Purchasing Portuguese property offshore had for many years proved one of the most tax-effective ways to own high-value property. However from January 2004 changes were made affecting all existing homeowners offshore and potential buyers with those looking to own property through an offshore corporate structure particularly disadvantaged.
Tax reforms saw increases for property owned in offshore jurisdictions, however, there are still good reasons for owning high value Portuguese property through a corporate structure.
Buying Process
- Once a suitable property has been found it is possible to sign a reservation contract – these are not standard agreements but they are worth negotiating as they give the buyer longer to look into the property, the vendor, the area and the title deeds etc. A reservation contract is conditional and it will see the buyer pay about GBP 2 – 3000 to the vendor for withdrawing the property from the market with the conditions that if something untoward is found with the property the buyer can pull out and get the money back but that if nothing untoward is discovered then the sale proceeds
- At this stage the buyer’s solicitor must begin legal investigations into everything from the right of the vendor to sell, the correct declaration of boundaries, the correct completion of taxation and building forms (where applicable), and whether there are any outstanding debts or claims on the property. This is the stage at which the buyer will again speak to their mortgage lender to formalize and finalise the request for funds
- The next stage is to sign the preliminary contract or Contrato Promessa de Compra e Venda in front of a notary. Both the vendor and buyer sign this contract and the buyer has to hand over between 10 and 30% of the final purchase price – this is non-refundable if the buyer pulls out and they may even be liable for compensation if they withdraw from the sale so it cannot be emphasized enough how certain the property purchaser needs to be before reaching this stage in the process
- To continue the buyer needs a tax number or Numero Fiscal de Contribuinte which they can get if they open a bank account or if they apply to the local tax office – the solicitor, vendor, mortgage lender or notary involved in the purchase and sale process will likely all be able to point the buyer in the right direction. In between signing the preliminary contract and the final contract there is normally a period of 30 days or four weeks during which time the buyer’s solicitor has to conclude satisfactorily all of the legal checks which will include obtaining copies and checking the license of use – Licenca de Utilizacao, the property registration document or Certidao de Teor and the property Tax document or Caderneta Perdial.
- Once the property finance is in place and the legal checks have been completed the buyer and vendor (or their solicitors if they have power of attorney) sign the final contract which is known as Escritura de Compra e Venda in Portuguese. The final money will be transferred, transfer taxes and notary fees will become payable and the title of the property will be registered at the Land Registry in the new purchaser’s name as soon as the buyer’s solicitor submits the registration documentation.
- It is wise to set aside 15% on top of the purchase price for property transfer tax, also known as IMT which varies from 0% to 8%, notary fees and stamp duty which comes to about 1%, legal fees of between 1 and 2%, mortgage arrangement fees and surveyor’s fees
- You should ensure you will have full title to the property on completion and that the “copia simple” is available for the bank. Also possibly required before a valuation can be carried out include the official plans of the Portuguese property, a plan of the site and a copy of the caderneta predial, fiscal numbers and ‘certidao de encargos’
- With a new property it is important you find out the date it will be registered in your name(s) as the bank cannot lend on the security of the property until it has been registered
- You should check with your Portuguese Lawyer (Notaire) or Estate Agent that the costs charged by Legal and Government Authorities are fully clarified. The lawyer may also include within his charges costs for assigning the mortgage
- It is strongly advised independent legal advice is taken before signing the sales contract. The bank will need a copy of this document along with the relevant application form
- It is advisable to arrange your Portuguese mortgage finance before agreeing to purchase a property in Portugal
Taxation Issues
- Purchases are usually subject to a State payment paid in at the Tax Office closest to the location of the property, with the amount varying with the nature of the purchase. In certain cases the buyer may be exempt from this Tax if the value of the deed of conveyance (escritura) is below 83,500.00 euros. Rural properties are subject to a flat Tax based on escritura value, and a purchase by an offshore Company is subject to a SISA (transfer) Tax of 15% applied to the escritura value.
- The 2004 changes proposed a five percent (up from two percent) flat rate Municipal Tax for property held offshore in addition to the introduction of a 15 percent property transfer tax.
By utilising corporate ownership as an alternative strategy, capital gains tax can be eliminated if the property is resold through the shares of in the owning company.
Corporate Ownership
- In addition to capital gains tax savings/elimination, if the property were resold through the transfer of shares, this would mean that the potential buyer could avoid paying legal fees, notarial fees and transfer taxes in the place where the property is situated. The lengthy procedures necessary to register new title deeds are also bypassed smoothing the sale and purchase process. The purchaser would be strongly advised to utilise the services of a corporate lawyer to check and prepare the sales contract
- On resale the property would be subject to Imposto Municipal sobre Transmissoes (IMT) and Imposto Municipal sobre Imoveis (IMI) – the replacements proposed as part of the tax reforms for SISA (transfer tax) and Contribuicao Autarquica (municipal tax)
- On properties worth EUR 500,000 and over IMT will be charged at maximum six per cent. IMI will be 0.2 and 0.8 per cent, depending on the tax valuation of the property and its age. This would cost up to EUR 34,000. Add to this registration and legal fees and the total bill could come to well over EUR 80,000
- Despite these apparent punitive tax policies, advantages are still available for the investor. The key is to find a corporate structure offering the benefits of offshore ownership without this tax liability. This means incorporating in a territory not blacklisted by the Portuguese and therefore retaining a favourable tax regime. Even if property is already held in a blacklisted territory, ie the property purchase has been completed and the property is already owned, then re-domiciliation of the corporate entity to for example Malta can provide a possible route
- For new projects, where the property is to be acquired from a local company, a popular alternative is to have the ownership registered in the name of either a UK or Irish resident company acting as a bare trustee for and on behalf of either an offshore company or offshore trust/foundation. Thus, when the time comes that the property is to be sold, the shares of the company can be transferred to reflect the change of ownership and not actually a change in title on the registry
Investment Potential
There is a variety of opportunity across Portugal for property investors mainly looking to raise an income from their commercial or residential real estate assets.
Portugal offers tourist locations with which to invest along with providing key towns and cities suitable for investment on a buy-to-let basis particularly to local professionals and expatriate executives and there is also the commercial side of property investment opportunity in Portugal to examine as well which encompasses everything from hotels and restaurants to shopping facilities and even golf resorts.
However, before an investor gets excited about the property market in Portugal it’s worth mentioning that economically speaking Portugal is not a particularly dynamic member of the European Union, and as a country reliant on its service based industry it has suffered significantly from the concept of offshoring and near-shoring for cost efficiency. Therefore GDP annual growth is currently negligible and there are pockets of Portugal that suffer from high unemployment. This means that an investor looking to profit from the local market should be careful about locating real estate investment and examining the local market for affordability as well as demand before committing to a purchase.
Property prices along the coast and in cities such as Lisbon and Porto have been climbing consistently proving that there is demand for well located assets from both the local and overseas markets but few overseas investors buy in Portugal hoping to realize a fast turn around on their capital investment, rather the market is one conducive of income production where an investment made and held for the medium to long term can return an overseas investor a fair capital appreciation.
Interested?
