Either to diversify their investment portfolio or driven by a desire to enjoy year-round sunshine on the West Coast of Europe, one can really think of a number of reasons that may lead non-Portuguese residents to consider buying a second home in Portugal.
In any circumstances, one cannot ignore that investing in real estate abroad has tax implications, not only at the moment of the purchase but during the lifetime of the investment and also when selling it. These implications need to be carefully considered before making any decision, to manage expectations about the outcome of the investment and also to avoid pitfalls.
We summarise here the main tax issues related to an investment in a second home in Portugal, knowing that a summary is … a summary. The reality can be much more complex (especially when we are talking about taxes) and the particulars of each investor (such as the country of residence) and of each investment cannot be ignored. That is why we recommend any investor to seek tailored advice prior to formalising any investment in Portuguese real estate.
How to invest: directly or through a corporate vehicle?
Tax wise, this is one of the most asked questions, but there is no one-fits-all solution. In fact, the answer depends on multiple factors, such as the level and structure of costs of the investment and its ultimate purpose (e.g., to carry out a rehabilitation project? To resell? To rent? To eventually make it the main residence of the owner under a future relocation project?).
The direct investment has the advantage of simplicity: only one level of taxation, no administrative costs related to the setting up and maintenance of a company and it may be particularly interesting if the investor envisages to make the property his/her main residence, as capital gains arising from a future sale may be exempt if the proceeds of the sale are reinvested in the acquisition of a property (in Portugal or in the EU or in the European Economic Area) with the same purposes.
Nevertheless, the corporate structure may be an interesting solution if there is an intention of assigning the property to an entrepreneurial activity (such as Airbnb). However, the use of a tax-haven entity should be avoided, as this triggers the application of aggravated tax rates upon acquisition and holding of the property.
Acquisition and holding taxes
Either investing directly or through a corporate vehicle, the acquisition of a property involves the payment of Real Estate Transfer Tax (RETT) and Stamp Duty, which can amount to 6.8% over the purchase price – or the property Tax Registered Value (TRV), if higher, which rarely occurs. For properties over €1 million, RETT and Stamp Duty amount to 8.3%. On top of this, there are notarial and registration fees, which tend to be immaterial. As for real estate brokerage, this is a contractual cost, which is normally borne by the seller.
Regardless of the use of the property (owner’s private use and/or to be rented out), a Property Tax is levied on an annual basis, at a rate that can go up to 0.45% (depending on each municipality). This Property Tax is levied on the TRV, which tends to be much lower than the property’s market value (especially for older buildings).
A Property Tax Surcharge also applies on the sum of the TRV of all the residential properties located in Portugal. However, for individual taxpayers, taxation is only levied if the taxable basis exceeds a certain threshold (€600,000 or € 1.2 million, for individuals or married/life-partners who opt to be jointly taxed for Property Tax Surcharge purposes, respectively). For individuals, the standard rate is of 0.7%, while for corporations is of 0.4% (but, if the property is allocated to the personal use of the shareholders or board members of the company, the rates applicable to individuals also apply, without the minimum exemption threshold).
Renting out the property
In case the investor considers renting out the property, he/she will be liable to Personal Income Tax (PIT) at a flat rate of 28% (it may be reduced the longer the duration of the contract), which is levied on the amount of the rents, deducted of costs effectively borne to obtain the rental income, except financial costs, depreciation and the costs incurred with the purchase of furniture and domestic appliances. For resident corporate investors, rental income will be part of the taxable profit, subject to the 21% Corporate Income Tax (CIT) rate (plus a municipal surcharge of up to 1.5%). For non-resident corporate investors, CIT will be due in Portugal at a 25% rate.
Disposal of the property
The sale of the property may trigger a capital gain. For non-resident individuals, such capital gain is now subject to the PIT progressive rates (ranging from 14.5% to 48%, plus a progressive solidarity surcharge, up to 5%, for the annual taxable income that exceeds €80,000), but only on 50% of the gain. For determining the applicable rate, the PIT Code imposes that the worldwide income of the non-resident investor should be taken into consideration. In the case of death of the investor or in case the property is gifted, no Portuguese inheritance or gift taxes are levied if the property is transferred to the spouse, civil partner, children or parents. Where the beneficiary of the transfer is a third-party (and regardless of being tax resident in Portugal or not), Stamp Duty applies at a 10.8% rate, to be borne by the beneficiary of the transfer.
If the Portuguese property is sold by a resident company, capital gains are also taken into consideration for determining the taxable profit, which is liable to CIT under the above referred rules. If the sale is made by non-resident corporate investors, the capital gain will be liable to CIT in Portugal at a 25% rate.
By Mónica Santos Costa, Tax Counsel at CMS Portugal