REALWorld Law

How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?

Rents and the profit from sales of property (that can be treated as profit or capital gain) are the types of income that can be expected from ownership of real estate.

Last modified 22 Mar 2024

How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?

Rents from urban, rural or mixed properties are classified as taxable income for the purposes of Portuguese corporate income tax (IRC). If the investor is private, individual rents will be treated as taxable income for Personal Income Tax (IRS) purposes.

Please note that the taxation of profits from the sale of property is referred in Taxation of disposals.

Whether generated through a resident corporate entity, a permanent establishment in Portugal or without a permanent establishment, rents from real estate located in Portugal are always subject to income tax. However, there are some peculiarities:

Indirect investment through a corporate entity

The income of resident corporate taxpayers is subject to IRC at the general rate of 21% (on the Portuguese mainland). A reduced rate of 17% may be applicable to the first €50,000 of taxable income (if the company is recognized as a small or medium-sized company, or as a small mid cap). To be recognized as small or medium-sized, the company must have fewer than 250 employees and its annual turnover must not exceed €50 million or its annual balance sheet total must not exceed €43 million. To be recognized as a small mid cap, the company must have less than 500 employees.The reduced rate mentioned above should be of 12.5% if the company qualifies as a start-up entity in accordance with the applicable Portuguese requirements.

The income of resident corporate taxpayers is also subject to a municipal surcharge of up to 1.5%, which is levied by many Portuguese municipalities, and a state surcharge of 3% applies to income varying between €1.5 million and €7.5 million. For income between €7.5 million and €35million the surcharge rises to 5%. Above €35 million the surcharge rises to 9%. The municipal surcharge and the state surcharge are applied on the income determined prior to deduction of losses.

A corporate entity is entitled to deduct costs related to maintenance and repairs, as well as general costs and municipal property tax (IMI), and other specific costs such as those incurred in connection with the construction or acquisition of the property and depreciation (excluding land).

Direct investment through a permanent establishment

Income attributable to a permanent establishment (PE) in Portugal is liable to IRC in the same way as a Portuguese-resident company at the rates mentioned above for resident corporations.

Direct investment without a permanent establishment

If the investor does not have a permanent establishment in Portugal, Income Tax (IRC or IRS) is only payable on income generated in Portugal.

Income derived from rents, is subject to Corporate Income Tax, at a rate of 25% for non-residents. As to the Personal Income Tax, the rate is of 28% for non-housing leases and 25% for housing leases (with potential reductions). The costs incurred by the taxpayer to obtain the rental income are tax deductible, except with respect to the following costs: financial costs, depreciation, furniture, fixtures, equipment and décor items, and the AIMI. A withholding tax of 25% may apply to non-resident individuals or corporations, if the lessee is an entity or individual required to prepare and to maintain audited accounts in Portugal, as is typically the case with a commercial lease.

Foreign investors must file an annual tax return with The Portuguese Tax Authority.

Decree-Law No. 7/2015 of 13 January 2015, which came into force on 1 July 2015, introduced the current tax regime for undertakings for collective investment (UCI), applicable to following entities:

• Securities Investment Funds (SIFs)
• Real Estate Investment Funds (REIFs)
• Securities Investment Companies (SICs)
• Real Estate Investment Companies (REICs)

Following a major trend in the taxation of investment vehicles in Europe, this law adopts the “exit taxation method”, whereby the taxation of income in the main is applied to the investors rather than the fund.

The SIGIs (a special type of real estate investment company, subject to a significantly relaxed regulatory framework) are also subject to the income tax regime applicable to UCIs (the SIGIs’ regime entered into force on February 1, 2019). The tax comments made below with reference to REIFs/REICs should also be read as applying to SIGIs.

In respect of income derived from REIFs/REICs, Non-resident Investors without a local PE will be subject to a withholding tax in Portugal at a rate of 10%.

Income derived from units in real estate investment funds and from shares in real estate investment companies are classified as income deriving from property for the purpose of this regime.

The fiscal regime governing REIFs can be summarized as follows:

Taxation of REIFs/REICs:

• REIFs/REICs will be subject to IRC at a single general tax rate currently set at 21%, with only the net income subject to taxation. However, income qualifying as investment income, rental income and capital gains is generally not subject to IRC.
• REIFs/REICs tax losses generated as of 2023 may generally be carried forward.
• REIFs/REICs are exempt from the municipal surcharge (derrama municipal) and state surcharge (derrama estadual).
• Mergers, demergers or subscriptions in kind between UCIs may benefit from the IRC code’s tax neutrality regime, allowing for more efficient restructuring operations or the transfer of assets between investment vehicles.
• REIFs/REICs income may not be subject to withholding tax.
• REIFs/REICs will be subject to the obligations set out in the IRC code, namely to maintain proper accounting systems and tax documentation procedures.
• Stamp Duty will apply to the fund’s global net asset value, and is due on a quarterly basis. The tax rate is 0.0125% for real estate funds.

Taxation of Investors:

Resident investors:

• Individuals – are subject to IRS at a withholding tax rate of 28% for non-housing leases and 25% for housing leases (potentially reduced). This is generally a final withholding tax, which settles the investor’s tax obligation, provided that the income in question is obtained outside the scope of a commercial, industrial, or agricultural activity, unless the investor chooses to aggregate his or her income, in which case the general progressive tax rates (from 14.5% to 48%, plus solidarity surcharges) apply;

• Corporate investors – are subject to IRC at a provisional withholding tax rate of 25% (unless the relevant beneficiaries benefit from an exemption from IRC which excludes investment income, in which case the withholding is treated as a final tax).
• Non-resident investors who receive income distributed by real estate investment funds or by real estate investment companies, are subject to withholding tax at the rate of 10%.

Non-resident investors who:

• do not present proof of non-residence in Portugal;
• are established in a country, territory or region whose tax regime is deemed to be clearly more beneficial than Portugal’s;
• the income is paid or made available through accounts under the name of one or more undisclosed holders (except if the beneficial owner is identified); or
• are entities directly or indirectly held to an extent greater than 25% by Portuguese residents (with certain exceptions),

are subject to withholding tax at definitive rates of 25%, 28% or 35% – being the rates prescribed for the regime applicable to resident investors.

Certain reductions in the rates of Municipal Property Tax (IMI) may also apply.

Last modified 22 Mar 2024

How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?

Income generated by investment can be transferred on the following terms:

Direct investment through a permanent establishment

Once the profits have been taxed in Portugal, income can be transferred to foreign investors without any further taxation. This is because a transfer between a Portuguese PE and its head office is considered to be an internal transfer within the same corporate entity.

Direct investment without a permanent establishment

Any tax paid by the investor in Portugal usually receives a tax credit in its country of residence, under most double-taxation agreements ('DTA') entered into between Portugal and other states.

Indirect investment through a corporate entity

In Portugal tax may have to be withheld on the distribution of dividends to shareholders. Tax withheld (if mandatory) may be provisional for residents and definitive for non-residents. This depends on the investor’s status as follows:

Portuguese-resident corporate shareholders

• Provisional withholding tax
• Distributions of dividends to Portuguese-resident corporate shareholders may be made without withholding tax if the participation exemption regime applies, and such equity was held by the shareholder in the year preceding the distribution. If the shareholder has its registered office in Portugal (ie is a Portuguese corporate entity) or if its management is located on Portuguese territory then it is deemed to be tax resident.

In all other cases a 25% withholding tax applies and the amount received as dividends is also taken into account in determining the taxable profits for the accounting period of the Portuguese-resident corporate shareholder.

Definitive taxation

Distributions of dividends to Portuguese-resident corporate shareholders are exempt from IRC if certain conditions are met, notably:

1. the taxpayer holds shares representing at least 10% of the share capital or voting rights of the entity distributing the dividends;
2. the relevant holding is maintained uninterruptedly during at least one year;
3. the taxpayer does not fall within the tax transparency regime;
4. the entity distributing the dividends is subject to and not exempt from IRC or any identical tax at a rate not lower than 60% of the Portuguese tax (for 2020 this will be 12.6%); and
5. the entity distributing profits is not resident in a country, territory or region with a preferential tax regime.

If the conditions are not met, the amount received as dividends is also taken into account in determining the taxable profits for the accounting period of the Portuguese-resident corporate shareholder.

The income of resident taxpayers is subject to IRC at the general rate of 21% (on the Portuguese mainland). A reduced rate of 17% may be applicable to the first €50,000 of taxable income (if the company is recognized as a small or medium-sized company, or as a small mid cap). To be recognized as small or medium-sized, the company must have fewer than 250 employees and its annual turnover must not exceed €50 million or its annual balance sheet total must not exceed €43 million. To be recognized as a small mid cap, the company must have less than 500 employees. The reduced rate mentioned above should be of 12.5% if the company qualifies as a start-up entity in accordance with the applicable Portuguese requirements.

• The income of resident corporate taxpayers is also subject to a municipal surcharge of up to 1.5%, which is levied by many Portuguese municipalities, and a state surcharge of 3% applies to income varying between €1.5 million and €7.5 million. For income between €7.5 million and €35 million the surcharge rises to 5%. Above €35 million the surcharge rises to 9%. Taxable income for IRC purposes is calculated on the basis of the net accounting profit as adjusted for tax purposes.

Corporate shareholders not established in Portugal (definitive withholding tax)

Profits distributed by a legal entity which is tax resident in Portugal (provided the entity is subject to and not exempt from taxation and is not a tax transparent entity), are exempt from IRC if the shareholder is resident:

1. in a Member State of the European Union;
2. in an EEA country which has agreed to administrative cooperation;
3. in a State with whom a DTA has been entered into.

Besides the requirements regarding the tax residency of the shareholder further conditions need to be met; notably

1. the taxpayer must hold shares representing at least 10% of the share capital or voting rights of the entity distributing the dividends before the dividends are made available;
2. the referred holding must be maintained uninterruptedly during the year preceding the distribution;
3. the entity distributing the dividends must not fall within the tax transparency regime;
4. the shareholder must be subject to and not exempt from a corporate income tax mentioned in the EU Parent Subsidiary Directive, or to a corporate income tax similar to IRC, at a rate not lower than 60% of the Portuguese tax (for 2022 this will be 12.6%).

Additionally, profits distributed to a company deemed to be tax resident in Switzerland are exempt from IRC in the terms set out in article 15 of the EU-Switzerland Agreement if:

• the company to which the profits are distributed holds at least 25% of the share capital of the company distributing the dividends (direct holding), for at least two years;
• in the terms set out in the DTAs entered into by Portugal and Switzerland with third countries, the company is not deemed to be tax resident in that third country; and
• both companies are subject and not exempt from Corporate Income Tax and both companies are limited liability companies.

If the abovementioned requirements are not met, 25% of any dividend paid must be withheld by the Portuguese corporate vehicle except where a DTA is deemed applicable.

Most of the DTAs entered into by Portugal, following the OECD Model Treaty, establish that the applicable Portuguese withholding tax rate on dividend or profit distributions cannot exceed 15% or 10%, depending on the percentage of the participation in the corporate vehicle.

Dividends paid to shareholders established in a country, territory or region whose tax regime is deemed to be clearly more favourable will be subject to withholding tax at a rate of 35%.

Dividends deposited in accounts of fiduciary entities, which act on behalf of undisclosed third parties, will be subject to withholding tax at a rate of 35%.

Last modified 22 Mar 2024

How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?

The income generated from real estate ownership is only subject to taxes. No other cost or charges are payable.

Last modified 22 Mar 2024

How is income arising from an investment in real estate taxed and can these taxes be reduced or offset in any way?

If the income generated from real estate ownership is transferred to shareholders or partners, this income is only subject to taxes. No other cost or charges are payable.

Last modified 22 Mar 2024