The Legalities of Buying Property in Portugal

Buying property in Portugal is quite straightforward and similar to buying property in any other foreign country. Above all else it is vitally important that you instruct the services of a reputable lawyer and notary.

When you have decided on your purchase you will normally be asked to sign a promissory contract and pay a deposit. If you withdraw after this you may forfeit the deposit. If the vendor withdraws he may have to compensate you.

If you are buying 'off-plan' from a new development under construction, you are normally required to pay the purchase price in stages.

The deposit paid, your lawyer should then run the necessary checks. In the past it has been quite normal for Portuguese property not to have a title deed or to be sold by someone who is not the legal owner. This is changing, and certainly these types of problems should not arise with a new development.

Your reputable lawyer therefore needs to check that:

  • The title deed is in order and is owned by the vendor.
  • There are no outstanding charges on the property.
  • The property itself has planning permission and all other necessary licences.
  • The terms of the contract are fair and reasonable.

Once all the necessary searches have been carried out and you are satisfied, the lawyer will arrange for any fees and taxes to be paid and for the title deed (escritura) to be transferred into your name and registered with the Portuguese Government Land Registry.

The escritura includes a detailed description of the property as well as carrying the name of the person legally owning it, and needs to be signed by the purchaser and vendor in front of a notary. If you cannot be in Portugal to attend the signing you can give Power of Attorney to your lawyer instead providing all parties agree. The importation of funds to buy the property usually needs to be recorded with the Portuguese authorities.

The notary is a public official who is there only to put on public record the fact that the title deed documenting the transfer of the property has been signed in the notary’s presence and understood by all parties concerned. When the escritura is signed in front of the notary, either the funds are handed over in his presence, or the vendor confirms that the money has already been received. Proof of the payment is incorporated into the title deeds.

The charges made by the lawyer in dealing with the basic legal administration in the purchase of property that already exists is usually 1% of the purchase price subject to a minimum charge of around €1,100. If the property is under construction, or there is extra work that the lawyer undertakes, a further charge may be made. Extra work may include negotiations concerning the price, sorting out any problems with the title deed and dealing with utility companies.

VAT (IVA in Portugal) at the standard rate of 21% will be charged on estate agent, legal and survey fees, and on all purchases of building materials as well as the builder’s fees if you build or extend a property.

The notary’s fee will vary. A fee is also payable to the land registry. Together, these fees typically amount to between 1.5% and 2% of the value of the property.

The purchase process and registration could take several months before you receive the title deeds.

IMT and IMI Property Taxes

A purchase tax, Imposto Municipal sobre Transmissôes Onerosas de Imóveis (IMT) of between 0% and 8% (depending on the declared value of the property - the registered Valor Patrimonial - VP) is payable by the purchaser of residential property. The calculation of this tax is not straightforward, but in 2005, property valued at up to €82,000 was exempt, while the rate applicable to property valued at over €510,000 was 6%.

Rustic property (not qualified for construction) is subject to a fixed IMT rate of 5% with no tax-free exemption. Other non-residential property is fixed at 6.5%. Where property is acquired by an Offshore Company based in a tax haven (as defined by Portugal – see below), the IMT is 15%,

There is an annual municipal tax (similar to UK Council Tax) called Imposto Municipal sobre Imóveis (IMI), based on the VP and fixed by each municipality. The rates range from 0.2% to 0.8%, depending on the location and age of the property.

It has long been common practice in Portugal for the purchase price of a property to be under-declared. This is illegal and the Portuguese authorities will eventually eradicate it. Meanwhile if you are pressured into buying this way, it is best to avoid getting involved. It will probably not save you anything in the long run (and could in fact increase any future capital gains tax liability), and if it is discovered, you could be subject to penalties.

If the authorities suspect that the purchase price has been under-declared they have the option to compulsory purchase at that price.

VPs still bear little resemblance to the real market value of a property and are being systematically reviewed, especially when a transaction occurs. The new VP values will follow a formula that takes into account criteria such as size of the property, the location and quality of build. In many cases the increase in registered value will be substantial.

Offshore Companies

A common method of purchasing Portuguese property was to purchase through an Offshore Company (OC), often set up in Gibraltar or the Channel Islands, jurisdictions which the Portuguese authorities came to define as Tax Haven Offshore Companies (THOCs).

This practice, which offered a lower rate of SISA (now known as IMT), allowed the owners to avoid paying many of the taxes due, including capital gains and inheritance taxes.

The Portuguese authorities introduced punitive taxes on property bought through THOCs so that it was no longer financially beneficial to purchase in this way. It was meant to discourage the practice, but for those who already own property through a THOC, it means much higher tax bills.

IMT for these properties was increased to 15%, and the annual tax (the IMI) has been increased to 5% per annum. Both of these increases are based on the revalued price of the VP. For example, on a typical mid-Algarve 4 bed villa, the previous IMI would have been around €750 p.a. at the former rate of 2%; now the IMI would be in the region of €3,000 before the VP has even been revalued.

In addition to these taxes, the Portuguese tax authorities suspected that THOC owners of property failed to declare rental income. In order to ensure that this no longer occurred, an fixed annual tax charge of 25 per cent has been introduced, payable on a deemed rental income of one fifteenth of the rateable value of the property, on all THOC-owned properties (as they are all deemed to be rented, whether or not they actually are). It is up to the THOC to prove that the property is not being rented and is therefore not liable to this levy.

The cost of utilities connected to the THOC property, maintenance bills and municipal tax can be deducted against the one-fifteenth figure, provided that the bills are properly documented and in the name of the limited company. Tax is then payable by the company at the flat rate of 25% on the balance.

The company can be re-domiciled to another country with a more favourable taxing regime (such as Malta or the USA, which are not considered THOCs in Portugal) to avoid these taxes on THOCs. Alternatively, the property could be transferred back into the owner’s personal name. Advice should be taken in either case.

This information has been provided by Blevins Franks, a leading pan-European financial advisory group, offering proven personalised strategies to improve and protect your wealth. It has developed a reputation as a major force in the area of international tax and investment planning. Visit for more information.

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