Tax on property income in Portugal
Taxation Researcher | November 30, 2020
Effective Tax Rate on Rental Income
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Nonresidents are liable to tax on their Portuguese-sourced income. Married couples are taxed jointly.
RENTAL INCOME TAX
Net rental income earned by nonresidents is taxed at a flat rate of 28%, withheld at source. Taxable income is gross rent less maintenance costs, repairs, and other related expenses (such as insurance premiums and municipal tax). Mortgage interest costs incurred when the property was purchased are not deductible.
CAPITAL GAINS TAX
Capital gains realized by nonresidents on the sale of Portuguese property are taxed at a flat rate of 28%. The taxable gain is computed by deducting the following from the selling price: the acquisition cost adjusted for depreciation and increased by the official inflation coefficient, costs of transferring ownership, and improvement costs incurred in the last fiveyears prior to the sale.
For capital gains realized from fixed assets such as real property, only 50% of the capital gains will be taxable if the capital gains are reinvested in fixed assets such as real property during the year the sale occurred, the previous year, or within two years after the sale.
Nonresidents are required to appoint a local representative in Portugal for tax purposes. The appointment must be in writing and must show the representative´s express acceptance. Non-compliance with this obligation incurs a fine of up to €5,000. The representative fulfills all the tax obligations of the nonresident such as filing the income tax returns and paying the tax liability.
Furthermore, any Portuguese-sourced income of nonresidents cannot be transferred abroad unless it is conclusively proved that any underlying tax liability is paid or adequately secured. Non-compliance with this prohibition incurs a fine of up to €25,000.
Property Tax (Immovable Property Tax, IMI)
Property tax is levied on the officially assessed values or "patrimonial value" of the buildings located in the territory of each municipality. The calculation of the patrimonial value takes into consideration the cost of the building, the average value of the land, the location of the property, etc.
The applicable rate is defined annually by each municipality in a decision taken by the respective municipal assembly. Rural properties are taxed at 0.8% while urban properties are taxed from 0.30% to 0.50%. Properties not updated in accordance to the new property tax rules are taxed from 0.50% to 0.80%. However, if the property owner resides in a low-tax jurisdiction place, then the applicable rate is 7.50%.
If you are considering to short let your property in Portugal, keep an eye out on the latest updates from the local council. New laws are being introduced across the country affecting short-term rentals, most recently in Porto. GuestReady, an Airbnb management agency, has prepared a practical guide on how to obtain your short-term rentals licence in Porto.
Income and capital gains earned by companies subject to corporate income tax at a flat rate of 21%. Income-generating expenses are deductible when calculating taxable income.
A municipal surcharge of 1.5% is levied on the taxable income.
A state surcharge of 3% is levied on profits between €1.5 million and €7.5 million, a state surcharge of 5% is levied on profits between €7.5 million and €35 million, and a state surcharge of 7% on profits exceeding €35 million.
Municipal and state surcharges will be phased out in 2018.