IMI is a municipal property tax, payable by the owner or occupier of the property (excluding tenants), on the VPT (value of the real estate assessed by the tax authority) of urban and rural properties. This tax is payable on the VPT of each property at rates that range between 0.3% and 0.8%, depending on the municipality and on the type of property.
Urban properties solely for the residential use of the buyer, as his primary domicile, may benefit from a temporary exemption from IMI for up to three years, if the property’s value is less than €125,000. To benefit from this exemption, the income of the buyer’s household cannot exceed €153,300.
IMI exemptions are also possible in the case of projects of economic importance, or buildings classified as of national, public, or municipal interest.
These deals may also be exempt from IMI or may benefit from tax reliefs in the following cases, among others:
- Urban property subject to urban regeneration may benefit from IMI exemption for a period of three years, renewable for a period of five years, counted from the date of the completion of the restoration works.
- Urban property acquired for energy production from renewable sources may benefit from a 50% reduction in IMI rate.
- In some cases, municipalities may determine a reduction of up to 25% of the IMI rate, applicable to an urban property with energy efficiency.
- Rural property is composed of forest areas covered by a forest intervention zone or acquired for forestry exploitation under a forest management plan.
- Under the Investment Promotion Tax Regime (RFAI), companies may benefit from exemption or relief of IMI for a certain period (up to 10 years), provided that some conditions were met.
IMI is borne by the owners of the property and it is collected by the municipalities according to the valuation of the property determined by the tax authorities.
The Portuguese State Budget for 2017 introduced the Additional to the IMI (AIMI). The AIMI is levied on the sum of the VPT’s of all dwellings owned or in relation to which the taxpayer has the right of use or the surface right.
In the case of individuals, €600,000 should be deducted from the sum of the VPT of all dwellings, being the AIMI levied on the residual value at a rate of 0.7% where the taxable value is less than €1 million, and of 1% marginal rate if and where higher. A marginal rate of 1.5% is applied when the taxable value is above €2 million.
In the case of companies, no deduction is to be applied, and the AIMI should be levied at a rate of 0.4%.
The value of buildings held by companies that are allocated to the personal use of equity holders, members of company bodies, or their spouses, ascendants, and descendants is subject to a rate of 0.7%, where the taxable value is less than €1 million, a 1% marginal rate if higher than €1 million and less than €2 million and a marginal rate of 1.5% if higher than €2 million.
Urban property classified as “commercial”, “industrial” or “for services” and “others” is excluded from AIMI.
For dwellings owned through a company established in a country, territory or region with a preferential tax regime. the AIMI rate is 7.5%.
Dwellings covered by an exemption on IMI are also not subject to AIMI.
Taxation of income
Rents and the profit from sales of property (that can be treated as profit or capital gain) are the types of income that can be expected from ownership of real estate.
Rents from urban, rural, or mixed properties are classified as taxable income for the purposes of Portuguese corporate income tax (IRC). If the investor is private, individual rents will be treated as taxable income for Personal Income Tax (IRS) purposes.
Whether generated through a resident corporate entity, a permanent establishment in Portugal or without a permanent establishment, rents from real estate located in Portugal are always subject to income tax. However, there are some peculiarities:
Indirect investment through a corporate entity
The income of resident corporate taxpayers is subject to IRC at the general rate of 21% (on the Portuguese mainland). A reduced rate of 17% may be applicable to the first €25,000 of taxable income (if the company is recognized as a small or medium-sized company). To be recognized as such, the company must have fewer than 250 employees and its annual turnover must not exceed €50 million, or its annual balance sheet total must not exceed €43 million).
The income of resident corporate taxpayers is also subject to a municipal surcharge of up to 1.5%, which is levied by many Portuguese municipalities, and a state surcharge of 3% applies to income varying between €1.5 million and €7.5 million. For income between €7.5 million and €35 million, the surcharge rises to 5%. Above €35 million the surcharge rises to 9%. Taxable income for IRC purposes is calculated on the basis of the net accounting profit as adjusted for tax purposes.
A corporate entity is entitled to deduct costs related to maintenance and repairs, as well as general costs and municipal property tax (IMI), and other specific costs such as those incurred in connection with the construction or acquisition of the property and depreciation (excluding land).
Direct investment through a permanent establishment
Income attributable to a permanent establishment (PE) in Portugal is liable to IRC in the same way as a Portuguese-resident company at the rates mentioned above for resident corporations.
Direct investment without a permanent establishment
If the investor does not have a permanent establishment in Portugal, Income Tax (IRC or IRS) is only payable on income generated in Portugal.
Income derived from rents, is subject to Corporate Income Tax, at a rate of 25% for non-residents. As to the Personal Income Tax, the rate is 28%. The costs incurred by the taxpayer to obtain the rental income are tax-deductible, except with respect to the following costs: financial costs, depreciation, furniture, fixtures, equipment, and décor items, and the AIMI. A withholding tax of 25% or 28% may apply to non-resident individuals or corporations if the lessee is an entity or individual required to prepare and maintain audited accounts in Portugal, as is typically the case with a commercial lease.
Foreign investors must file an annual tax return with The Portuguese Tax Authority (through an
Real estate investment fund (REIF)
Decree-Law No. 7/2015 of 13 January 2015, which came into force on 1 July 2015, introduced a new tax regime for undertakings for collective investment (UCI), applicable to the following entities:
- Securities Investment Funds (SIFs)
- Real Estate Investment Funds (REIFs)
- Securities Investment Companies (SICs)
- Real Estate Investment Companies (REICs)
Following a major trend in the taxation of investment vehicles in Europe, this law adopts the “exit taxation method”, whereby the taxation of income in the main is applied to the investors rather than the fund.
The recently adopted SIGIs (a special type of real estate investment company, subject to a significantly relaxed regulatory framework) are also subject to the income tax regime applicable to UCIs. The tax comments made below with reference to REIFs should also be read as applying to SIGIs.
In respect of income derived from REIFs, Non-resident Investors without a local PE will be subject to a withholding tax in Portugal at a rate of 10%.
Income deriving from units in real estate investment funds and from shares in real estate investment companies are classified as income deriving from the property for the purpose of this regime.
The fiscal regime governing REIFs can be summarized as follows:
Taxation of REIFs:
- REIFs will be subject to IRC at a single general tax rate currently set at 21%, with only the net income subject to taxation. However, income-qualifying as investment income, rental income, and capital gains is generally not subject to IRC.
- REIFs tax losses may be carried forward for a period of 5 years.
- REIFs are exempt from the municipal surcharge (derrama municipal) and state surcharge (derrama estadual).
- Mergers, demergers, or subscriptions in kind between UCIs may benefit from the IRC code’s tax neutrality regime, allowing for more efficient restructuring operations or the transfer of assets between investment vehicles.
- REIF income may not be subject to withholding tax.
- REIFs will be subject to the obligations set out in the IRC code, namely to maintain proper accounting systems and tax documentation procedures.
- Stamp Duty will apply to the fund’s global net asset value and is due on a quarterly basis. The tax rate is 0.0125% for real estate funds.
Taxation of Investors:
- Individuals – are subject to IRS at a withholding tax rate of 28%. This is generally a final withholding tax, which settles the investor’s tax obligation, provided that the income in question is obtained outside the scope of a commercial, industrial, or agricultural activity unless the investor chooses to aggregate his or her income, in which case the general progressive tax rates (from 14.5% to 48%) apply;
- Corporate investors – are subject to IRC at a provisional withholding tax rate of 25% (unless the relevant beneficiaries benefit from an exemption from IRC which excludes investment income, in which case the withholding is treated as a final tax).
- Non-resident investors who receive income distributed by real estate investment funds or by real estate investment companies are subject to withholding tax at the rate of 10%.
Non-resident investors who:
- do not present proof of non-residence in Portugal;
- are established in a country, territory, or region whose tax regime is deemed to be clearly more beneficial than Portugal’s;
- the income is paid or made available through accounts under the name of one or more undisclosed holders (except if the beneficial owner is identified); or
- are entities directly or indirectly held to an extent greater than 25% by Portuguese residents (with certain exceptions),
- are subject to withholding tax at definitive rates of 25%, 28%, or 35% – being the rates prescribed for the regime applicable to resident investors.
Certain reductions in the rates of Municipal Property Tax (IMI) may also apply.
This was the first part of our three articles regarding taxation when buying or selling property in Portugal. Don’t forget to check out the other articles as well!