What it means and where it’s going

news: What it means and where it’s going

Most foreign homeowners are baffled by the recent changes in the taxation of their properties. At the heart of the property tax reform is the ‘Valor Patrimonial’ or rateable value of property. Many homeowners wonder why this evaluation is so low – too low sometimes to even assess. For most people, the determination of this appraisal is a total mystery, yet how this evaluation is determined is a clear manifestation of what the reform needed to address.

The old V.P.

Under the former regime, ‘Valor Patrimonial’ was based on the income potential of a property. If you own residential property, then this value will be seen as potential rent. Imagine that in your neighbourhood your house would rent for 500 euros per month. The formula works like this:

500 eurosX 12 monthsX 15 years=90,000 euros = ‘Valor Patrimonial’

This system was construed over half a century ago, when rental properties were quite abundant. A small white paper square taped in each of the windows of an apartment or house meant ‘For rent’. In those days, prior to Social Security, it was common for middle class families to save and eventually purchase property to rent, to create an income flow that would sustain them in retirement.

When the Revolution came in 1974, all of this changed. New laws were passed, giving tenants more rights than the landlords. Rents were frozen as well as the ‘Valor Patrimonial’ for all practical purposes. As always, when time becomes artificially fixed, distortions set in that eventually grow to ludicrous proportions. On the eve of the current reform, half of the property owners (those who live in older housing) paid only one per cent of the tax collected on properties. At the other end of the spectrum, one per cent of the owners (those with brand new housing) contributed over a third of property tax revenues. They had to change the system!

The new system

The new ‘Valor Patrimonial Tributável’, referred to as ‘V.P.T’, is market-based rather than a hypothetical reflection of potential rental income. It is a combination of the size of the property, the cost and quality of construction, location, age and type of usage.

A so-called ‘objective’ formula has been defined to determine your ‘V.P.T’. However, with over 7.1 million urban properties to be re-evaluated, it was an impossible task to carry out this system immediately. Therefore, the legislation allows a 10-year period for implementation, with re-evaluations triggered automatically whenever properties change hands.

The interim system

In the meantime, the decision was made to adjust the old ‘V.P’ for inflation, based on when the last time the property was re-evaluated. The following table gives the inflation coefficients, with 44.21 being applied to all properties up to 1970:

Inflation Adjustment Coefficients for 2003

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981

44.21 42.21 39.34 35.76 27.42 23.43 19.62 15.06 11.80 9.29 8.38 6.85

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

5.69 4.54 3.54 2.94 2.68 2.44 2.22 1.97 1.77 1.56 1.46 1.35

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1.28 1.23 1.19 1.17 1.14 1.11 1.08 1.04 1.00 1.00

Each Council determines its own rates between 0.5 per cent – 0.8 per cent, with the higher end being most common. As such, a 2003 rates bill – called ‘I.M.I.’ (Imposto Municipal Imobiliário’) – for a home registered in 1987 would be calculated as follows:

Old ‘V.P.’Coefficient

Interim ‘V.P.’ Rate ‘I.M.I’

90,000 eurosX 2.44 euros=219,600 eurosX0.8 per cent=1,756.80

Over the first five years of the reform, there is a ‘Safeguard Clause’, capping the maximum tax increase. Naturally, such protection is not extended to offshore property company owners who also suffer a flat five per cent rates assessment. If your 2003 ‘IMI’ bill failed to implement all of these factors, be prepared for an eventual correction and subsequent assessments.

• Dennis Swing Greene is an International Fiscal Consultant for Finesco International Financial, with offices in the Algarve and in Lisbon. Appointments may be scheduled either in Guia, telephone 289 561 333 or alternatively in Lisbon, telephone 213 210 131.