The Principal Measures Affecting the Real Estate Sector in the Proposed 2018 LOE

23 October 2017

The 2018 State Budget Law (2018 LOE) provides for changes in the level of tax benefits, namely for urban buildings under renovation and ‘historic stores’, and grants the Portuguese government authorisation to legislate on the affordable rental program.

Submitted on October 13, the proposed 2018 LOE provides for some changes regarding tax incentives for urban buildings or fractions thereof, which were completed more than 30 years ago, or are in urban renewal areas (ARU), namely:

– Exemption from the Municipal Property Tax (IMI) for a period of three years, counting from the year of completion of the renovations. The waiver may be extended for another five years, at the owner’s request, in the case of properties placed on the rental market or those used for owner’s personal and permanent use. Currently, the law already grants an exemption from IMI, but for a more extended period (5 years) and without conditioning the renewal of the exemption to the use of the property. On the other hand, the  IMI waiver for urban buildings undergoing urban rehabilitation is no longer foreseen, for three years from the issuance of their respective city license;

– Exemption from the Municipal Tax on Real Estate Transfers (IMT) in the first transmission, subsequent to the rehabilitation, of real estate to be placed in the long-term rental market or, when located in an urban rehabilitation area, and for the owner’s personal and permanent use. The change from the current tax regime is that the exemption will now cover renovated properties for placement in permanent rental housing.

Only those buildings that are classified under regulations relating to the “rehabilitation of buildings” under the Urban Rehabilitation Law or the Exceptional Regime for Urban Rehabilitation may benefit from these incentives and, due to the renovations, also increase their conservation status by two levels, reaching at least a ‘good level’, and meet the energy efficiency and thermal quality requirements for buildings. The fees due for the conservation status evaluation of the will be halved.

Historic stores will receive tax benefits

According to the proposed 2018 LOE, buildings or parts of buildings associated with ‘historic stores’, recognized by the municipality as establishments of historical, cultural or social interest, and which are part of the national inventory of establishments and entities of historical, cultural and social interest, are now exempt from IMI, in accordance with Law 42/2017 of June 14. The automatic exemption operates through the simple communication of the municipality’s recognition of the property’s status and its following addition to the national inventory, and begins in that same year.

On the other hand, and in relation to income taxes, it is stated that ‘in determining the taxable profit of individual’s income taxes whose primary activity is commercial, industrial or agricultural, and in determining business and professional income not covered by the simplified income tax regime, 110% of the expenses and losses of the period related to conservation works and maintenance of buildings or parts of buildings pertaining to historic stores can be deducted from tax payments. 110% of individual income tax expenses incurred in the two years before the commencement of rental agreements related to conservation and maintenance may also be deducted when they concern buildings or fractions of buildings pertaining to historic stores.

Alteration of property to use in rental housing exempt from capital gains

According to the proposal, the concession of buildings to private residential property that used for obtaining category F (property income) income is not subject to the taxation of capital gains with regards to individual income taxes, maintaining the tax deferral while the property is used in the same manner.

The issue of the taxation of capital gains when the alteration of the property’s use occurs was much discussed regarding the local tourist accommodations. If the proposal goes ahead, there will be no taxation of capital gains in the event of a cessation of the use of the property for local accommodation, provided that the property is then placed in the long-term residential rental market.

Joint taxation of AIMI will have slight adjustments

Regarding the IMI surcharge (AIMI), the proposed Law provides for the introduction of some adjustments, to correct certain difficulties in implementation that were identified during new tax’s first year.

Thus, the option by taxable persons are married or are joined in a stable partnership, the joint declaration of taxes regarding the AIMI becomes applicable until such union should come to an end, meaning that this exemption, once exercised, will not require yearly renewal through a notice to the Tax Authority.

On the other hand, the Finance Portal will provide information on municipal records concerning the ownership of property by taxable persons. When the property records do not accurately reflect any joint ownership of properties that belong to a married or stable partnership, that fact must be communicated by February 15.

Affordable rental program

The proposed law provides for a legislative authorization for the Portuguese government to create a tax benefit for property owners who use their holdings in conjunction with the ‘Affordable Rental Program’ The objective is for these owners to benefit from a tax exemption on the property income resulting from placement of the properties, or fractions thereof, under the said program.

The government is also authorised to create a tax benefit for owners who enter into long-term rental agreements. The purpose of the authorisation is to eliminate the blanket tax rate of 28% and create differentiated rates for these owners.

This legislative authorisation is valid for 90 days. In practice, this means that the Portuguese government will have to legislate on this matter by the end of the first quarter of 2018.

Original Story: Vida Imobiliária / Imojuris

Translation: Richard Turner