Portugal property ownership – benefits and requirements

Occupying the west side of the Iberian Peninsula, bordered by Spain to the east and north and the Atlantic to the west and south, Portugal boasts an impressive 1,800km of coastline, with the mountainous areas and plateaus to the north giving way to the rolling plains of the Algarve in the south. It also includes the two autonomous island regions of Madeira and the Azores in the North Atlantic Ocean.

Given its high quality of life and low cost of living, an attractive climate, and beautiful urban and rural settings, it is not surprising that Portugal is a top destination for expats looking to relocate, either for work or retirement. Many foreigners have also invested in a second home in Portugal. The Portuguese real estate market is well developed and attracting an ever-wider variety of nationalities.

The government of Portugal maintains an open-door policy toward foreign direct investment (FDI) and sees it as a driver of economic growth. Portuguese law is based on non-discrimination principles, such that there is no legal distinction based on nationality and there are no restrictions on foreign property ownership. As a foreigner, you can own land, apartments, houses and commercial properties just like a Portuguese citizen.

Real estate continues to attract investors to Portugal. In the first quarter of 2024, foreign direct investment in real estate was €682 million, although this figure fell compared to the €853 million recorded in the last quarter of 2023 when the clock was ticking on the exclusion of all real estate investment options available under the Golden Visa scheme.

Despite this, the Portuguese real estate market continues to represent the largest share of the €1 billion in foreign direct investment in Portugal registered between January and March this year. According to the Bank of Portugal, investors resident in European countries invested the most in Portugal between January and March, totalling €544.03 million, followed by those from Asia (€211.81 million), America (€159.53 million) and Africa (€108.83 million).

Since the removal of all real estate-related qualifying investments in October 2023, the most popular passive investment option for the Golden Visa is to make an investment of €500,000 in qualifying investment or venture capital funds. It is worth remembering that the Golden Visa remains the only route to an EU passport without a minimum six-month stay at this investment level.

Once an individual and/or family member has maintained legal residency in Portugal for five years or more (calculated from the submission date of their initial residency application), they are eligible to apply for Permanent Residency in Portugal or Portuguese/EU citizenship.

Buying property in Portugal

To buy a property in Portugal, non-residents must obtain a Portuguese taxpayer number for tax purposes. EU residents may obtain this number directly from the tax administration (in person or by means of an appointed proxy), while non-EU residents must appoint a Portuguese resident ‘fiscal representative’, such as Sovereign, to handle matters with tax authorities.

Buying a new property in Portugal can be expensive, but ultimately the cost depends on the location and the age of a house. In some locations such as city centres or historic villages, the new property options may be extremely limited.

Property acquisition process – six steps to buying real estate in Portugal

1. Once you have made the decision to purchase a Portuguese property and have confirmed with the seller, you will need to appoint a lawyer (‘advogado’). It is important to confirm with the lawyer precisely what is to be included in the conveyancing fee and to fully describe the land and construction details of your purchase. Conveyancing fees are usually 1% of the purchase price but can be negotiable, particularly with higher value acquisitions. The lawyer will carry out due diligence checks on the property details – the legal ownership, registration at the tax department (‘Serviço de Finanças’) and Land Registry (‘Conservatória do Registo Predial’), as well if there are any charges against the property.
2. On agreement to purchase, you will need to obtain an individual Portuguese fiscal number (‘Numero fiscal de contribuinte’), a nine-digit number that is used on all documents relating to the purchase of the property. This number is also required to open a bank account in Portugal. For married couples, both individuals must obtain a fiscal number even if only one party is to purchase the property, otherwise the Tax Department will not accept payment of the IMT Property Transfer Tax (‘Imposto Municipal sobre Transmissões Onerosas’). If you are purchasing through a company, the company will also need a fiscal number. Non-EU residents must appoint a ‘fiscal representative’, who will obtain the fiscal number from the tax department. Sovereign will charge an initial registration fee and an ongoing annual fee for continued representation. This representation can only be cancelled by the appointment of another representative or if the individual becomes an EU resident.
3. A promissory contract (‘Contrato de Promessa de Compra e Venda’) setting out the terms agreed between the vendor and the purchaser will be drawn up and signed, at which time a deposit (usually between 10% and 30% of the purchase price) is also paid. This contract stipulates the date by which the property Deed must be completed and cannot be broken without one of the parties receiving compensation. Provisional registration of the intended purchase should also, where necessary, be made at the Land Registry (‘Conservatória’).
4. Up to 48 hours before the purchase and sale contract (‘Escritura de Compra e Venda’) is signed, the lawyer will pay the IMT Transfer Tax based on a variable percentage of the purchase price from zero to 8%, depending on whether the property is a primary or secondary residence, is in an urban or rural area, the value of the transaction and whether the buyer is an individual or company. Stamp Duty (‘Imposto de Selo’) at 0.8%, is calculated on the acquisition value of the property, which is recorded in the final acquisition deed.
5. The purchase and sale contract serves as the Deed of the property. This must be prepared and verified by a Notary (‘Notário’), who will identify the relevant parties agreeing to the purchase / sale of the described property and the price agreed. A further Stamp Duty may be payable to the bank if the transaction involves mortgage financing.
6. Once the Deed is signed, registration can then be completed at the Land Registry. The lawyer should also confirm the registration of the new owner(s) at the local Tax Department (‘Finanças’). You will not need to be present if you have given your lawyer power of attorney.

Taxation of Real Estate in Portugal

Annual Property Taxes

In the calendar year following the Deed date, the Tax Department will issue the first IMI Municipal Property Tax (‘Imposto Municipal sobre Imóveis’) assessment, which will be due for payment in May. As your fiscal representative Sovereign will receive all your correspondence from the tax department and will contact you to arrange payment.

The IMI is charged at a maximum of 0.5% of the rateable value of the property (Valor Patrimonial Tributário or VPT) as set by the Tax Department based on a property’s size, location and construction. The rateable value is usually less than the purchase/market value. IMI bills are generally issued either twice a year in May and November. For higher values a further instalment may be issued in August.

An AIMI additional property tax (‘Adicional ao Imposto Municipal Sobre Imóveis’) is also applied to individual property owners, including non-residents, if the sum of all property tax values is equal to or exceeds an allowance of €600,000. Married couples who own a property jointly can combine their allowances to gain a tax exemption of up to €1.2 million before attracting AIMI taxation.

AIMI is charged at a rate of 0.7% on an amount over €600,000 up to €1 million, 1% on an amount between €1 million and €2 million and 1.5% over €2 million. AIMI is due for payment in September.

Properties that are held by companies will pay a flat AIMI tax bill of 0.4% on the full property tax value. However, properties held by non-resident companies that are registered in ‘blacklisted’ jurisdictions will pay an IMI of 7.5%, plus the additional AIMI of 7.5%.

Owning a property overseas, even if you do not intend to live there throughout the year, could impact your tax residency. An individual is deemed to be resident in Portugal for tax purposes if he/she either:

• Spends more than 183 days, consecutive or not, in Portugal in any 12-month period starting or ending in the fiscal year concerned.
• Maintains a residence in Portugal during any day of the above period with the intention to use it and retain it as their primary residence.

If an individual is classified as a tax resident in Portugal, then all their worldwide income and assets will be subject to Portuguese taxation.

Capital Gains Tax on the sale of property in Portugal

If a property in Portugal is sold by an individual, the sale must be declared to the Tax Department and a tax return must be submitted in the tax year following the sale of the property.

Portuguese Capital Gains Tax (‘Imposto sobre Mais-Valias’) is paid at progressive rates on 50% of the difference between the purchase value as declared on the Deed of purchase and the sale price as declared on the deed of sale, less any costs incurred during the transfer of ownership and any property improvement costs that have incurred within 12 years of the sale.

If land was initially purchased and a property subsequently built, there is the option of either:

• Taking the land purchase price plus the cost of construction as the starting price for the CGT calculation.
• Or using the tax value allocated to the property when construction has been completed.

If the vendor is a tax resident of Portugal, generally 50% of the capital gain will be added to annual earnings and will be subject to tax at the standard income tax scale rates. The same applies to non-tax residents, but their worldwide income will be assessed in determining the applicable tax rate.

In the case of tax residents, the gain may be wholly or partially exempt if the property sold was the taxpayer’s primary residence in the previous 24 months and the sale proceeds, less any outstanding loans, are reinvested in the acquisition, improvement or construction of another primary residence in Portugal or within the EU or EEA within 36 months from the sale or in the period of 24 months previous to the sale.

Further exemptions apply to retirees over the aged of 65 who reinvest, within six months, capital gains arising from the sale of real estate into a pension scheme or insurance fund.

It is very important to remember that the CGT calculations may be very different if the property being sold is registered for short-term letting under an ‘Alojamento Local’ (AL) licence. This is classified as a business activity, so the Tax Department will automatically assume that the property was a business asset for CGT calculations. Unless the business activity is ceased three years prior to the sale, the vendor will not be permitted to deduct any costs from the sale price.

Inheritance Tax in Portugal

The Portuguese inheritance law provides for the payment of a ‘stamp duty’ of 10% (Imposto de Selo) on the value of the assets located in the country, which can be real estate, movable assets and copyrights, shares or works of art. In the case of real estate, the stamp duty is calculated on the VPTof the property.

However, in most cases the heirs do not pay any inheritance tax in Portugal. Since 2009, the spouse or unmarried partner, descendants (children and grandchildren) and ascendants (parents and grandparents) are exempt. Known as the ‘legitimate heirs’, they do not have to pay inheritance tax but do have to declare the assets received to the IRS.

CGT implications for Corporate Ownership

If a property in Portugal is held by an offshore company, the vendor has the option of selling the company shares or selling the property out of the company.

Transferring ownership of the company shares to the buyer means avoiding many of the procedures associated with buying or selling a property in Portugal and means that the buyer will avoid the IMT Transfer Tax on the purchase, as well as the Stamp Duty charges, notary and registration fees.

Before 2017, corporate ownership also had the advantage that, if the property was sold by transfer of ownership of the company, there was no requirement to submit a CGT declaration in Portugal. However, beneficial owners, directors and shareholders are now required to register on the Central Register of Beneficial Owners (RCBE). This means that a share transfer must be declared in Portugal and CGT must be paid at 28% on the whole of any gain unless the gain is taxed in the company’s place of residence in accordance with the Double Taxation Treaty in place.

CGT also applies if the property is sold out of the company. A declaration must be submitted within 30 days of the date of the deed of sale. Structural improvements and repairs on the property from the last 12 years may be offset against the CGT if the invoices are in the vendor’s name and include the vendor’s Portuguese fiscal number and the property address.

Sovereign will provide clients with a tax assessment and guide them on the best corporate structure suitable to their individual needs.

Many properties in Portugal may still be held by a company incorporated in a jurisdiction on Portugal’s ‘blacklist’ of tax havens and are subject to higher taxes in Portugal.

Clients should not be afraid to purchase a property in this situation providing all the necessary tax obligations have been met prior to the transfer of the property to their name. The company can generally be re-domiciled to a white-listed jurisdiction.

The two most widely used white-list jurisdictions are the US (Delaware) and Malta. Neither are considered fiscally privileged by the Portuguese government, and both have established legal systems, simple corporate compliance requirements and re-domiciliation legislation in place.