Zeev Fisher, Daniel Russo,
Updated August 2024
Intro
Portugal is a popular destination for many expats who choose to come and invest in it. In recent years, the immigration to Portugal increased and the infrastructure supporting expats has improved considerably. Portugal has high quality international schools, excellent private medicine in affordable prices and great quality of living.
Portugal’s real estate market is boiling. Despite significant price rises, Portugal’s real estate market continues to offer excellent opportunities. However, as with any other market, Portugal has unique challenges, and many foreigners fall into avoidable traps.
This guide focuses on the process and risks of purchasing real estate in Portugal, particularly as foreigners.
The process of purchasing property in Portugal
The process of purchasing real estate in Portugal starts with finding a suitable asset. Assets could be apartments, houses and even buildings. A good rule of thumb is that the larger the asset is, the less competitive the market and the odds of a good opportunity rise. Less people can afford larger assets.
After finding a suitable asset (more on real estate agents later on) and an offer that is accepted, the next stage is the standard legal checks.
It is important to validate that:
- The asset belongs to whoever claims to own it.
- It is a habitation license.
- It has an energy certificate or is legally exempt.
In many properties in Portugal that are not apartments (and even in apartments in certain cases), there are issues with illegal construction. These arise from the exhausting bureaucracy of obtaining permits and should not necessarily be a cause for a major concern. In most cases (but not all), with time and patience, permits can be arranged. One of the checks involves consulting with the bank to obtain a principal mortgage approval.
The next step is the "Contract for Promissory Purchase and Sale" (CPCV). At this stage, a deposit of 10-20% of the property price is paid, and a period is set for completing the transaction (usually 60 days with an option to extend by another 30 days). 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.
At this stage, the parties are committed to the transaction, and if the buyer withdraws from the deal for a reason not stipulated in the agreement, they lose the deposit; if the seller withdraws for a reason not stipulated in the agreement, they are obligated to return twice the amount of the deposit to the buyer.
In Portugal, like in most of Europe, mortgage brokers are common and can compare offers from various banks. It is also possible to approach the bank directly. Relationship networks are very important in Portugal, and it is advisable to develop a good relationship with the banker since the branch has a significant influence on the bank's decision to provide financing. In most cases, there is no point in approaching the bank through the broker that the buyer's account operates with, as the request will automatically be directed to the buyer's branch and not the branch the broker usually works with.
When the mortgage is based on income from abroad, it is important to translate all documents into English or Portuguese and sometimes it is advisable to prepare a cover letter and highlight the important parts, as banks "miss" important parts in the supporting documents.
After the CPCV, it is recommended to register a cautionary notice in the land registry. Such registration is rare and unconventional in Portugal, but it is a legal right of the buyer, and performing the registration prevents the seller from selling the property to others. Although defaults are rare, we do not recommend anyone be the exception!
The final stage is the final signing or the "Deed." This stage is conducted in front of a notary. The notary has an important role in verifying the validity of the transaction and explaining its essence to the parties. 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 0.7% of the property value.
IMT is progressive and depends on the property value. Here is the real estate taxation for residential properties:
Up to €101,917: 0% for a primary residence and 1% for a property that is not the buyer's residence (second home)
€101,917 to €139,412: 2%
€139,412 to €190,086: 5%
€190,086 to €316,772: 7%
€316,772 to €633,772: 8%
€663,453 to €1,102,920: 6%
Above €1,102,920: 7.5%
The taxation in the islands is slightly lower. The tax rates are similar, but the tax brackets are higher.
Rustic buildings are taxed at 5% and buildings at 6.5% both on the mainland and on the islands.
Maintenance Taxes (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, there is an additional IMI payment at a rate of 0.7-1.5% (or 0.4% in a company).
Tax Return and Tax Exemption for Renovating an Old Apartment
One of the most significant tax benefits in Portugal is the combination of the IMT tax return and a maintenance tax exemption for 3-5 years for those who renovate a property older than 30 years (like most properties in Portugal) or a property in an urban regeneration area (ARU) or that is 30 years old or more in a renovation that improves the energy efficiency by 2 grades or more (hence the great importance of the energy efficiency certificate). This exemption can return tens of thousands of euros to the seller's pocket, and most people are unaware of it.
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.
It is important to understand that the agent who "brings the buyer" receives the payment from the agent responsible for the property, so the fee is split between them.
Most agents handle both sellers and buyers – thus, if someone approaches an agent who exclusively represents the owner of an apartment and the inquirer is not interested in the property, the agent often offers their services to find another property. It is not an act of kindness – the agent knows they have a serious buyer, and if they find a property for them, they will share the fee with the agent representing the seller.
It is almost impossible to reduce the brokerage fee even by avoiding an agent representing the seller.
Although the seller’s agent's fee is double when the buyer approaches them directly, they will not reduce it – the agents operate as a cartel and protect their fee rates.
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.
Buyers based in Portugal are aware of the market structure (almost every Portuguese has an agent in the family!), but foreign buyers are not always aware that the agent (or the "companion" or any other term) is already paid by the seller and are tempted to make additional and usually very significant payments to agents who join the original agent's fee.
In our opinion, there is no problem with an additional payment as long as it is done transparently and the agent informs the buyer that they are receiving half (or any other part) of the brokerage fee. In most cases, this information is hidden from the buyer.
Capital Gains Tax
A property whose main purpose is the residence of its owner and is registered as the main residence is exempt from capital gains tax if the sale proceeds are used to purchase an alternative residence in the Europe Union within a certain time frame. An investment property is subject to capital gains tax. For residential property, the tax is normally calculated only on 50% of the capital gain. However, it is important to note that if the property was operated as a short-term rental property with an AL license, the 50% reduction does not apply, and instead, tax is paid on 95% of the capital gain. To restore the exemption, it is necessary to cancel the short-term rental license and wait 3 years. If the property is held by a company, the capital gains tax is replaced by corporate tax on the profit.
Taxation on Renting Properties
There are two main pathways for taxing residential property rentals in Portugal – most people hold properties directly. Sometimes, properties are held by a company established for this purpose.
When the property is held directly: Rental as individuals
Commercial property- the taxation on renting a commercial property in Portugal is 28%.
Regular rental (long-term)- the taxation on regular rental (as opposed to short-term under a license) of a residential property depends on the length of the transaction period.
Renting for a period of up to 5 years is subject to a tax of 25%.
Between 5-10 years – 15%
Between 10-20 years – 10%
Long periods over 20 years – 5%
Short-term rental- 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 income 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.
What is better – holding directly or through a company?
When a company is established to hold properties, all the company's income is taxed as corporate tax, and there is no additional tax on the rental. The corporate tax on properties located on the Mainland (not on the islands) is 17% on the first €25,000 and 21% on the remaining income. All expenses are recognized in deductions (but it is important to note that we are talking about expenses and not an investment that enhances the property).
The corporate tax on properties in the islands and regional islands is 11.7% on the first €50,000 and 14% on the remainder. However, when withdrawing the money, Portugal will withhold a source dividend tax at a rate depending on the country where the company's owners are located.
For most people who buy a single property for long or short-term rental, the taxation is significantly lower as individuals and not as a company, and there is no logic in establishing a company to hold properties. In addition, a company has maintenance costs, accountants, etc.
However, there are cases where it is very worthwhile to hold properties through a company:
First, properties in the islands benefit from significantly lower corporate tax.
Second, those who own businesses that embrace the world and have flexibility regarding the location of companies in different places in the world can use tax planning to transfer money between companies without additional taxation on the dividends.
Third, those who hold multiple real estates and invest in groups can benefit from the simplification of investment management in a company.
Fourth, those who are taxed on renting a residential apartment in the country of residence can achieve a deferral of the tax by holding through a company.
Lastly, ironically, those who buy for residence can lend money to the company to purchase real estate, thus postponing the tax payment on the money lent to the company (which would otherwise be taxed as dividend income or as a salary).
Restrictions on Using Properties in Portugal – Warning for Investors!
Many buyers of properties in Portugal automatically assume that they will be able to use the properties for short-term rental (such as AirBNB). Often, sellers indicate that there is an AL license for the property, thereby misleading the buyers to think that they will not need to worry about the license. In 2023, the government in Portugal passed comprehensive reform in legislation relating to short-term rental, which includes, among other things, the following provisions:
Every AL license in all of Portugal automatically expires when there is a transfer of ownership in the property.
The license expires even when the property is rented by a company and the ownership transfer is in the company (so the company continues to hold the property).
In most of Portugal, new AL licenses can only be obtained for private houses and not for apartments.
There are areas in Portugal where it is possible to continue obtaining licenses for apartments, but only if there is 100% agreement from the other apartment owners in the building. These areas are mainly rural areas within Portugal (not Lisbon, not Porto, and not the popular Algarve) and the islands.
Thus, for apartments authorized for short-term rental in Lisbon and Porto, there is no value to the license.
All AL licenses will be reexamined in 2030. In addition to the reform described above, in certain areas in Lisbon and Porto, new AL licenses are not granted, and in addition, a ruling by the Supreme Court of Portugal determined that apartments in buildings may need a planning permit to change the apartment's designation for short-term rental without the condominium's consent.
It is important to note that in 2024, a new government was elected in Portugal, which is a moderate right-wing government. The elected government does not have a coalition but apparently has a majority in Parliament to cancel most of the reform described above, and indeed, the government announced its intention to cancel the reform, but it is still unknown whether it will succeed.
Opportunities in Light of the Regulation, Planning the Purchase, and Tax Planning
The regulation described above is unclear to many property buyers. Especially among investors, it is common to purchase cheap apartments in Porto, the Setubal area, and other areas where it is possible to find relatively cheap apartments. Many investors are not aware of the restrictions and do not correctly calculate the tax and are likely to be disadvantaged.
Planning the Purchase and Tax Planning
The importance of a meticulous examination of every real estate transaction, including regulation, the building, and taxation, cannot be overstated.
