Are Taxes on Homes High in Portugal? EY Did the Math

28 February 2018

IS, IMT, IRC, IMI … these are some of the taxes that come into play during the purchase or sale of a property. EY’s study compared Portugal to four other EU states to evaluate the tax burden in each.

Several taxes come in to play when investors, or even families, decide to buy or sell property. Intending to analyse the tax regime covering Portugal’s national territory, the consultancy EY compared it with other four European markets to evaluate the respective tax burden in each. The study’s conclusions are clear: the taxes in Portugal are high enough that they are capable of negatively affecting investment in the sector.

In the “Tax competitiveness study in the real estate sector,” prepared by EY in partnership with the Portuguese Association of Developers and Real Estate Investors (APPII), the two institutions compared the taxes covering the Portuguese real estate sector with those in four other countries – Germany, Spain, the Netherlands and Italy. These countries are considered Portugal’s direct competitors in the quest to attract real estate investment. The study also included potential regulatory changes that could increase Portugal’s competitiveness vis-à-vis those markets.

“It was imperative for us to know to what extent our sector is competitive on an international scale and which aspects can and should be improved in favour of this same competitiveness,” said Hugo Santos Ferreira, vice president of the APPII.

Are you about to buy a house? IS and IMT

When the time comes to buy a new home, two taxes immediately arrive, slightly dampening the pleasure in the new home. They are the Stamp Tax (IS) and the Municipal Real Estate Transfer Tax (IMT). The IS, created in 1660, is the oldest tax on the books in Portugal’s national tax regime. Currently, when a home is acquired or received through a donation, a rate of 0.8% is attached. Portugal can be seen as occupying a kind of middle ground when levying this kind of tax when compared with the other four countries. Although the stamp duty is lower than the one practised in Spain (1.5%), the tax does not even exist in Germany, the Netherlands and Italy.

As regards to the IMT, this levy came into force in 2004, replacing the Sisa Municipal Tax. According to the Budget Execution Synthesis released by the Budgetary Directorate-General, this tax earned Portugal’s municipalities €851.2 million in revenue in 2017, 195.7 million more than in the previous year. After analysing the top rates applied for this tax, in the residential sector, in the five countries, the two institutions discovered that Spain has the highest rate, at a maximum of 11%. Portugal has the third highest rate (beginning at 6%), ahead of Italy (4%) and the Netherlands (2%).

Thus, according to the study’s conclusions, the level of taxation at the time of the acquisition of property, including the Stamp Tax and Municipal Real Estate Transfer Tax, “could be considered much costlier than in the other countries under analysis,” except for Spain. The entities also noted that “the impact of IS on financing for the acquisition of real estate/equity holdings may be a negative factor concerning attractiveness.”

Once the home has been bought, there are three more taxes

An agreement was reached, and the papers signed… but tax charges continue unabated. While Portuguese homeowners continue to be in possession of their homes, they are obliged to pay another three taxes: the Municipal Property Tax (IMI), the IMI surcharge (AIMI), levied on more expensive homes, and the Corporate Income Tax (IRC).

The Portuguese government introduced the IMI at the end of 2003 to replace the “municipal contribution.” The tax is levied on the “property value of rural and urban buildings.” In the case of urban properties, rates can vary between 0.3% and 0.45%. About a year ago, the Portuguese government created a surcharge to the IMI – the AIMI also known as the “Mortágua tax”, applies to houses with a taxable value of over €600,000. The rates practised in Portugal are “in line” with those in the other countries included in the study, the EY reported. The Netherlands has the lowest minimum rate, set at 0.05%, while Germany charges the highest rate, 2.83%.

As for the third tax, the IRC, it is only charged to companies and is based on their profits. The applied rates for this tax are practically at the same level in all five countries. Portugal has the lowest minimum rate (21%), with Germany accounting for the highest maximum rate (32.98%), while Portugal’s maximum, 29.50%, is the second highest. In 2018, the maximum rate for Portugal rose to 31.5%. In this way, both entities concluded that “the taxation at the level of the IRC, is in general terms at a high level.” This may be “a negative factor affecting attractiveness.”

Time to sell! But there’s still the IRC

If a company wishes to sell a property, it is faced with the IRC on sales, which directly impacts results. Firms that sell property are taxed through the IRC on the income obtained with the transaction. This rate varies according to the investor’s tax residence – whether it is based in Portugal or abroad. In the case of investors based in Portugal, the tax ranges from 21% to 29.5%. These include the lowest minimum rate and the second highest maximum charge.

Concerning non-resident investors in the country, the rate is 25%, a fixed amount. Compared with the other four states, Portugal is precisely at the level of the Netherlands and slightly above Italy (24%). The country with the lowest IRC rates is Germany, at 15.83%. Thus, the study concluded that “IRC taxation at the disinvestment stage is high compared to the rates in force in the other countries under analysis,” adding that this tax can also ” constitute a negative factor affecting attractiveness.”

According to the data analysed so far, EY and APPII consider that there is still a certain “legislative instability” accompanied by excessive bureaucracy, potentially negatively affecting the sector. “The internal potential of the Portuguese real estate market, resulting from lower prices and attractive yields (in the face of competing markets), could be accompanied by measures that enhance Portugal’s competitiveness as an attractive real estate investment market,” Pedro Fugas, a partner at EY, stated. One of the measures proposed by the consultant is the introduction of “Real Estate Investment Companies (“SIPI” or REITs), which have been successful in some of the jurisdictions under analysis and found to be critical sources of investment.

Original Story: Economia Online – Rita Neto

Translation: Richard Turner