In 2003, there was a significant reform of the real estate taxes with special focus on the annual municipal property tax, known simply as IMI (Imposto Municipal Sobre Imóveis).
Up until the end of 2003, the annual real estate tax, called then Contribuição Autárquica, relied on a rate levied on the tax value of properties. This was considerably lower than their commercial value and even merely symbolic in some cases. This caused a shortage in revenue for the municipalities that required higher operating budgets.
In 2003, the tax reform foresaw a conciliation of the property tax values to figures closer to their actual values, determining new criteria to calculate such values.
This criteria relied not on the commercial value itself (which was very volatile and difficult to determine), but also on other factors such as the property location, the surrounding area, the comfort and quality lifestyle features, purpose of the property, and age of construction.
Although these factors are predetermined by law, the location is evaluated periodically and changes inside each council, defining areas of greater and lesser value.
These contributing elements needed a basis for its overall calculation, hence, it has been established that every year the government issues an official average construction value per square meter, applicable to an entire territory.
This value will then be multiplied by the applicable factor: (number of square meters X the factor correspondent to the age of the property). From here, the value will increase if the property has a swimming pool, garage, elevator, if its purpose is commercial or dwelling, where is it located, etc.
The new values were bound to be higher, but in compensation, the new applicable rates were lowered. Whereas before the rate was established between 0.5% and 0.8% (according to the municipality), from 2004 onwards would then be between 0.2% and 0.4%.
The 2003 law established that every new property that was being transferred in ownership, as of 2004 onwards, it would be revaluated according to the new criteria and that, within the following 10 years, the tax department would gradually evaluate every other property, aiming to have every single property with updated tax values by 2014.
The new transfers of property did indeed comply with the intentions of this new reform, but the State failed in one area where it is usually very efficient: in charging higher taxes! The official evaluations on properties that did not change ownership were never re-evaluated.
Last year, one of the conditions from the IMF and EU to bail Portugal out was that the State would implement this evaluation system in a two-year time frame (throughout 2012 and 2013), and this would ensure higher revenue.
Therefore, people who own urban property prior to 2004 will have their property evaluated throughout this year or the next, with the new evaluations taking effect in 2013 and 2014. The owners will be notified by registered mail, with the results of the evaluation. It is possible to challenge the evaluation and ask for a new one, but within legal criteria.
This was unavoidable and somehow expected ever since the law was first published in 2003 but, unfortunately, it comes at a time where there is already too must tax strain. The government tried to soften the transition establishing a gradual increase of the current tax, that will not be higher than €75 (or 1/3 if less) in the first year after the evaluation.
There is another concern that has to do with the drastic fall of the property market. Within the IMI evaluation, the only factor that varies every year, and that could become visible this autumn, is the official average construction value. This value has indeed been updated every year since 2004. Although it was falling in 2009 and 2010, it maintained for 2011 and 2012 falling less than 2%!
During its peak, the average official construction value reached €492.00 in 2006, being now at €482.40.
It is not likely that the government will upgrade their evaluation criteria with the evolution of the market and, in most cases, the tax evaluations will remain at a lower value than their commercial one, but we just don’t know for how long.
Source: Legal information provided by Dr Francisco Bivar Weinholtz
To contact Bart van Linden from Exclusive Algarve Villas, please call 282 353 019, 912 826 969 or email [email protected]. Alternatively, please visit www.eavillas.com
