Residents of Portugal are required to declare their worldwide income in Portugal on an annual tax return, whereas non-residents need only declare income that is derived from Portugal – typically rental or self-employment income.
When is Stamp Duty Applicable?
Stamp duty is applicable on a variety of transactions in Portugal – this may occur when a property is inherited or when a property is purchased. Please refer below for more details.
What Inheritance Tax Implications Exist for Property (or is it Stamp Duty that Applies)?
Although inheritance tax is not applicable in Portugal, stamp duty does apply.
For the purposes of stamp duty, inheritance or gifts may fall into one of two categories – those which are exempt, and those taxed at a flat rate of 10%. Inheritances by close relatives, such as parents, children and spouses, are exempt from stamp duty. All other inheritances and gifts are taxed at a flat stamp duty rate of 10%.
Stamp duty is payable for the respective property, even if the recipient does not live in Portugal.
If you are a UK/US domicile, your Portugal property will form part of your UK/US estate for UK/US inheritance tax purposes.
Stamp Duty on the Purchase of a Property
Stamp duty on the purchase of a property is charged at a rate of 0.8% at the higher of the purchase price or VPT (the rateable value, attributed by the tax authorities). The VPT in most cases is much lower than the actual purchase price of the property.
The purchaser must pay this duty, prior to signing the final deed, and proof of payment will need to be provided to the notary.
VAT may be applicable on the purchase of new builds in particular situations.
Property Transfer Tax
Property transfer tax, namely IMT (Imposto Municipal sobre Transmissões Onerosas de Imóveis), is applicable each time ownership is transferred. The tax is required to be paid by the purchaser prior to the final deed of sale being signed (as the original copy of proof of payment needs to be shown to the notary at the time of the property exchange).
The tax paid, is calculated on the higher of the purchase price or the VPT.
The property transfer tax rate is largely dependent on the ultimate use of the property and whether it is your first or second home, with the rates varying between 0% and 6%.
Annual Municipal Property Tax (IMI)
Annual municipal property tax, or IMI (Imposto Municipal sobre Imóveis), is payable by the person who is the property owner as at 31 December of the previous year, and is based on the VPT. The rate applied ranges from 0.3% to 0.8%, and is dependent on whether the property type is classified as urban or rural (classified by the Portuguese tax authorities based on the location of the property). Note that any investor or company located in a blacklisted tax jurisdiction, in accordance with the Portuguese tax authority, will be subject to a flat rate of 7.5% IMI.
An additional annual municipal property tax, namely AIMI (Adicional ao IMI), is chargeable for any VPT value exceeding €600,000, for all residential properties and construction plots, at a rate of 1%. Thus, the first €600,000 will be subject to the IMI at the respective IMI rate, and the excess value above €600,000 will be subject to AIMI at rates that vary between 0.4% and 1.5%.
Please note that AIMI is not only considered for a single property but considered per owner and therefore, if more than one property is held, the cumulative VPT needs to be considered. If the cumulative VPT value of all properties held by a single owner exceed €600,000, AIMI will be applicable on the value of the properties held, exceeding this threshold.
What Tax Consequences are Applicable Upon the Sale of a Property?
Capital gains tax is applicable on the sale of a property, unless purchased before 1989.
The tax consequences vary dependent on whether you are resident or non-resident. In addition, the use of the property and the way that the proceeds from the sale are utilised are paramount, as this may have a significant impact on the related tax consequences applicable.
The tax is calculated on the difference between the selling price and the acquisition value (adjusted for inflation rates, net of documented costs incurred when the property was acquired, coupled with any capital improvements within the last 12 preceding years of the sale).
As a Portuguese tax resident, 50% of the gain is required to be paid. If the property was held for a period of two years or more, inflation relief may also be applicable. Capital gains, on your property, are added to your other annual income and are taxed at marginal tax rates of up to 48%.
It is worth noting that gains resulting from the sale of a primary residence are exempt for residents, if you reinvest all of the proceeds (net of any mortgage on the property), in another main home in Portugal or the EU/EEA, before the property is sold (a window of up to 24 months), or within 36 months of the disposal of the property, provided you live in the new property, within 6 months of the purchase.
Capital gains are taxed at 28% for non-residents individuals and 25% for non-resident companies.
However, the tax consequences in Portugal are not the only consideration to bear in mind. One also needs to consider the double taxation treaty and local laws and regulations applicable in the country of tax residency.
A typical example of this for a UK/US resident, is the fact that UK/US tax residents also pay tax on the gain from the Portuguese property in the UK/US, however, under the double taxation treaty, any tax paid in Portugal may be credited against the tax due in the UK/US.
Is there a Preferred Structure to Hold Property in Portugal?
A topical query – what is the most preferred and tax efficient structure to hold property in Portugal?
Although the answer may vary dependent on objectives and circumstances from one investor to the next, as well as the purpose for such properties, it is worth noting that as a non-tax resident investor wishing to invest in property to earn rental income, holding such a structure through a Portuguese company may be more beneficial with tax rates varying between 19% to 21% and 11.9% to 14.7%, for properties located in Portugal mainland and the autonomous region of Madeira respectively, in comparison to the flat rate of 25% for non-resident entities.
For residents, holding a primary residence in their personal capacity, may be more beneficial from a capital gain point of view. Thus, each situation needs to be considered on a case-by-case basis.
Other considerations, however, need to be taken into account, such as the operational costs for running a company and ensuring appropriate substance exists. The cost of holding a property through a corporate structure may thus not exceed the benefit in all circumstances.
Alternative qualitative benefits may include the fact that corporate structures provide an extra layer of asset protection, which may be considered invaluable for many individuals located in jurisdictions exposed to considerable financial and other types of risk.
Summary of Property Tax Consequences
To summarize the tax and costs applicable for purchasers, owners, sellers and others, as discussed above, please refer below:
The related tax rates may be summarized as follows:
If you let out furnished accommodations to holidaymakers on a short-term basis (typically any rental period up to a month), you are engaged in tourist services and the income is classified as ‘Category B’ (Business Income).
What must I do to rent out my property for short-term lets?
An individual, generally one of the property owners, should be registered as self-employed at the Serviço de Finanças (Tax Department) and Segurança Social (Social Security) office in Portugal for the purpose of running the rental business.
Will I have to pay social security?
You must register with the Social Security office but if you are a non-resident of Portugal and are already paying social security in your home country, you will be exempt from payments in Portugal.
If you are retired you will also be exempt from paying social security in Portugal.
Must I declare the rental income in Portugal?
Yes, the rental income must be declared in Portugal via a yearly personal income tax return submitted by the property owner, whether the income is received inside or outside Portugal. This return is known as the IRS – short for ‘Imposto sobre rendimento das pessoas singulares’.
If I receive my rental income outside Portugal, do I still need to do a tax return in Portugal?
Yes. Regardless of where you are paid and in what currency, your primary responsibility is to report the activity in Portugal because this is where the business activity takes places and where the property is located.
A non-resident of Portugal will also be required to report this income in their home country, but the tax due in Portugal can potentially be offset against any tax due in their home country under a bilateral double tax agreement (DTA).
When is the tax return due?
Tax returns must be submitted between May and June (inclusive) each year in respect of the previous year’s income. The Portuguese tax year runs from January to December.
How much tax will I pay?
As a non-resident of Portugal you will pay tax at a rate of 28%, but only on 35% of the total rental income because the remaining 65% is deemed to be expenses in running the business. This means you are paying an effective tax rate of less than 10%.
As a resident of Portugal your rental income will become part of your worldwide income and the IRS tax rate is on a progressive scale from 14% to 48%.
Your tax bill will be issued in August for payment in September.
The income from long-term rentals – typically over one month long – is classified as ‘Category F’ (Income from Immoveable Property).
Do I need a rental contract?
Accordion Sample DescriptionYes. A contract must be drawn up between you as the landlord and the tenant and this contract must be registered at the Tax Department. Stamp Duty is due on the rental contract at the rate of 10.8% of one month’s income. Every time there is a change in the contract, stamp duty must be paid again. If appropriate, automatic renewals should be included in the original contract to avoid repeated stamp duty payments.
Do I have to issue a rental invoice/reciept?
Yes. An invoice/receipt must be issued under your name for each rent received and submitted via the Tax Department online site.
Do I have to declare the rental income in Portugal?
Yes, the rental income must be declared in Portugal via the annual IRS tax return submitted by the property owner, whether the income is received in Portugal or outside of Portugal.
How much tax will I pay?
A non-resident of Portugal will pay tax at a rate of 28% on the profit after the deduction of the following expenses from the total rental income received:
- Structural maintenance and repairs
- House Insurance
- Condominium fees
- Property taxes – Imposto Municipal Sobre Imóveis (IMI) and Adicional Imposto Municipal Sobre Imóveis (AIMI)
- Villa management fees
- Utilities – provided these are the responsibility of the landlord to pay.
All eligible expenses must be substantiated by an invoice that includes the individual’s name, fiscal number and the rented property’s address otherwise they will be rejected by the Tax Department. Always request proper VAT invoices (Fatura) with these details on them. Residents of Portugal may also deduct the above expenses but may elect to be assessed autonomously at a flat 28% or aggregate this income with their worldwide income and be taxed at progressive rates for the IRS personal income tax on a scale from 14% to 48%.
Long term rental: 28% income tax, but for long term contracts it can be reduced as follows:
Between 2 and 5 years: the applicable tax rate is 26%. For each contract renewal for the same period, a 2% tax reduction is applied, with a maximum limit of 14%;
Between 5 and 10 years: the applicable tax rate is 23%. For each contract renewal for the same period, a rate reduction of 5% applies, with a maximum limit of 14%;
Between 10 and 20 years: a rate of 14% is applicable;
Over 20 years: a 10% rate is applicable.
Is it a legal requirement to make a report for everyone who stays in my property to the Borders and Immigration Agency (SEF)?
Yes. The passport details and the names and addresses of tenants should be submitted to the Serviço de Estrangeiros e Fronteiras (SEF) via its online registration portal.
CORPORATE-OWNED PROPERTY RENTALS
Can I rent out my property if it is held in the name of a company?
Yes. For short term rentals, a leasing contract must be drawn up between the company and the individual operating the rental business, who must then comply with the regulations and obligations for the declaration of Category B income.
For long term rentals, there must be contract drawn up between the company and the tenant and this contract must be registered at the Tax Department, as detailed above for long-term rentals.
Does the company have to submit a tax return to declare the rental income?
Yes. The company must submit a tax return for corporate tax – Imposto sobre o Rendimento das Pessoas Colectivas (IRC) – each year by the end of May to declare the previous year’s rental income.
The tax rate is 25% on the profit after deduction of eligible expenses for:
- Structural maintenance and repairs
- Condominium fees if property is in a complex or resort
- Property taxes – IMI and AIMI
- Villa management fees
All eligible expenses must be substantiated by an invoice that includes the company’s name, fiscal number and the rented property’s address or they may be rejected by the Tax Department. Always request proper VAT invoices (Fatura) with these details on them.