The Tax System of Portugal

Taxes and Real Estate Maintenance Expenses in Portugal: From Purchase to Sale

Portugal is one of the European countries that have successfully developed a residency-by-investment program (the so-called "Golden Visa"). Every one of our clients purchasing real estate in Portugal faces questions about taxes and subsequent maintenance costs. The goal of this article is to provide answers.

General Assessment of the Portuguese Real Estate Market

The Portuguese real estate market is one of the most dynamic and attractive in Europe. For example, in 2019, it grew by 7.7% in real terms, according to the Instituto Nacional de Estatística. Two key reasons contribute to this:

• Property prices here are still lower than in most EU countries. According to the Global Property Guide, in early 2020, the price was €1,312 per m². By comparison, in “expensive” European countries (the UK, Switzerland, Austria, Germany), this figure is 2 to 4 times higher.
• In recent years, Portugal has been ranked among the most comfortable and attractive countries in which to live. At the beginning of 2020, the American magazine International Living ranked Portugal first in the world for quality of life.

While compensating for the low cost of housing, taxes are quite high here, especially when purchasing real estate. In this article, we will prove this with specific figures, analyzing the stages: purchase, ownership, and sale of the property.

Taxes and Expenses at the Time of Purchase

Real Estate Transfer Tax, or IMT

IMT is a mandatory tax when purchasing real estate. It is calculated as a percentage of the taxable value of the asset or the value stated in the contract, minus the fee.

If the contract amount differs from the taxable value, the percentage is taken from the higher amount.

The deductible part is the set fee. All information about it can be found on the official Portuguese financial portal.

It is impossible to predict the exact percentage of the transaction value you will have to pay or if you will have to pay at all. It is known that the amount will range between 1% and 8% of the assessed value. The tax amount depends primarily on the following factors:

• The region where the property is located (mainland or island regions);
• The type of area (urban or rural);
• Its value at the time of purchase;
• The purpose of the property (for the buyer's actual residence or other uses).

The calculation formula:

IMT = Property Price by Contract or Taxable Value of the Asset (whichever is higher) x Applicable Rate – Fee

The percentage rate depends on the purpose of the real estate acquisition and its location.

Important! If the assessed value of the property is less than €90,407, IMT is not charged.

On average, you should expect that in rural areas, the tax is around 5%, while in cities, it is 6%. The calculation of IMT for urban residential real estate is particularly complicated, as the rate increases with the assessed value. If the property is purchased for reconstruction, you can avoid paying this tax, provided that a series of conditions are met.

On the Azores and Madeira islands, IMT calculations differ from mainland Portugal. Specifically, for high-value properties, the tax can reach the maximum level of 8%.

Value Added Tax (VAT)

In most cases, VAT is included in the advertised property price, although not always, so this should be clarified with the seller. It applies only to properties being sold for the first time (in the primary housing market).

Stamp Duty (Imposto de Selo)

Stamp duty is paid by the buyer at the time of the transaction. The payment is accepted by the notary. The general stamp duty rate is 0.8%. In the case of a mortgage, the stamp duty is calculated based on the loan amount and ranges from 0.5% to 0.6%.

The calculation formula:

IS = Contract Value or Taxable Asset Value (whichever is higher) x 0.8%

Registration Fee

Strictly speaking, this is not a tax but a fee paid to the state for registering you as the owner. The cost is 1% of the assessed value.

Notary Services

Notary services in Portugal typically cost 1% of the property's stated price, but in some cases, especially for transactions exceeding €500,000 to €600,000, the percentage increases according to the parties' prearranged agreements.

On average, all associated taxes and payments at the time of the transaction add about 6% to 9% of the property’s value for the buyer.

The Property is Purchased. What Taxes and Expenses Will the Owner Incur?

Owning real estate entails paying property tax, or municipal property tax (IMI, Impuesto Municipal sobre Imóveis). Its rate depends on whether the property is in a city or a rural area. In the first case, it is around 0.8%, while in the second case, it ranges from 0.3% to 0.45%.

The funds go to the municipal authorities where your property is located, so the tax rate also varies (though slightly) depending on the specific municipality. The highest payments are in Lisbon and its resort suburbs.

This tax is paid in May, at the end of the tax year. If the amount is between €100 and €500, payment can be made in two installments, and if it exceeds €500, in three installments.

For individuals with above-average wealth, there is an additional property tax (AIMI). It is levied only on urban residential properties valued above €0.6 million. For spouses filing a joint tax return, the value of taxable property increases to €1.2 million. The AIMI tax rate is 0.7%.

Tax on Rental Income

In Portugal, it is 28% of the gross income generated from renting out property. Utilities, depreciation, and repair costs, if any and confirmed by receipts, are deducted from the gross income when calculating the tax.

Aside from taxes, maintaining property involves other ongoing expenses, primarily utility bills, property management services, and insurance.

Utility Services

When renting out a property, tenants usually pay for utilities.

As in most countries, payments depend on the size of the property and the municipality in which it is located. For convenience, it is customary to assume that the monthly utility costs for 1 m² of living space will be 1 to 1.2 euros, although this is a rough estimate. Here are some approximate monthly costs for a small 80 m² apartment:

• Electricity: €40-50;
• Cold water: €10-15;
• TV and dedicated internet: €25-30;
• Garbage collection and sewage: €5-8;
• Gas (if centralized): €20-25. However, bottled gas is often used in Portugal.

Important! In Portugal, centralized heating is usually absent, and heating in cold weather is solved in different ways: through electricity, built-in fireplaces or stoves, and special gas burners.

For individual houses villas, or condominium properties, owners usually sign an additional service agreement with a management company. Depending on the type of services, condominium management costs about 10% of the annual rental income. In the case of a detached villa with extensive surrounding grounds, the cost of services can reach or exceed €5,000 (maintenance of the garden, lawn, pool, etc.).

Property Insurance

Property insurance in Portugal is not mandatory, but it is commonly purchased. Insurance premiums range from €200 to €500 per year.

Decided to Sell the Property. What Taxes and Payments Will You Face?

Capital Gains Tax

If, upon selling the property, it turns out that its price is higher than it was during the purchase, you must pay tax on the profit. The tax is 28% if the seller is not a Portuguese resident. Citizens and residents of the country pay tax only on half of the profit, according to a progressive scale.

Repair and renovation costs incurred during property ownership can be deducted from the taxable profit. Naturally, these must be confirmed by relevant documents: receipts, contracts with contractors, etc.

Preferential Regime in Portugal for Tax Residents

Residency by investment in Portugal, with the prospect of generating income and obtaining citizenship, is not the only benefit offered by the government to foreign citizens. A detailed examination of Portuguese law demonstrates the advantages of a special tax resident status for those planning to spend most of their time in Portugal.

The preferential regime under the NHR scheme exempts certain taxes partially or entirely through the application of special tax rates. The status is granted for 10 years, with the right to suspend the special rules if the foreign citizen's tax resident status is revoked in any given year. The total duration of the preferential period remains unchanged.

To obtain Portuguese tax residency, foreign citizens must:

• Legally reside in the country for more than 183 days per year;
• Not have had tax residency in Portugal in the previous five years;
• Have a permanent residence in Portugal;
• Own a business or work in the country.

To obtain preferential tax status, an electronic request must be submitted to the Portuguese tax authorities by March 31 of the year following the year in which tax residency status was granted. Additionally, the applicant must have a taxpayer number and a permanent residence in Portugal.

The program allows wealthy citizens from non-EU countries who have obtained tax residency status to either not pay income tax or pay it at a reduced rate:

• 20% on income earned within the country (the list of eligible professions is adjusted based on the needs of the domestic labor market);
• 0% on almost all income from foreign sources;
• 10% on foreign pension income;
• 5% and 16.8% on income from business owners in low-tax zones (offshore locations—Madeira and the Azores).

Tax residency status in Portugal, a jurisdiction included in the Organisation for Economic Co-operation and Development’s (OECD) "white list," significantly simplifies the opening of bank accounts worldwide, transferring funds to Portugal (no duties), and several other procedures. It also guarantees participation in double taxation avoidance agreements, provided there are treaties between the countries.

Purchasing real estate is not a mandatory requirement when applying for special tax residency status in Portugal; it is enough to sign a lease agreement for at least 12 months. However, to stay in the country for more than 183 days a year, legal grounds are required. This right can be granted to non-EU citizens through a residence permit (residency permit). The fastest and most reliable path to obtaining a residence permit in Portugal is participation in the GOLDEN VISA program.