Fiscal
Representation. First and foremost, it is a
legal requirement. Any non-resident
owning property or with income generated
in Portugal must designate a resident entity
to serve as Fiscal Representative to fulfil all
compulsory tax obligations. Even without
income, a Fiscal Representative needs to be
designated when first acquiring a
Portuguese Tax Number (Cartão de
Contribuinte), a prerequisite for almost any
important transaction.
Recent changes in legislation have
dramatically altered the duties &
obligations of the Fiscal Representative.
Along with new responsibilities and
revised enforcement practices, this once
benign position has turned into a potential
nightmare for both the unwary service
provider and the non-compliant property
owner.
Fiscal Representatives are required to
fulfil all accessory fiscal obligations.
Under the recently reformed version of the
“General Law on Taxation”, a Fiscal
Representative, can even be held
accountable for paying any outstanding
taxes of the non-resident. |
| Proper Professional Services |
| 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: |
| 1) Asset Protection: |
| Your property is a major investment.
If basic requirements go unmet or are not
completed correctly, your property
could be at risk. Having a qualified
professional Fiscal Representative should
be considered a prerequisite, not an add-on. |
| 2) Fiscal Requirements for
Property Owners: |
| It is essential to be fully compliant while
paying the legal minimum. |
| 3) Resourcing Information to Owners: |
| Portugal is often a difficult country in which
to obtain accurate, reliable information.
When changes occur in legislation that may
be relevant to you, updates on current
requirements and the steps that are needed to
stay compliant can be decisive. |
| 4) Liaison between Finanças and
Property Owners: |
| It’s essential to have a Fiscal Representative
who knows the “ins and outs” of Portuguese
bureaucracy. When called to task by the
authorities, you will need someone who is
experienced and knowledgeable to sort out
any problems that arise. |
| 5) Personalised Service: |
| When you have doubts or questions, you
want to deal with capable and friendly
professionals, someone who speaks your
language and understands your needs.
Personalised service is a must. |
| 6) Payment Facility: |
| Your Fiscal Representative is responsible
for seeing that all fiscal obligations are met.
Rates and Income Tax demands must be
paid on time in order to avoid fines and late
interest payments. |
| 7) Plain English: |
| As you already know, Portugal has a
complex bureaucracy. Most forms and web
pages are only available in Portuguese and
instructions are often in a language that
even native Portuguese sometimes have
trouble grasping. You need someone who
can communicate the full process to you in
a language that you can understand. |
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