Taxes on Portugal Real Estate

In Portugal, there are some circumstances under which the capital gains tax on real estate sales may be wholly or partially exempt for tax residents, provided certain requirements are met:

Primary Residence Exemption

If the property being sold was the taxpayer’s primary residence in the last 24 months and the sale proceeds (reduced by the value of any outstanding loans relating to the purchase of the property being sold) are reinvested in the acquisition, improvement, or construction of another primary residence in Portugal or within the European Union (EU) within 36 months from the sale or in the period of 24 months previous to the sale, the capital gains may be exempt.

Partial Exemption on Reinvestment

When residents sell their primary residence to purchase another property, they are exempt from capital gains tax. If the new property costs less than the sold one, the tax is applied to half of the difference in price.

Exemption for Retirees and Residents over 65

Retirees and residents over 65 can invest the profit from the sale of their primary residence in a pension fund or an insurance company to be exempt from capital gains tax. However, this must be done within six months after the transaction.

It’s important to note that other exemptions may also apply on the capital gains arising from the sale of real estate in Portugal.

CAPITAL GAINS TAXES IN PORTUGAL

General Rule:

• Capital gains in Portugal are subject to a flat tax rate of 28%. 
• However, only 50% of capital gains arising from the sale of shares in micro and small companies not listed on the stock exchange are subject to taxation.

Aggregation of Capital Gains and Losses

Starting from January 1, 2023, the positive balance between capital gains and capital losses resulting from the transfer of shares and other securities is mandatorily aggregated under the following conditions:

• Holding Period:
  • The assets must have been held for less than 365 days.

• Taxable Income Threshold:
  • The taxpayer’s taxable income, including the balance of capital gains and losses, must amount to or exceed € 81,199.

• Aggravated Tax Rate:
  • These rules also apply to the balance subject to the aggravated 35% tax rate (for countries, territories, or regions with more favorable tax regimes).

Real Estate Capital Gains for Non-Residents:

• For non-residents, similar to the regime applicable to tax residents, only 50% of capital gains from the sale of real estate are taxed. The income is subject to marginal rates ranging from 13.25% to 48% (plus the solidarity rate, if applicable) for 2024. 
• Non-tax residents’ applicable tax rate considers worldwide income received, even if not taxed in Portugal.

BENEFITS OF HOLDING PORTUGAL REAL ESTATE WITH A COMPANY

Holding Portugal real estate through a company offers several benefits:

IMT (Imposto Municipal sobre Transmissões Onerosas de Imóveis)

• Historically, offshore companies were used to legally avoid IMT. 
• However, recent changes mean that non-resident companies with significant Portuguese real estate value may now be subject to a 25% Portuguese corporation tax on share transfers.

Tax Efficiency:

• Previously, non-Portuguese companies were considered ‘opaque,’ allowing them to avoid capital gains taxes on property sales.
• But recent changes mean that non-resident companies with 50% or more Portuguese real estate value may be subject to a 25% Portuguese corporation tax on share transfers.

Privacy and Simplicity:

• Corporate ownership provides privacy and anonymity.
• Property sales via a corporate structure are straightforward and tax-efficient.

Remember that specific tax implications can vary based on residency and other factors.

Deductibility of Land Purchase Costs for Real Estate Development

Depreciation and Amortization

Qualifying Cost for Tax Purposes:

• Acquisition or Production Cost: The cost of an asset for tax purposes is determined by its acquisition or production cost.
• Depreciation Methods: Depreciation is used to account for gradual wear and tear of assets. There are two primary methods:

Depreciation is computed by using two methods:

• • Straight-Line Method: Depreciation is calculated evenly over the asset’s useful life.
  • Declining-Balance Method: Not applicable to certain assets (e.g., buildings, passenger vehicles, furniture, social welfare equipment, or second-hand assets).

Rates and Coefficients:

• Straight-line rates typically align with industry practices. For the declining-balance method, coefficients adjust the straight-line rate:

• • 1.5 if the asset’s useful life is less than five years.
  • 2 if the useful life is five or six years.
  • 2.5 for useful lives exceeding six years.

Depreciation must be computed by using the straight-line method or the declining-balance method. The latter cannot be applied to buildings, passenger vehicles, furniture, social welfare equipment, or second-hand assets.

Straight-line rates of depreciation are normally consistent with rates privately used by business and industry and are increased, for the purposes of applying the declining-balance method, by coefficients of:

• 1.5 if assets have a useful life of less than five years.
• 2 if the useful life is five or six years.
• 2.5 for useful lives in excess of six years.

Flexibility in Depreciation Methods:

• Different depreciation methods can be used without prior approval from the tax authorities (PTA).
• Annual depreciation cannot exceed the amount resulting from either the straight-line or declining-balance methods.

Some examples relating to the maximum straight-line depreciation rate are as follows:

Rates and Reductions:

• Taxpayers have the option to reduce rates by 50% in any given year. However, if the reduction exceeds 50%, the difference cannot be used for tax purposes in the future.
• Additionally, a total of 60% of additional depreciation on revalued fixed assets (as permitted by law) is allowed for tax purposes.

Depreciation of Tangible Assets:

• Companies with a two-shift schedule (or three shifts) may increase depreciation rates by 25% due to faster asset deterioration.
• Assets with an acquisition value below € 1,000 can be depreciated in the acquisition year unless they are part of a larger set that must be depreciated together.

Exceptions for Specific Assets:

• Yachts and airplanes not essential for business activities cannot be considered a tax-deductible cost.
• Passenger cars and certain vehicles exceeding specific acquisition values (defined by law) are also disallowed as tax-deductible costs.

The caps are as follows:

• Vehicles acquired between 2012 and 2014: 
  • € 25,000 
  • (€ 50,000 for electric vehicles).

• Vehicles acquired from 2015 onwards: 
  • €25,000 for fully electric vehicles.
  • €62,500 for hybrid plug-in vehicles.
  • €37,500 for LPG or compressed natural gas vehicles.

Intangibles and Biological Assets:

• Development expenses, patents, trademarks, licenses, and similar rights can be amortized for tax purposes if acquired for a limited period of time.
• Certain intangibles with unlimited life (e.g., trademarks, permits) can be amortized over 20 years.
• Depreciation of non-consumable biological assets is tax-deductible.
• Internally generated asset-related expenses are deductible in the tax year incurred.

Taxes on property purchase and sale

Property tax rates in Portugal vary based on real estate value, location, and the owner’s status. As of the first quarter of 2023, the average housing cost is €2,481 per square meter. While Lisbon’s real estate prices remain stable, Santarem and Braga have experienced growth. For optimal rental investments, consider inland regions like Santarem

Taxes on Property Purchase and Sale in Portugal:

 Portugal imposes several taxes related to real estate transactions. The key taxes include:

• Property Transfer Tax (IMT): The municipal tax on property transfer is known as Imposto Municipal sobre a Transmissão Onerosa de Imóveis (IMT).

• • IMT ranges from 0% to 8%, depending on the property’s value and type.
  • Buyers pay this tax before signing the sales agreement.

• Annual Property Tax (IMI): The immovable property tax (Imposto Municipal sobre Imóveis, or IMI) is an annual tax.

• • For urban properties, the rate ranges from 0.3% to 0.5% of the market value.
  • Rural properties are subject to a 0.8% rate.

Stamp Duty (Imposto de Selo):

• Stamp duty is paid during property transactions (purchase, gifting, inheritance, or renting).
• It amounts to 0.8% of the transaction value.
• Real estate purchases made by organizations are exempt from stamp duty.

Wealth Tax /Adicional Imposto Municipal sobre Imóveis)(AIMI).
It applies to properties valued over €600,000. 

• The AIMI rate for individuals ranges from 0.7% to 1%, while legal entities pay 0.4%. 
• For properties above €1 million, both individuals and organizations pay a flat rate of 1%. 
• If spouses file a joint declaration, wealth tax is levied on properties valued above €1.2 million.

Wealth Tax Rates in Portugal

• Individuals:
  • Property value €600,000 to €1,000,000: 0.7%
  • Property value above €1,000,000: 1%
  • Property value €1,000,000 to €2,000,000: 1.5%
  • Property value above €2,000,000: 1.5%
• Legal entities:
  • Property value €600,000 to €1,000,000: 0.4%

Inheritance Tax

While inheritance tax in Portugal was abolished in 2004, if real estate is inherited by a spouse, children, parents, or grandchildren, the inheritor pays a stamp duty of 0.8%. 

In other cases, an additional stamp duty of 10% is applied. 

For example, if someone inherits a house from a non-relative, the total stamp duty they must pay will be 10.8%.

Gift Tax (Imposto sobre Doações)

Gift tax is also not charged in Portugal. However, similar to inheritance, before transferring property as a gift, a stamp duty of 0.8% or 10.8% must be paid, depending on the recipient’s relationship to the property’s previous owner.

Rental Income Taxation in Portugal

As a rule, both tax residents and non-tax residents earning rental income are subject to a special tax rate of 28%. 

However, there are specific details to consider:

Residential Rentals:

• Rental income from residential properties is taxed at 25% for contracts signed or renewed from October 2023 onwards (with some exceptions).
• Taxpayers have the option to include this rental income in their total aggregated income under certain circumstances.
• Special reductions or exemptions may apply based on specific conditions.

Business and Professional Activities:

• If a taxpayer consistently leases properties as part of a business or professional activity (self-employment), the rental income may be taxable under “Category B.”
• To determine the income subject to taxation, the same rules used for “Category F” rental income apply.

Tax Rates for Portuguese Residents:

• Income tax rates for rental income range from 14.5% to 48%, depending on the income level.  
• Income tax rates for rental income are as follows:
  • Up to €7,091: 14.5%
  • €7,091 to €10,700: 23%
  • €10,700 to €20,261: 28.5%
  • €20,261 to €25,000: 35%
  • €25,000 to €36,856: 37%
  • €36,856 to €80,640: 45%
  • €80,640 and above: 48%

Deductions:

• When calculating rental income, utility payments and repair expenses can be deducted, provided corresponding receipts are available.

Tenant Expenses:

• Tenants themselves do not pay taxes on rental income.
• In addition to the contractual payment, tenants may need to provide a security deposit equal to two months’ rent.