Portugal: Overview

RENTAL YIELDS

Yields are moderate in Lisbon

Gross rental yields are around 5% to 6% in Lisbon, the national capital. For properties located in Cascais and Estoril, rental yields are lower at 3.6% to 4%.

Prime property prices in tourist-popular Algarve range from €3,400 to €4,000 per sq. m., higher than Lisbon, at €2,500 to €3,100 per sq. m., according to Global Property Guide research.

Low yields and pro-tenant laws have led to shrinking private rental market, from 39% of all households in 1981 to 30.6% in 1991 and 21% in 2001.

Read Rental Yields  »

TAXES AND COSTS

Taxes range from moderate to high in Portugal

Effective Tax Rate on Rental Income
Monthly Income	€1,500	€6,000	€12,000
Tax Rate	13.2%	13.1%	13.1%
Click here to see a worked example
Source: Disclaimer

Rental Income: Net rental income is taxed at a flat rate of 15%, withheld by the tenant. Repairs, maintenance expenses, and local taxes are deductible from the gross rent leading to an effective tax rate of around 13%.

Capital Gains: Net capital gains are taxed at a flat rate of 25% in Portugal. Acquisition costs are deducted from the gross selling price of the property.

Inheritance: There are no inheritance and gift taxes in Portugal.

Residents: Resident individuals' worldwide income is subject to tax at rates from 10.5% to 40%.

Read Taxes and Costs  »

BUYING GUIDE

Buying costs in Portugal range from low to moderate

Roundtrip transaction costs, i.e., the cost of buying and selling a property, range from 5% to 16%. Significant costs include the real estate agent’s fee (3% to 5%, plus 21% VAT), transfer tax (effective rate at 6% maximum) and legal fees (1% to 2%).

Read Buying Guide  »

LANDLORD AND TENANT

Portuguese law is strongly pro-tenant

The law in Portugal is still strongly pro-tenant, despite substantial changes brought by the New Urban Lease Act.

Rent: The amount of the rent can usually be freely agreed between the parties, with the exception of low cost housing. Rent reviews can also be freely agreed (although they must take place annually), and, with careful drafting, cost-of-living rent increases and suchlike can be agreed.

Tenant Security: The parties may stipulate fixed-term contracts, but they must have a minimum initial term of five years, and there are automatic and consecutive extensions of three years. In the absence of such a fixed term stipulation, the lease agreement will be considered open-ended. Open ended contracts were previously much like ‘tenancy for life’ agreements and are very difficult to terminate.

Read Landlord and Tenant  »

ECONOMIC GROWTH

Portugal’s growth is at Europe’s tail end

Portugal (pop. 10.5 million) continued to experience weak economic performance in 2006. Although GDP growth at 1.3%, was higher than the annual average of 0.8% from 2001 to 2005, it was the lowest growth rate in all Europe. Portugal’s GDP per head, at US$18,465 in 2006, has been overtaken by Czech Rep, Greece, Malta and Slovenia.

While the adoption of the EU ushered a period of economic expansion to some countries, Portugal failed to take full advantage of opportunities created by EU membership. The strong euro vis-Ã -vis major currencies have deteriorated the country’s competitiveness has seriously deteriorated.

Portugal's economy is based on traditional industries such as textiles, clothing, footwear, cork and wood products, and beverages (i.e. wine). Its comparative advantage before was low labour costs, but it faces huge competition from Central Europe and Asia.

Weighing down on productivity are low human capital, heavy administrative burden on firms, restrictive labour market regulations and lack of competition in key sectors of the economy.

Huge fiscal deficit, at 6% of GDP in 2005, prevented the use expansionary fiscal policy to stimulate the economy. The government addressed the issue by raising the VAT from 19% to 21%, restricting public sector wages, increasing minimum retirement age to 65 from 60 and reducing sick pay sharply.

The reforms are paying off; fiscal deficit was down to 3.9% of GDP in 2006, still above the EU stability-pact ceiling of 3%. The deficit is expected to go down further to 3.3% in 2007 and 2.4% in 2008.