If you own property in Portugal, or are thinking about buying a home here, you could be affected by new tax rules for 2017.
This year has seen the introduction of a ‘wealth tax’ in the form of an additional tax on higher-value properties. The government has also revised how it determines whether residents should be penalised for using ‘tax havens’.
A new wealth tax on property
If you have a share in a Portuguese property worth over €600,000 – either through joint or sole ownership – you will be liable for the new wealth tax – the ‘Adicional Imposto Municipal Sobre Imóveis’ (AIMI). This is charged at 0.3% each year, regardless of where you are resident.
There is some relief with a €600,000 allowance per person, deducted from the value of all their Portuguese properties. So if, say, you and your partner jointly own one Portuguese home, the property will only attract wealth tax if it is worth over €1.2 million, and then only on the value above this. On the other hand, someone owning three properties worth €500,000 each would be liable for wealth tax on €900,000 – the properties’ combined value minus the individual allowance.
In any case, all Portuguese properties will remain subject to ‘Imposto Municipal Sobre Imóveis’ (IMI) – the Portuguese equivalent of UK council tax – of between 0.3% and 0.8%.
The €600,000 allowance is available to all individuals and estates, unless they have tax owing, as well as companies whose main activities (at least half) are agricultural, commercial or industrial. There is, however, no wealth tax exemption for other companies, including those trading in properties and any incorporated in a ‘tax haven’ (the definition of which has recently broadened).
But the new wealth tax may not be bad news for everyone. As a result of its introduction, the former 1% stamp duty on property worth over €1 million has been abolished, so for some it could result in less taxation. Also, the way in which the tax authorities calculate the value of a property – the ‘Valor Patrimonial Tributário’ (VPT) – usually generates lower figures than the actual market value. As a result, properties with a market value of around €600,000 (or €1.2 million if jointly held) may escape wealth tax liability altogether.
Owning property through a company or trust
Many expatriates have found it tax-efficient to own property in Portugal through a non-trading holding company, which may in turn be owned by a trust. However, with the new wealth tax in place since 1 January – including zero exemption for companies – corporate-owned properties attract the annual 0.3% wealth tax charge on the entire value. Again, this is in addition to the Imposto Municipal Sobre Imóveis (IMI) tax.
As a result, this approach may offer fewer tax advantages today, although it may still be of benefit for succession planning.
The new definition of ‘tax havens’
If your property is owned by an offshore company, depending on where it is based, you may be affected by the new ‘blacklist’ rules that redefine how the Portuguese authorities recognise tax havens.
Previously, you could identify blacklisted jurisdictions from an official list, but the definition is now decided on a case-by-case basis. If the authorities see that tax rates levied in a jurisdiction are less than 60% of the equivalent Portuguese taxation, they may consider it blacklisted and impose taxation of up to 35% on residents holding assets there.
Is there anything you can do to reduce your exposure?
If you own a Portuguese property through a corporate structure, it is not necessarily in your interests to change anything. You should carefully weigh up your options, as it could prove more expensive to extract a property from corporate ownership than just accept the new tax rates.
One thing to bear in mind is that if you have any substantial work done to a property, it could be subsequently revalued by the tax authorities, leading to higher ongoing IMI and wealth tax charges. However, increasing the taxable base cost to bring it closer to market value could provide capital gains tax benefits when it comes to sell the property.
Taxation is complicated, especially when you have to take into account cross-border circumstances and the changing rules of a foreign regime. Whether you live in Portugal or just own property here, make sure you do not get caught out by unexpected taxes, and take steps to do what is right for you and your unique situation.
Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual is advised to seek personalised advice.