Firstly, the property prices you see advertised in Portugal are inclusive of IVA (i.e. VAT), unlike in Spain, where IVA must be added to the agreed purchase price. Secondly, while there are many criteria to take into consideration to decide in which country to buy, a head-to-head comparison of eventual forms of taxation will prove to be one of the key factors in making an informed decision. The following chart lists the principal taxes related to property in both countries in 2005. Neither would normally be classified as a ‘low-tax jurisdiction’, but it is quite apparent that, of the two countries, Portugal is the clear winner!
Residents: 50% exemption and balance at marginal rates Non-Residents: 25%
Wealth Tax
0.2 % - 2.5% pa
Nil
Inheritance Tax
7.65% - 34%
Immediate Family: exempt Others: 10%
Property Transfer Tax
7% (Stamp Duty)
0 - 6% (IMT)
Capital Gains Tax for Individuals
As with all aspects of taxation in most countries, tax breaks exist for residents (who are the voters) that do not exist for non-residents (who cannot vote). Those that have their permanent residence outside Portugal pay a flat rate of 25%, which is more than any resident taxpayer would pay. Residents receive a 50% exemption before the gain is added to their other income and taxed at marginal rates. If the property is your principal residence, then you can roll over your profit into a new property and you have a three year period to do so: up to one year before the sale and as much as 2 years after. If you re-invest less than the full amount, the exemption will be on a pro rata basis. In the event that you do not fulfil your declared intentions, an assessment will be made on the entire non-reinvested balance plus interest.
Capital Gains Tax for Companies
Non-resident companies are assessed at the flat rate of 25%. If you use a Portuguese company such as a Nominee Company, to hold your property, the CGT rate on the sale of the company (holding the property) drops to only 10%.
How to Calculate the Gain
Although it is the Tax Office, not you, who does the actual calculation, it may be worthwhile knowing what you will have to pay. For example, if you sell your home in 2005 and had originally purchased it in 1994, you would calculate your CGT as follows:
Step 1: From the sale price, subtract any selling costs (commissions, Notary fees, etc)
Step 2: From the purchase price, add qualifying expenses (purchase costs, legal fees, etc)
Step 3: Subtract any documented capital improvements carried out to your property in the past 5 years. (Note that obtaining proper invoices can be a major problem as many contractors only give informal receipts that are not valid for tax purposes. If this dilemma reaches significant proportions in your instance, specific tax advice may be needed.)
Conclusion: The difference between the adjusted purchase and sale prices is your net taxable profit.
Roll-Over Relief
If you sell your principal residence and fully reinvest the proceeds in a new home, the capital gain is exempt. This is to be extended eventually to new home reinvestment anywhere in the European Union.
Inheritance Tax
The good news is that Portugal abolished Inheritance Tax on 1 January 2004. All family members (spouse, children, grandchildren, parents and grandparents) are exempt from tax on gratuitous transfers by way of gift or inheritance. All others are assessed tax at a flat rate of 10%.
