New property tax laws 2004 in Portugal

023-E TAX REFORMS ON REAL ESTATE

For many years, the Portuguese government has been promising to reform the existing tax system in relation to private estate (Patrimonium), inheritance, and gift tax.

During the last couple of months a new tax reform was presented to Parliament and approved and part of it, the new Sisa (transfer tax) now called I.M.I. has become affective already as from 1-6-2003.

The changes concern the following taxes.

1. Sisa =      Transfer tax on properties
2. Contribuição Autarquica =    Rates
3. Imposto de doações e sucessões =  Gift and Inheritance tax.

The changes are the following:

• Sisa and Contribuição Autarquica will get a different name, gift and inheritance tax will be abolished as long as it favours surviving partners, children and parents. In case other people inherit, a stamp duty (Imposto de Selo) of 10% will replace the existing tax.
• The Contribuição Autarquica will be replaced by the IMI (Imposto Municipal sobre Imóveis)
• Taxes and Rates on new(er) properties will be reduced, whilst rates on older properties will most likely suffer an increase especially when their rateable value is historically low.
• The main intention of the law is to bring these values of V.T. (Valor Tributável) more in line with present market values as at this stage there is a big discrepancy between those figures.
• The Sisa has been replaced by the I.M.T. (Imposto Municipal sobre as Transmissões) and the maximum tax will be 6% instead of the current 10%. Whilst current properties below  61.000 are exempt for paying tax this figure will be raised to  80.000.
• Whilst a flat rate tax of 10% in the past (before 1-6-2003)  was applicable for properties with a value of  170.000 and higher, under the present regime (since 1-6-2003) the maximum of 6% will be only applicable for properties with a value of  500.000.
• If the Finançes (tax department) doubts the declared value, they may carry out a valuation of the property in question, which will be binding.  In addition, the local town hall will have first option to purchase for the declared price if they feel the declared price is too low.
• The Contribuição Autarquica at present and still over 2003 is between 0, 7 and 1, 3% of the rateable value (V.T.)  For new properties, this will be reduced to between 0, 2 and 0, 5% if already valued under the new scheme  of the CIMI) On other and remaining properties a tax will be levied between 0, 4 and 0, 8% over a corrected V.T. value.  The percentage will be published by the local tax department before the end of this year.
•  It is the intention of the tax departments that all existing properties will receive a new value of V.T. before the end of this year. This figure will be reached by  multiplying the present V.T. by an inflation correction factor (monetary index) , which could be between 1 en 44 times the existing value depending on when it was last done.
• The government intends to lower the rates especially for new properties. This will be achieved by lowering the percentage whilst the figure of the V.T. for never properties will remain unchanged or only will undergo a small correction.
• However, there will be a limit to the yearly increase for individual owners in case the value comes out much higher.

An example:
The V.T. value of a property is now  50.000 and the local rate percentage is 1, 3% (like in Lagos and Lagôa). The yearly tax to be paid will be  650
In case the new value will be  150.000 and the percentage charged by the individual town council will be 0, 7% the rates to be paid should be  1.050.
However there is a clause in the new law (Cláusula de Salveguarda) whereby the total amount to be paid on rates over for example 2004 should never be more than  60 compared to the previous year. In this example, it would mean that the I.M.I. (Rates) would be  710.
After 2008, this system will ne revised.

All transaction, which will take place after 1-1-2004, related to new and second hand properties will be subject to a new valuation system, which will be based on several factors.

The V.T. will be established to take into consideration:

1. The average building cost per m²  (Valor base dos prédios edificados)
2. The size of the house and the land (Área bruta de construção e implantação)
3. The type of object (Coeficiente de afectação)
4. Location (Coeficiente de localização)
5. Quality and comfort (Coefeiciente de qualidade e conforto)
6. Age of the property (Coeficiente de vetustez)

• It is obvious that all properties in Portugal have to be revalued and estimates suggest carrying out the 6.500.000 valuations may take up to 10 years. 
• The 1st. of January 2004 will be the new starting date for these new introductions.

As mentioned above the I.M.I. (the old Sisa) already became affective on June the 1st.

Below you will find how it was before and also how it is as from 1-6-2003.

The old system:
 

The new system and tables:
 

Above the new proposal

For other urban purchases like building plots and commercial properties, there will be a flat rate of 6, 5%
The tax on rustic properties will drop from 8 to 5%

An example
Under the old system the Sisa tax to be paid on a property of  300.000 would have been a flat 10% =  30.000,00
Onder the new system the tax to be paid will be 8% over  300.000 =  24.000,00 -  10.400,00 =  13.600 or an average tax burden of approx.  4, 5%

Exemptions to the above-mentioned rules!

The government has decided to charge a fixed 15% of I.M.T. tax (Transfer tax) without any benefits or deductions in case the owner of the property either individual or a company is located in what is considered by Portugal a favourable tax jurisdiction.
A list with the 83 countries, classified as being favourable was published last year by the Min. of Finançes and they include well know places like Gibraltar, Isle of Man. Guernsey and Jersey.

In addition, they decided that a flat rate of 5% of I.M.I. (Rates) will be charged to owners living in or properties registered by means of offshore constructions in one of those 83 countries or jurisdictions. This 5% will be over the new to be established V.T. which the Finançes tries to establish before the end of this year.

In addition, the above-mentioned Cláusula de Salveguarda will not be applicable for off shore jurisdictions.

From the above-mentioned measures, it seems that the Portuguese Government is serious is banning black listed offshore companies. 

Due to this new legislation, many of the advantageous an offshore had before will disappear and the annual costs to keep an off shore will be as from 1-1-2004 high.
 
To use the same example again.
A house with a V.T. value of  50.000 paid before 2002, for example 1, 3% tax, being
 650
The same house with a V.T. value of  50.000 will pay in 2002 en 2003,  2, 0% =  or  1.000 + the fact that one has to pay company tax (IRC) on the presumed rental income, which could be 1/15 of  50.000 * 25% =   833

Suppose the new values is established at  150.000 per 1-1-2004
De I.M.I.  will be in that case  150.000 * 5% =  7.500
De IRC most likely will be 1/15 van  150.000 * 25%  =  2.500
Total tax to be paid in Portugal will be  10.000 + the expenses incurred to keep the offshore company.

For that reason it is of great importance of all owners to review their position and to discuss it with their legal and/or fiscal advisors in Portugal and/or at home.

For many the best option will be to buy the property in individual names or buy it back from the off shore companies.

It is obvious that unfortunately, expenses will be involved in this operation but also that one will earn this back in a very short period.

There are other options available to avoid this heavy tax to be paid.  However, that is depending on individual circumstances.

It is really advised to take action a.s.a.p. and to have your situation to be corrected before the end of this year; otherwise, a change at a later stage could be even more costly.

Cost involved in a change of ownership will be:

1. Paying I.MI. (oude Sisa)
2. Notary Cost
3. Registration cost
4. Legal expenses
5. Cost to wind up the offshore company
6. Capital gains tax to be paid by offshore company if a profit is made..
7. Changing all contracts for utilities, insurances etc.

Robert M.L. Snapper

This article is written and provided with permission by Robert M.L. Snapper, fully licensed real estate agent in Portugal.