Investing in Portugal Property - an overview

Since May 2013 the OECD has listed Portugal as one of the top countries in the world to buy and own real estate. According to this organisation, Portuguese real estate is undervalued and the price-to-rent ratio makes Portugal unarguably the most attractive property market in continental Europe. 

In an article published on 24th January 2017, titled London's The World's Alpha City But You Should Look At Lisbon In 2017, Forbes stated that "The Portuguese capital, in particular, looks set to become even more popular among global buyers. Both the 2017 Alpha Cities report and an earlier study by Christie’s International Real Estate pick it as a ‘city to watch’ for its combination of affordable real estate and foreign investment programmes — the Golden Visa, which draw the non-European market, and the Non-Habitual Resident Program, which is geared towards Europeans who want move to Portugal — along with a welcoming atmosphere, thriving, tech-driven economy, excellent climate and vibrant culture. Among others, Lisbon was named city of the year in "Wallpaper* magazine’s 2017 Design Awards."

The property market in Portugal is highly developed, has a high quality of supply in all sectors and a considerable presence of foreign occupiers. The market is highly transparent and counts various international consultants and agents. Finally, it should be noted that the laws governing rental agreements are fairly liberal and that evicting a tenant that fails to pay the rent may be relatively expedite. 

In sum:

• A highly developed and transparent market
• A high quality of supply in all sectors
• A considerable presence of foreign occupiers
• Various international consultants and agents
• Property prices have been on the rise and the forecast of most specialists is that they will keep increasing over the coming years

The best residential and commercial property location is in the Lisbon-Cascais-Sintra region:

• Lisbon is the main decision centre, most big companies’ headquarters being located in this city or its vicinity, and a major tourist magnet;
• The Lisbon International Airport is the main hub for flights in and out of the country;
• Most international schools are located in this region. 

The second best residential property location is the Algarve, the southernmost region of Portugal, which also has an important airport, several international schools and top-notch resorts that attract millions of tourists and retirees from northern Europe.

Recently, the coastal northwestern city of Porto, also served by an important international airport, has been attracting many international investors and the real estate market there has heated up considerably.

Fuelled by the rising influx of tourists and new residents all over the country, the interior regions of Portugal, traditionally overshadowed by the coastal areas, are also attracting investors, motivated by the beauty of the Portuguese countryside combined with the bargain asking prices that may still be found there.

In accordance with the legislation governing the activity of short term rental (“Alojamento Local”), Municipalities may establish containment zones. Specific advise should be sought prior to any acquisition.

• Excellent opportunities abound in the commercial property sector, mainly in office space and car parks.
• Rural property is also there for the grabs, sometimes at unbelievably low prices.
• However, residential property remains the most popular property type, mainly due to the versatility of its use, which can include private use as well as short or long term rentals.

There are various official incentives in Portugal aimed at the rehabilitation of urban areas, buildings and even apartments. Such rehabilitation is encouraged by a legal framework which, among other measures, provides for less red tape, great tax breaks and finance schemes.

In order to conduct your property search, you have basically two options: you either do it yourself, starting with an internet search and then contacting the most promising estate agents; or you hire a search agent to do it, the main advantages of which being a deep knowledge of the market and having access to unlisted properties.

Typically you sign a promissory contract and make a down payment, after which you grant someone (normally your lawyer) a power of attorney for him/her to complete the exchange of final contracts and the property conveyance once the necessary funds have been transferred to Portugal and all the paperwork is in order.

Besides legal fees, the following taxes are payable by a property buyer: one-off transfer tax ("IMT") and stamp duty ("IS") on the purchase price or on the tax office valuation of the property, whichever the greater. The rate of stamp duty is 0.8% and that of the transfer tax varies according to the type, the use and the value of the property. Taking as an example residential property which is not to be used as one's permanent home, the transfer tax rate is as follows:

• On a price of up to €92,407 the tax is 1%
• On a price from €92,407 to €126,403 the tax is 2% less €924.07
• On a price from €126,403 to €172,348, the tax is 5% less €4,716.16
• On a price from €172,348 to €287,213, the tax is 7% less €8,163.12
• On a price from €287,213 to €550,836, the tax is 8% less €11,035.25
• On a price from € 550,836 to € 1,000,000 the tax is 6%
• On a price upwards of € 1,000,000, the tax is 7,5%
• The conveyance registration is subject to small charge, typically €375 per property. 

Municipal annual tax ("IMI") is payable annually by who owns the property as at 31 December at a rate of between 0.3% and 0.5% on the tax office valuation of an urban property (different rates apply to rural property).

There are several real estate agents who provide property management services, including the following: 

• Managing the refurbishment and/or decoration of your property
• Finding tenants
• Negotiating the rental agreements
• Checking tenants in and out
• Collecting deposits and rent
• Managing property repairs and maintenance
• Handling utility and service contracts and payments
• Handling property tax payments.

Management charges vary according to property type, investment legal structure, rental type, etc., and should be negotiated with the agent once everything is defined. As a rule of thumb, the management charges for long-term rentals (> 1 year) will vary between 8% and 15% of the gross income, while those for short-term rentals (< 1 year) will vary between 20% and 40% of the gross property income.

Net rental income earned by a non resident landlord (whether individual or corporate) or by a resident individual landlord is calculated for tax purposes as gross income less properly documented direct costs, except for financial costs (which are not tax deductible). This net rental income is taxed at 28% in the hands of a non resident, and, in the hands of the individual resident landlord, optionally taxed at 28% or taxed at progressive rates.

The taxation of short-term rentals is more complex and a potential minefield for an inattentive property owner, so one should seek professional advice before entering this business, whether on one's own or through a manager. This is a relatively new market and even some established managers are unaware of all the possible legal traps.

For the resident corporate landlord (either a local business or the local branch of a non-resident business), the gross rental income and all eligible business expenses concur to the company’s profit, which is taxed at the normal corporation tax rate, currently 21% plus a municipal surcharge of up to 1.5%, there being a special rate of 17% that applies to the first taxable income slice of €15,000.

Total tax exemption is granted to the capital gains made on the disposal of a property by an individual, if the property is his/her main residence and the proceeds are used to purchase another main residence in the EU.

Otherwise, net capital gains are taxed at a rate of 28% in the hands of a non resident seller (whether individual or corporate); and 50% of the net capital gains are (a) included in a resident individual's total taxable income and taxed at progressive rates; (b) included in a resident business's taxable profit calculation, the net profit being currently taxed at 21% plus a municipal surcharge of up to 1.5%. In the latter case, the 50% exemption is subject to the proceeds being reinvested within 2 years.

The best property investment structure depends on your intentions:

• Just to own a residence in Portugal, the most practical and cost-effective solution is private direct ownership.
• But if you intend to invest a sizeable amount in rental real estate, then the best investment structure could be an EU company having a branch in Portugal, because:

1. The branch will be taxed like a normal Portuguese company, but the distribution of profits to the parent entity is free of tax.
2. Importantly, all business expenses, including financial costs (within certain limits), will be tax deductible by the branch.
3. You can dispose of the parent entity in lieu of the property itself.