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Impact of the Changes in the 2021 State Budget on the Property Sector in Portugal
December 22 2020 – Ana Custódio
The State Budget for 2021, which was approved on November 26, will have a series of effects on the real estate sector.
The final version of the document that came out of Parliament contains some alterations from the Portuguese government’s initial proposal, and some of the changes may pose questions regarding its application, both for individuals and companies.
Although the sector has been one of the most resilient areas of the economy during the pandemic, there are fears that a drop in foreign investment, along with a potential increase in the tax burden, may burden the sector in the post-COVID -19 era.
To better understand the impact that these measures will have on the real estate sector, here we provide a guide to the most significant changes and their potential effects.
Incidence of IMT deriving from the acquisition of public limited companies with property holdings in Portugal
As of January 1, 2021, there is no longer a distinction between private limited companies and public limited companies. Both will be liable for the payment of IMT, at a rate of 6.5%. In the first point, acquisitions of shareholdings in (unlisted) companies whose assets consist of more than 50%, directly or indirectly, of real estate located in Portugal, in the second point where such real estate is not directly related to an agricultural, industrial or commercial activity (except for the purchase and sale of real estate) and in the third point provided that by that acquisition, by amortisation or any other facts, any of the partners will control at least 75% of the share capital (or the number of partners will be reduced to two married partners or de facto cohabitees).
This measure is intended to standardise the IMT regime regarding the acquisition of shares of companies with real estate in Portugal. However, the measure will not have a significant impact as the rule only applies to the acquisition of companies with real estate not affiliated to an activity or whose activity consists of purchasing and selling real estate, being limited to particular situations. Beneficial change for private limited companies in which to date any acquisition of at least 75% of the share capital of a private limited company with more than 50% of real estate is subject to IMT. From next year only acquisitions of companies owning real estate not related to an activity or with the activity the purchase and sale of real estate will be subject to this tax.
Indirect holdings by entities resident in tax havens
Properties indirectly owned by an entity controlled by an entity based in an offshore tax haven are now subject to increased rates of IMI and IMT (7.5% and 10% respectively). Until now, the increased rates were only applicable in the case of direct investment, whereby offshore companies directly owned real estate in Portugal.
Possibility of IMT compensation on the transfer of company properties
The incidence of IMT concerning partners, shareholders or participants will now be levied on the difference between the value of the assets acquired and the value at which the tax was previously paid on the acquisition of the respective shareholdings or units, thus creating the possibility of IMT compensation on the transfer of real estate.
Inheritances
The measure already appears in the Draft Law for State Budget 2021 and is related to the possibility that the IMI exemption provided for buildings with a Taxable Asset Value (TAV) equal to or less than €66,500, of taxable persons with total gross household income equal to or less than €15,295, may now be applied to the share of heirs who meet the requirements for the exemption when these properties are held by undivided estates and used as the heirs’ permanent residence.
Determining the TAV (Taxable Asset Value) of land for construction
One of the novelties introduced by the approved proposals is related to the rules for determining the TVA of land for construction, enshrined in Article 45 of the IMI Code.
One of the changes aims to expressly introduce the form of calculation, clarify and demystify some doubts regarding the interpretation of the correct determination of the TAV of plots of land for building.
The other change is that the percentage of the value of authorised or planned buildings with land included (one of the parameters of the formula and which varies between 15% and 45%) will now apply to the whole formula, which is not currently the case, and which could lead to a reduction in the TAV of building land.
Allocation (and removal) of real estate to professional/business activity
The proposed changes have resulted in an adjustment to existing obligations, which provide for an exemption on transfers of real estate between the professional/business sphere and that of private entrepreneurs (no longer being taxed on personal income tax, but only on the sale of the property to third parties), and also creates some additional obligations which, in some cases, may penalise taxpayers to a greater extent.
The real estate sector has been fundamental to economic activity in recent years in Portugal, where national and above all, international investment positively contributed to the economic recovery. For this reason, some market participants demonstrated their discontent during the last Webinar “The State Budget 2021 and other legislative and fiscal measures in real estate”, organised by APPII (Portuguese Association of Real Estate Developers and Investors), Vida Imobiliária and Confidencial Imobiliário. According to Pedro Seabra, Senior Partner of Explorer Investments, “long term foreign investment is fundamental for Portugal”, also questioning “how one can live in a country where the rules of the game change every year. According to Paulo Núncio, Partner at Morais Leitão, “The 2021 State Budget is completely outdated before even coming into force.”
Translation: Richard Turner