Are you a property owner in Portugal? Here are 5 things you need to know
One of the highlights of the last quarter of 2023 was the publication of Law 56/2023, of 6 October, which enacts several measures of the “More Housing” program.
This package made headlines for several months because of its controversial main feature: the elimination of new applications for Golden Visas based on real estate acquisitions and capital transfers of € 1.5 million. You may find more on this here.
However, the Law has other important aspects and paves the way for further reforms.
Following our tradition of addressing relevant topics for our clients and peers, you may find 5 selected amendments below.
1. Transfer of properties from short-term rental (“Alojamento local” - AL) to long-term rental
The transfer of properties in AL to long-term rental will benefit from an exemption from personal income tax and corporate income tax on property income obtained until December 31, 2029, if the following conditions are cumulatively met:
- The properties have been operating in the AL market;
- Both registration and use of the AL took place before December 31, 2022;
- The long-term rental contract is signed and registered with the Portuguese Tax Authorities until December 31, 2024.
Our comment: This is an interesting measure that might lure property owners to the long-term residential rental market.
2. New rates for long-term rental income
Property income from long-term residential rentals will now be taxed at 25% (previously, 28%). Hence, the tax rate of 28% will now exclusively cover non-residential rental agreements.
A 10% reduction of the rate is applied to income arising from permanent residential lease contracts with a duration of 5 years or more and less than 10 years, i.e. a rate of 15% is applied to the income. For each renewal of the same duration, a 2% reduction is also applied, with a limit of 10%.
Further reductions apply to long-term rentals of 10-20 years (15% reduction) and long-term rentals of more than 20 years (20% reduction).
The reductions cease to apply when the lease contracts end their effects before the respective duration periods and underlying renewals have elapsed for reasons attributable to the landlord.
It should be noted that lease agreements signed from January 1, 2024, where the rent exceeds 50% of the general limit of the price of rents by type and municipality, do not benefit from the reductions mentioned above. This should, therefore, be assessed on a case-by-case basis.
Our comment: This is a welcome reduction intended to foster long-term residential rental over short-term rental. The rationale is that the longer the contract, the less taxes you pay. However, the strict requirements regarding rent increases are likely to mitigate the practical effects of this measure.
3. Extraordinary contribution for apartments in short-term rental (CEAL)
The CEAL is a new contribution that focuses on apartments and accommodation establishments integrated into an autonomous unit of a building allocated to an AL, with reference to 31 December of each calendar year.
The tax base comprises the application of the economic coefficient for local accommodation and the urban pressure coefficient to the gross private area of residential properties on which CEAL is levied. These coefficients will be published annually.
The CEAL rate is 15% and must be paid by June 25 each year.
The following properties are excluded from CEAL:
- Properties located in inland territories;
- Residential properties that are not autonomous units, nor parts or divisions capable of independent use;
- AL units in permanent dwellings, as long as the exploration as AL does not exceed 120 days per year;
- Properties located in parishes in which a situation of housing shortage has not been declared, as per the applicable legislation.
Properties located in Madeira are not subject to CEAL.
Our comment: the CEAL has been heavily criticised for its complex structure and for demonising the AL sector without relying on a clear study of how this industry has impacted the current housing crisis. The good news is that Madeira will not apply CEAL at all, a welcome move that will undoubtedly appeal to AL investors to this region.
4. Capital gains reinvestment regime
According to the Portuguese personal income tax code, capital gains on the disposal of real estate may be wholly or partially exempt if the proceeds refer to the taxpayer's primary residence and such proceeds are reinvested in the acquisition, improvement, or construction of another primary residence in Portugal or within the EU/EEA within 36 months from the sale or in the period of 24 months previous to the disposal.
In addition to the requirements already applicable, taxpayers are now obliged to:
- Have had their tax residence in the period of 24 months previous to the disposal;
- Not have benefited from an exclusion from taxation in the year in which the gains were made or in the previous 3 years unless it can be proved that this was due to exceptional circumstances.
To avoid doubt, the law now specifically provides that both the sold and the acquired properties must be the tax address of the taxable person.
Our comment: the additional requirements bring an extra layer of complexity, but the fact that the law now states explicitly that the properties must be the tax address of the taxable person will at least bring more certainty in applying the regime, as the Tax Authorities were demanding this (albeit without success).
And because not everything in life is about tax:
5. Simplification of urban and construction licensing
From the beginning of 2024, a new Decree-Law, known as the “Urban Simplex,” has implemented reforms in urban planning and construction licensing legislation. This new package will come into force on 4 March 2024.
The changes include simplification measures intended to eliminate bureaucracy, simplify the approval of new projects and foster construction.
Our comment: all reforms take time to be interpreted and are expected to have positive effects. However, this reform has at least the clear intent of expediting processes and enabling investors to implement their investments more quickly and hassle-free.