A holiday home in Portugal has been a dream for many. The existing popularity of Portugal has been further enhanced since the pandemic with an ever popular real estate market, that continued to flourish even with headwinds such as rising interest rates.
Portugal is characterized first and foremost by its kind and welcoming culture, as well as its incredible locals. It offers a diverse landscape with multiple options, consolidated in a relatively small area.
As with any other market, Portugal has unique challenges, and many foreigners fall into avoidable traps.
Buying a property in Portugal – how does it work?
The buying process of real estate in Portugal is comprised of 4 main steps:
1. Choosing an area and finding a property –there are very different areas in Portugal, from waterfalls and lakes in Geres-Paneda national park, down to the Douro wine area, the Porto river bridges, through the big wave beaches of the silver coast, through the incredible capital of Lisbon and further down to more amazing beaches in Comporta, a diverse landscape in the Alentejo and finally, the ever popular Algarve – not to mention the quintas of the inland areas. These are very different areas for different tastes. Once choosing an area, a perfect property should be located.
2. Due diligence– after finding your dream holiday home, it is important to check the ownership, license rights, suitability for rental (short and long term), energy certification, tax status and other factors. Such checks are done by our real estate department on a daily basis.
In many properties in Portugal that are not apartments (and even in apartments in certain cases), there are often issues with illegal construction. These are not necessary a deal breaker but it’s important to identify them and quantify the costs of amending the situation.
3. "Contract for Promissory Purchase and Sale" (CPCV)– this step is not mandatory but it is the “way to go” in Portugal and exists in nearly all transactions. The normal flow is that a deposit of 10-20% of the property price is paid to the seller. Importantly, escrow accounts are not part of the process in Portugal and the money is paid directly to the seller. The CPCV is signed in the presence of lawyers. The time is primarily allocated for completing the bank financing. It is very important to allow as much time as possible for bank financing because holidays or public holidays in Portugal can lead to significant delays.
Three points are of extreme importance:
First, in Portugal real estate agents commonly apply pressure on buyers to refrain from using lawyers. It is important to remember that estate agents (even those seemingly working for the buyer) are all paid by the seller and are only paid when the property sells. They are therefore in a conflict of interest when it comes to recommending buyers to walk away in the face of serious problems with the deal or the property.
Second, it is legally possible but not customary in Portugal to enter a “provisional notice of registration” in the title deed between the CPCV and the completion of the transaction. In the absence of such a notice, the seller can, in theory, sell the property to multiple buyers and run (particularly in view of the fact that money is not held in escrow). We therefore believe that the provisional notice, as it is done in other countries, is a necessary step and must be recommended to buyers by all responsible lawyers.
Third, a buyer who does not pay until the time set in the contract will lose the deposit and it is therefore important to allow for sufficient time to secure a bank mortgage and stipulate in the contract that should no mortgage be secure, the deposit will be returned. This is not always agreed by the seller, but an important point in negotiation.
4. Final deed– finally, the last payment is made and the property is delivered to the buyer. This process is done at the notary’s office and is called “the deed”. Unlike in other countries, the deed is attended by all relevant parties, including representatives from the mortgaging banks. When the buyer does not speak Portuguese, the notary will insist in most cases on a translator, and the buyer's lawyer usually acts as a translator.
Taxes on Purchase
Purchasing real estate in Portugal is subject to purchase tax. There are two types of purchase tax – stamp duty and IMT.
Stamp duty is always 0.8% of the property value.
IMT is progressive and ranges from 0% (1% for second homes) to 7.5%.
Rustic buildings are taxed at 5% and buildings at 6.5% both on the mainland and on the islands.
Taxes on Maintenance (IMI)
Property owners need to pay a tax every year. The exact tax is determined by the municipality where the property is located and is in the range of 0.3%-0.45%. When properties are worth more than a million Euro, there is an additional IMI payment at a rate of 0.7-1.5% (or 0.4% in a company).
AL License – license for short term rental
One exciting prospect is to have a holiday home and use it for leisure purposes whilst renting it out to tourists the remainder of the time.
To rent a house for touristic purposes, a license is required and such a license is called AL license.
The rules regulating AL licenses have changed extensively in the last few years, with the previous government in Portugal trying to reduce the number of licenses and make them harder and the new government trying to open up the market and make such licenses easier to obtain.
As of the time of writing this article, the situation is roughly the following:
- AL Licenses forapartmentscannot be obtained in most of Portugal. It can only be obtained in certain inland areas, as well as on the island Madeira and the Azores, but subject to an agreement from the building condominium.
- AL Licenses forhousescan still be obtained in most of Portugal, with the exceptions being high density areas within Lisbon and Porto.
- Buildingsthat have been vacant for at least 3 years can generally be renovated and a license for all the apartment in the building can be obtained. However, if the buildings are in certain high density areas in Lisbon and Porto, such a license may be dependent on a cultural contribution being part of the project, such as using the lobby of the building as a museum.
It is therefore important to get advice on the availability of licenses, since the licenses are of enormous value.
Furthermore, AL licenses cannot be transferred when this article is written, but an amendment of the law to allow the transferability of licenses again is being sought by the government.
Brokerage Fees and the Role of Agents
In Portugal, the brokerage fee is always paid by the seller, and it is very high – the usual rate is 5% plus VAT. However, direct sales from the seller are very rare, and almost always an agent is responsible for the sale.
The property search on behalf of the buyer is also usually conducted by an agent. That agent that “brings the buyer” is paid a part of the commission of the seller’s agent.
It is almost impossible to reduce the brokerage fee even by avoiding an agent representing the seller.
This market structure indeed increases property prices by 5% but also creates significant competition among agents, and the brokerage market is one of the few in Portugal where the service is fast, effective, and friendly.
It is important to understand this market and the motivations of the agents. Buyers should be aware of agents looking to charge them a fee for a property search without being transparent about fees paid to them by the seller’s agents.
Taxation on Renting Properties on a short-term basis
Renting as individuals
Short-term rental can only be conducted under an Alojamento Local (AL) license requested from the local municipality. In this case, the income is considered business income. If the total business income from all sources of the taxpayer falls below €200,000 per year, the simplified accounting model can be applied, and the income is subject to progressive tax rates but only 35% of the income is taxed (65% is automatically considered expenses. Only 15% of the expenses are subject to proof).
Short-term rentals can therefore be an excellent deal when the operating expenses of the property are low. More on short-term rental and licenses later.
Renting as companies
Companies are subject to corporation tax – on the mainland 17% on the first 25K and 21% on the remainder and in Madeira/Azores 11.7% on the first 50K and 14% on the remainder - and individuals withdrawing money from companies are subject to 28% dividend tax for Portuguese tax residents. The dividend tax for those who live in other country depends on the tax treaty between that country and Portugal.
What is better – holding directly or through a company?
There is no rule of thumb. For most people, renting as individuals produces a better outcome, but this depends on relatively low running costs.
Sophisticated tax planners would opt for neither individual nor direct corporate holding and would opt for more sophisticated structures. For example, a holding structure with a foreign parent company and a Portuguese subsidiary could produce a fantastic outcome for people under the NHR regime, whilst holding some assets individually and others through a company could allow for a more efficient distribution of expenses.
Considering the magnitude of buying real estate and the irreversibility of such ownership, quality tax advice that is separate from real estate advice is very important!
