Real Estate in Portugal: Rent or Buy, and What Are the Taxes

Rent or buy property, how to find it and get 

proper assistance, as well as taxations explained in detail. We have gathered some useful information so you get to know more about the real estate market in Portugal.

Real estate rent or buy

Rent or buy?

Cash isn’t merely an issue when considering real estate in Portugal. Whether to rent or purchase a home is heavily influenced by the location and type of property. Although renting in Portugal is variable, however, there may be a scarcity of long-term rentals in major tourist regions. Some landowners even demand hefty prices for short-term holiday rentals leaving the accommodation empty during the quieter season.

After years of uncertainty and declining housing values, Portugal’s economy is beginning to recover. Despite the possibility of higher long-term profits, Portugal’s real estate market remains quite risky. Making a profit in Portuguese real estate requires more time. Since the market is still recovering, individuals who want to spend less time in Portugal should assess whether they will be able to recuperate the cost of their short-term investment. This is due to capital gains tax, which can deplete profits, particularly for non-residents.

At the same time, purchasing real estate in Portugal can sometimes be less expensive than paying monthly rent. Prices in Portugal are rising for purchasers as the economy improves. However, with the country’s economic crisis, it is still comparatively low. Prices increased 3.66 % year on year in January 2016, to an average of 1,047 euros per square meter.

How to find a real estate property in Portugal

Contacting an expert local real estate agent is the simplest approach to seeking real estate in Portugal. There are several alternatives available while searching the internet. Private sales are uncommon, although they do occur sometimes. 

The real estate agents in Portugal operate on behalf of the seller and for a commission. When buying real estate in Portugal, no need to pay any real estate agency fees. However, bear this in mind and seek independent counsel before a purchase.

All real estate agents must be government-registered and have a license number (Associacao de Mediadores Imobiliarios). To find out if your agency is registered, contact the Instituto da Construcao e do Imobiliario.

What are the taxes

Taxes when buying real estate in Portugal apply to everyone and in various cases. Here we list some. 

Taxes for investors

Corporate investors. Subject to the IRC (Corporate Income Tax), must be charged at a 25% temporary withholding rate. If the applicable recipient qualifies for an IRC exemption, which excludes investment income, the withholding tax is final.

Individuals. It pays the IRS (personal income tax) at a withholding rate of 28%. This is the ultimate withholding tax applied to an investor’s tax liability. If the relevant income is received outside the area of industrial, agricultural, and commercial operations, unless the investor decides to combine their income, in that scenario, a progressive tax rate ranging from 14.5 % to 48 %would apply.

Non-resident. They are subject to a 10% withholding tax. These are those receiving funds shared by the funds operating in the real estate business or such companies. 

Income taxes

Taxation of the real estate in Portugal may be rents or the sold property profits. There are IRC (corporate income tax) that goes for mixed, rural, or urban property taxable income, and IRS (personal income tax) in case of the private investor treating individual rents. 

Here are some features:

  • The indirect investments made with a corporate institution

In mainland Portugal, the IRC tax rate is 21%. If the firm is classified as small or medium-sized, a 17 % tax cut can be applied to the first 25,000 euros of taxable revenue.

The income of resident corporate taxpayers varies in terms of a municipal surcharge of up to 1.5%, and:

  • 3% to income between €1.5 – €7.5 million; 
  • 5% to €7.5 – €35 million income;
  • 9% to income above €35 million.

Deductions for maintenance and repair expenditures are given to corporate companies. In addition to general overhead and municipal property tax (IMI), there are also specialized charges, such as construction or acquisition expenses and depreciation, except for land.

  • Investments made directly with no permanent institution

Income tax (IRC or IRS) is exclusively levied on income earned in Portugal if the investor does not have a stable pledge in the country.

Income derived from rents is at a rate of 25% for non-residents – subject to Corporate Income Tax. 28% is subject to the Personal Income Tax. Taxable expenses incurred by taxpayers to generate rental revenue are excluded. Finance charges, installation fees, furnishings, depreciation, equipment, and AIMI are exceptions. Non-resident firms or persons may be subject to withholding tax (25% or 28%) if the lessee is a Portuguese business or individual obligated to file and maintain audited accounts.

  • Investments made directly through a permanent institution

Revenues attributable to PE (Portuguese Permanent Establishment) will be subject to the IRC at the rates specified earlier for resident firms, in an alike way as those of Portugal resident corporations are.

Ongoing taxes

IMI is a tax paid by the property owners (other than renters) of urban and rural properties on the VPT (Value of Property Evaluated by the Tax Authority). Rates range from 0.3% to 0.8%.

If the property is worth less than 125,000 euros, the city property that is the buyer’s principal residence may be excluded from the IMI for up to three years. The maximum annual income is 153,300 euros. Exemptions from IMI are also allowed for projects of economic significance or buildings defined as belonging to national, public, or municipal interests.

The IMI received new provisions in Portugal’s 2017 National Budget (AIMI). AIMI is levied on the total VPT of all dwellings owned or associated with taxpayers of whatever age or land rights.

  • Individuals: subtract 600,000 euros from the total VPT for all homes. AIMI is taxed at a rate of 0.7% on the residual value of taxable value less than 1 million euros, or a surcharge of 1% if the taxable value exceeds the marginal tax rate. When the taxable value surpasses 2 million euros, the rate is 1.5%.
  • Companies: AIMI will be charged at the rate of 0.4%, with no deductions.

The value of a building owned by the firm and distributed to shareholders for personal use, corporate members, and others, at a rate of 0.7% for taxable values less than 1 million euros, and an extra 1% for taxable values greater than 1 million euros but less than 2 million euros, and 1.5% if more than 2 million euros.

 

AIMI-classified city property excludes “Commercial,” “Industrial,” “Services,” and “Other.” For dwellings held by a corporation registered in a nation, territory, or area with a particular tax system, the AIMI tax rate is 7.5%. AIMI does not apply to IMI-exempt dwellings.

Real estate investment fund (REIF)

The Decree-Law 7/2015, which went into effect on July 1, 2015, enacts exit taxation law, which means setting up the “exit method of taxation” where the income taxes are applied to the investors, not the funds. The law establishes a new tax framework for the UCIs (collective investments undertakings), which applies to the entities:

  • REIFs – Real Estate Investment Funds; 
  • SIFs – Securities Investment Funds;
  • SICs – Securities Investment Companies;
  • REICs – Real Estate Investment Companies.

The freshly established SIGI (Specialty Real Estate Investment Company) is subject to the same income tax system as the UCI. 

Foreign investors who do not have local PE are liable to a 10% withholding tax on REIF earnings in Portugal.

Real estate income is defined as income earned by real estate investment fund units and shares in real estate investment firms for the system.

This was the first part of our three articles regarding taxation when buying or selling property in Portugal. Don’t forget to check out the other articles as well!

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