PORTUGUESE RESIDENTIAL PROPERTY TAX REFORMS

The Portuguese government has produced a Bill for the overhaul of all property taxes in Portugal, which was approved last month and which will have far reaching effects for existing and future property owners.

The SISA, Gift and Inheritance Tax Code is to be revoked as is the current Municipal Tax Code known as “Código da Contribuição Autárquica” (Council Tax). These will be replaced with Municipal Property Transfer Tax (CIMT) and Municipal Tax (CIMI). Inheritance and Gift Tax will be dealt with under the existing Stamp Duty Code. Equally there will be alterations to the current income tax legislation.

The message being sent by the Portuguese authorities is a very simple one; gone are the days where a perceived minority contributes to the Portuguese Exchequer. Rates of tax will be reduced, taxable values will be realistic and new anti-avoidance measures will be enforced.

In anticipation of these reforms, on 30th May, SISA purchase tax rates were reduced. The maximum rate of tax on urban property is reduced to 6% from 10%, rustic property being charged at 5%. Transfers below €80,000 are exempt. But with this reduction in tax rates comes the obligation to produce to the Notary on completion the Promissory Contract of Purchase and Sale so as to ensure that the consideration stated in the contract is the same as that declared for the purpose of the Deed of Purchase and with it, that transfer tax is payable on the true consideration. Anti-avoidance measures as far as under declaration is concerned, does not stop there; the approved Bill provides for the government exercising a right of purchase where they consider and prove that the declared price of acquisition was understated by 30% or €5,000.

The Portuguese government has concentrated its mind wonderfully on the one fact which is likely to hurt: the taxable value of properties.

In the past, as indeed in the future, property taxes were based on the taxable value and apart from the fact that there was no real objective criteria in ascertaining this amount, many properties in Portugal, particularly the older ones, have not been revalued for many years. Consequently, as from 1st January 2004 (our best estimate) the revaluation process will begin. Any property changing hands will automatically be revalued. The Bill lists extensive criteria on which valuations will be based and even produces a formula: age of property, size, construction areas, location and the property's condition will all be assessed. And it will be on this new found taxable value that the approved rates of tax will bite. The Portuguese Valuation Commissioners have advised that new taxable values under CIMT are likely to equate to between 80 and 90% of a property's market value.

But as an interim measure and prior to revaluation under CIMI, all property taxable values will be corrected in accordance with inflation, and adjusted according to regional market swings. The earliest point of reference will be 1970.

The existing Municipal Tax bands of 0.8%-1.2%, within which each local authority sets their charge, are to be restricted to 0.2%-0.5% of the CIMI taxable value. In the meantime, and until revaluation occurs (the government counts on a 5 year transitional period) a taxable rate of between 0.4%-0.8% of the corrected taxable value will be payable, with a yearly ceiling on increases until 2008. In 2004, Municipal Tax cannot be increased by more than €60.

But the really bad news is for offshore property owning companies. If the advantage of buying a property using an offshore company was to avoid paying a cocktail of Portuguese taxes: SISA, capital gains and Inheritance Tax, then like most good things in life, this has come to an end.

The treatment of offshore property owning companies, whose registered office is in a tax haven (a list has been published by the Minister of Finance), such as Gibraltar, Isle of Man, and the Channel Islands, etc., will be subject to two draconian measures; payment of Municipal Transfer Tax at a rate of 15% and yearly Municipal Tax at a rate of 5% of their corrected taxable value until revaluation under CIMI. This, in addition, to the recent requirement of filing annual accounts and deemed income provisions for corporation tax purposes. Consequently, a house in the Algarve with a corrected taxable value of £400,000 would face an annual Municipal Tax bill of £20,000.

As to Inheritance and Gift Tax, the advantages of ownership through offshore companies have evaporated. Transfers between spouses, children and parents are to be free, and the new rate of tax for both gifts and transfers on death will be 10%. Of course capital gains on profits made by non-residents throughout ownership will still be charged at 25%.

Many will be considering whether the answer to the offshore predicament would simply be to transfer the registered office of a company to a non-listed country. This solution is not as easy as it may seem. Firstly, there will be the practical problem of getting the Portuguese authorities to accept the change of registered office and secondly, the fact that the Minister of Finance’s already extensive blacklist can always be added to. Equally, many jurisdictions, i.e. the Isle of Man, do not allow companies to migrate. But these measures are only the other side of the coin since beneficial interests in offshore companies have been declarable to the Inland Revenue by UK residents for some time.

Bearing in mind that revaluation procedures are not expected until 1st January 2004 (our best guess as to when the legislation may be enacted) many owners of properties held by offshore companies would be wise to give some thought to restructuring their ownership arrangements before the awaited and approved legislation comes into force.

But for new property owners, the tax reforms can only be good news – in many cases, the tax burden on buying property in Portugal is almost halved. This is “grown-up” legislation and must be welcomed by the industry, the majority of owners and prospective purchasers alike.

IMT Property Transfer Tax Rates

Mainland Portugal

  • Up to €80,000 - Exempt
  • Sliding scale from €80,000 - €500,000
  • Maximum rate 6% for purchases above €500,000

Madeira and Azores

  • Up €100,000 - exempt
  • Sliding scale €100,000 - €625,000
  • Maximum rate of 6% for purchases above €625,000

Land

  • For construction: 6.5%
  • Rustic and agricultural: 5%

Capital Gains Tax

  • Flat rate 25% for non-residents

Gift and Inheritance Tax (charged as Stamp Duty)

  • Transfers between spouses, children and parents are exempt.
  • Other transfers: flat rate of 10%

IMI Council Tax

  • You will pay between 0.4% and 0.8% of your corrected taxable value
  • On revaluation you will pay between 0.2% and 0.5% of the value given to your property

Offshore Companies Pay Flat Rates

  • 15% IMT on purchase
  • 25% Capital Gains on profit on sale
  • 5% IMI on corrected taxable value/revaluation