Buying a second home in Portugal: taxes and aspects

Whether they want to diversify their investment portfolio or enjoy year-round sunshine on the west coast of Europe, there are several reasons why non-residents of Portugal may consider buying a second home in Portugal.

In any case, it cannot be ignored that investing in real estate abroad has tax implications, not only at the time of purchase, but also throughout the life of the investment, as well as when it is sold. These implications should be carefully considered before making a decision in order to manage expectations about the outcome of the investment and avoid problems.

We summarize the main tax issues involved in investing in a second home in Portugal, knowing that a summary is just a summary. The reality can be much more complex (especially when it comes to taxes), and the particularities of each investor (such as country of residence) and each investment cannot be ignored. We therefore recommend that every investor seek individual advice before making any real estate investment in Portugal.

How to invest: directly or through a corporate structure?

From a tax perspective, this is one of the most frequently asked questions, but there is no one-size-fits-all solution. In fact, the answer depends on several factors, such as the level and cost structure of the investment and its ultimate objective (e.g., undertaking a renovation project? Resale? Leasing? Possible conversion into the owner's primary residence as part of a future relocation project?).

Direct investments have the advantage of simplicity: only one level of taxation, no administrative costs associated with setting up and maintaining a company, and they can be particularly interesting if the investor plans to make the property his main residence, since the capital gains arising from a future sale can be exempted if the proceeds of the sale are invested in the acquisition of real estate (in Portugal, in the European Union or in the European Economic Area) for the same purpose.

The corporate structure may nevertheless be an interesting solution if there is an intention to use the real estate for business activities (e.g. Airbnb). However, the use of tax havens should be avoided as it leads to the application of higher tax rates when acquiring and owning real estate.

Taxes on acquisition and ownership

Whether investing directly or through a corporate entity, acquiring real estate involves paying real estate transfer tax and stamp tax, which can be 6.8% of the purchase price or the assessed value of the property (TRV) if it is higher, which is rarely the case. For properties worth more than €1 million, the real estate transfer tax and stamp tax are 8.3%.

With regard to real estate, a property tax is levied annually at a rate that can be as high as 0.45% (depending on each municipality). Property taxes are levied on the assessed value of the property (TRV), which is usually well below market value (especially for older buildings). The real estate tax surcharge also applies to the TRV of all residential properties located in Portugal. However, for individuals, taxation is only imposed if the taxable base exceeds a certain threshold (€600,000 or €1.2 million for individuals or spouses/partners who elect joint taxation for property tax purposes). The standard rate for individuals is 0.7% and for legal entities 0.4% (but if the real estate is used for the personal use of shareholders or members of the board of directors of a company, the rates applicable to individuals apply, with no minimum exemption threshold).

Renting real estate

If an investor is considering renting a property, they will be liable to Personal Income Tax (PIT) at a flat rate of 28% (this can be reduced as the length of the contract increases), which is levied on the amount of rentals reduced by the expenses actually incurred to generate rental income, excluding finance charges, depreciation and expenses incurred on the purchase of furniture and white goods. For tax residents, corporate rental income investors will have a portion of their taxable income taxed at a corporate income tax rate of 21% (plus council tax targeting of up to 1.5%). For non-resident corporate investors income tax will be paid in Portugal at a rate of 25%.

Selling real estate

The sale of real estate can result in capital gains. For non-resident individuals, such capital gains are now subject to progressive personal income tax rates (ranging from 14.5% to 48%, as well as a progressive levy of solidarity tax, up to 5%, for annual taxable income exceeding €80,000), but only on 50% of the gains realized. To determine the applicable rate, the non-resident's worldwide income is taken into account.

In the event of the death of an investor or the transfer of real estate as a gift, no inheritance or gift tax is charged in Portugal if the real estate is transferred to a spouse, civil partner, children or parents. If the recipient of the transfer is a third party (whether or not tax resident in Portugal), stamp tax is charged at a rate of 10.8%, payable by the recipient of the transfer. If Portuguese real estate is sold by a resident company, the gain from the sale is also taken into account in determining the taxable income, which is subject to corporate income tax under the above rules. If the sale is carried out by non-resident legal entities, the capital gain will be taxed in Portugal at a rate of 25%.

Author: Mónica Santos Costa, Tax Advisor CMS Portugal