Portugal Investor Guide 2019

THE LEGAL PERSPECTIVE PORTUGAL INVESTOR GUIDE 2019

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Contents

INTRODUCTION 04 6.6 Assignments/transfers 12

1. OF REAL 05 6.7 Subleases 12

6.8 Termination 12 1.1 Full ownership 05 6.9 Sale of leased 12 1.2 Surface right, and right of use 05 7. TAX 13 1.3 05

1.4 Restrictions on ownership by foreigners 05 7.1 Transfer Taxe, Stamp Duty 13

2. ACQUISITION OF OWNERSHIP 06 7.2 Value added Tax 13

7.3 Other Taxes 13 2.1 Formal requirements 06 7.4 Taxation of rental income from 2.2 Registration 06 Real Estate 14 2.3 Asset deals 06 7.5 Taxation of dividends from a company 2.4 Share deals 07 owning Real Estate 15

2.5 Public auctions 07 7.6 Taxation of capital gains on Real Estate 16

3. OTHER RIGHTS TO PROPERTY 08 7.7 Taxation of capital gains from the disposal of shares Corporate Resident Entities 16 3.1 Mortgages and charges 08 7.8 Taxation of Capital Gains From the Disposal 3.2 08 of Shares by Non-Residents 16

3.3 Pre-emption rights 08 7.9 Real Estate Funds 17 3.4 Options 08 7.10 Portuguese Reits 18 3.5 Overage 08 8. REAL ESTATE FINANCE 20 4. ZONING AND PLANNING PERMITS 09 8.1 Interest rate risks 20 5. ENVIRONMENTAL LIABILITY 10 8.2 Assets held as security 20 6. LEASES 11 8.3 Further collateral agreements 20

6.1 Duration 11 8.4 Taxation on the creation of security 20

6.2 Rent 11 CONTACT 21

6.3 Rent review 11 ABOUT DLA PIPER 22

6.4 Operating expenses 11

6.5 Maintenance, repair and reinstatement at end of lease 11

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Introduction

In recent years, Portugal has in turn enhanced the ability to inance The stability of the real estate market become an attractive market for real estate transactions. Furthermore, along with a large inclination among investment in real estate. The in 2015 signiicant changes in the tax market players to embrace foreign market has seen a huge growth in treatment of collective investment investment has placed Portugal, and volume of transactions during that entities, including Real Estate particularly Lisbon, as an attractive time, particularly in Lisbon. This Investment Funds incorporated either place in which to invest. has been eased by the golden visa as corporate funds or as contractual program, which allows citizens of funds, came into force and this Investors around the world want to non-EU Member States to apply for has served as a further boost to have a clear idea of the acquisition a residency permit, subject to certain the market. process and the relevant tax conditions, one of which is a minimum implications arising in connection investment in real estate of €500,000, An additional boost has been with these transactions and ongoing or €350,000 in some special cases, provided by the inlux of tourists from ownership. Accordingly, we have and also as a result of Europe wide around the world to both Lisbon and prepared this real estate investment tax reforms which have placed Oporto, which combined with the guide to allow investors to assess the Portugal in the spotlight for investors coming into force of a regime allowing regime and to obtain an overview of aiming to beneit from the tax owners to ofer short term leases, the legal issues involved with property regime pertaining to non-residents. has created a great opportunity acquisitions in Portugal. For any Additionally, as the economy has for investors aiming to obtain a further questions, please contact our improved, national investors have also signiicant return on investment. Lisbon Real Estate Team. regained access to credit, which has

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1. Ownership of Real Estate

1.1 Full Ownership Usufruct is the right to use and extent that in case of an alteration Full ownership consists of a enjoy temporarily and in full a third to the condominium regulation, complete and exclusive right to party’s property for a certain period which is connected with the possess, beneit and dispose of or during the beneiciary’s lifetime. submission of the building to the a property. However, this may be If the beneiciary is a legal person horizontal property regime, can subject to limitations arising from it is limited to a period of 30 years. only be done by means of public speciic public statutes (including The beneiciary is entitled to use and approved unanimously development plans). the property as if he /she was by all condominium owners. the owner. The condominium regulation sets A over a property may be forth the terms and conditions for vested in a sole owner or multiple The right of use is a right to use the use and beneit of the common owners and, in the latter case, a a property owned by a third party areas and sets out the rules for co-ownership regime in accordance under certain terms and conditions. the management of the property. with the terms of the Civil Code will Additionally, payment regarding apply. This regime contains speciic In all the above cases, in order to the amounts for the maintenance rules for property management have efect vis-â-vis third parties, of the property and the respective and contains also rights that will be registration before the Land monthly amount attributable to triggered in the event of disposal, Register Oice is required. each owner for items used in such as pre-emption rights in favour common areas shall be agreed. of the other co-owner(s). 1.3 Condominium It is always possible to amend and The incorporation of a condominium alter the condominium regulations, In order to create a more than is in connection to the submission although depending on the subject merely contractual right and ensure of the building to the “strata title matter of any proposed amendment a title in real estate is binding on regime” (horizontal property regime), a speciic majority or unanimity may third parties, said title in real estate i.e. the building legally divided be required. must be registered before the Land into several autonomous units. Register Oice. The submission of a property into 1.4 Restrictions this regime must be executed by On Ownership By 1.2 Surface means of a public deed and typically Foreigners Right,Usufruct and occur at the same time as the Foreign investors are not subject Right of Use owners approve the condominium to any limitations on real estate A surface right is deined as the regulations. A condominium investment. Portugal has adopted right to build and maintain a regulation is only mandatory when several measures to encourage and building or use and enjoy a building there are more than four diferent attract foreign investment, such as located on or over land which is owners of the same property. We the establishment of a residency owned by a third party. The surface advise that the approval of the permit program (commonly right can be established for a condominium regulation shall referred to as “Golden Visa”) and a limited period or can be granted be treated separately from the more favourable tax regime when in perpetuity. submission of the building to the compared with other EU countries. horizontal property regime to the

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2. Acquisition of Ownership

2.1 Formal 2.3 Asset Deals identify all and encumbrances Requirements A title to a property may be acquired that are registered over the property Since 2008, any agreement directly by the buyer from the and their legal status. for property purchase can be owner. A straightforward asset deal undertaken by private . is the direct purchase by the buyer Notary fees are determined by each This is subject to legalization of the to the seller. The sale and purchase Notarial Oice, although a table signatures of both seller and buyer, agreement must clearly state and detailing prices for each service is in accordance with speciic statutory identify the parties, the identiication published regularly. Costs for the requirements. Purchase and sale of the property involved in the execution of a deed are determined agreement may be executed by transaction, the price, the payment by reference to the acquisition legal representatives on behalf of method and all main terms and price. Registration costs are lower their clients, subject to compliance conditions applicable. Additionally, when all procedures are undertaken of mandatory procedures set forth as mentioned above, the sale online as the cost will be €250 per by the Portuguese Bar. Property and purchase agreement may be property/unit. purchase may also be executed by executed by means of a private notarial deed. contract (subject to compliance Prior to completion of the with all formalities for this purpose) transaction, the buyer must pay the In order to execute a deed or or by means of a public deed. property transfer tax (“IMT”) and a private contract, the buyer Registration is required in order to stamp duty (“Imposto do Selo”). In undertakes to provide be enforceable against third parties. principle, the transfer of real estate that all taxes due on the transaction is exempt from paying VAT. IMT have been duly paid. It is from It is also usual for parties to execute rates vary depending on the price the responsibility of the seller to a promissory sale and purchase or on the value of the property provide evidence of compliance agreement setting forth the agreed as assessed by the Tax Authority with all formalities relating to the terms of the transaction, prior to (“VPT”), whichever is higher and the transaction, including evidence that the deed or private contract signing. purpose for which the property is all necessary notices were complied This interim agreement is normally acquired subject to a top marginal with as to any pre-emption rights. used to secure the transaction. It is rate of 8%. An exemption to the advisable to promote a provisional rate referred above was introduced 2.2 Registration registration of the promissory to discourage the acquisition of Every property is recorded before agreement before the Land Registry through ofshore vehicles the Land Registry Oice and all Oice, which will be converted and where this takes place IMT details, including a description of into a deinitive registration upon will be levied at a rate of 10% if the all transactions pertaining to the the private contract or public buyer is a company established property, since its registration is deed signing. in a country, territory or region publicly available. The Land Registry whose tax regime is deemed to be Oice also provides a code to Legal advice should be obtained less onerous. have access to this information in connection with the drafting of through an online platform. the abovementioned or Stamp duty is levied on the price The Land Registry is accurate for the review of same. Additionally, or on the value of the property and any potential buyer may rely legal advisors will typically conduct as assessed by the Tax Authority on its content. The land registry due diligence on behalf of a (“VPT”), whichever is higher, at a certiication attests to the current potential purchaser based on the ixed rate of 0.8%. There are some and legal situation of the property. information disclosed by the seller speciic cases where diferent rates or on additional information/ apply. For that purpose, please refer documents requested for such to 7.1 below. purpose. The due diligence aims to

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2.4 Share Deals be registered (e.g. information registration requirements. Post Property may also be acquired via on board minutes and employee completion actions such as the acquisition of the vehicle registered records, etc.). resignation of directors and updates as its proprietor. Although there with regard to the Commercial are other legal entities which may Formalities such as pre-emption Registry are required and acquire a property, there are two rights waivers and/ or consent for performed prior to signing the sale types of limited liability company the transaction must be discharged and purchase agreement. which can be used, namely (i) a joint and dealt prior to signing the sale stock company (sociedade anónima – and purchase agreement. This may 2.5 Public Auctions S.A.) or (ii) a limited liability company be executed either by public deed Properties which become the by quotas (sociedade por quotas or private contract, according to the subject of public auctions are usually – Lda.). parties’ intention. Parties are also free distressed assets following a default to agree on a price mechanism for of its registered proprietor in relation Where this structure is adopted due calculation of the assets valuation. to its creditors, tax authorities or any diligence includes, in addition to all other instance where the property information on the property, all legal Where a share structure is used, IMT has been provided as security. considerations connected to the is only due in the event of the legal company and its quota or shares, as entity which owns the property is In view of the complex nature applicable. A review of the company limited by quotas and if 75% or more and speciic requirements of the accounts and articles of association, of the company’s share capital is auction process a prospective buyer as well as all information regarding acquired. In the event the property would be advised to obtain legal compliance with and discharge of is owned by a joint stock company advice on the process, including tax and social security obligations no IMT is due regardless of the ascertaining the legal status of the must also be undertaken. In this percentage of share capital being property, and whether there any case, comprehensive information transferred. liens or encumbrances that may be must be collected and/ or provided subsisting or afecting the property. by the seller as the information The transfer of shares or quotas contained in the Companies does not impact on the existing Registry is not exhaustive and arrangements at the Land Registry not all information requires to and thus there are no additional

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3. Other Rights to Property

3.1 Mortgages and It should be noted that the • tenants which have been granted Charges registration of mortgages before a lease for a term of more than 2 Mortgages are the most common the relevant Land Registry Oice years beneit from pre-emption form of charge. They can be is essential for the validity and rights in the event of sale of the (i) voluntary or (ii) legal, depending enforceability of the guarantee. leased property. on the reason for their creation. Apart from the legal pre-emption For example, (i) bank mortgages for 3.2 Easements rights contained in the Civil Code, the purpose of granting loans are Under Portuguese law, properties parties are free to create other voluntary and (ii) for the guarantee may be encumbered in favour of pre-emption rights by agreement, of a speciic debt to a public entity the neighbouring property by the although those rights cannot act (such as the Social Security or the establishment of easements such in priority to legal pre-emption Tax Authority) are legal mortgages. as rights of way, rights of use and rights. If a pre-emption right is restrictions on use, prevention of granted (by agreement). In order Another form of charge that may development, etc. for this pre-emption right to be also be used is the encumbrance enforceable against third parties, it which arises by the act of a creditor All easements must be registered shall be registered before the Land initiating a legal procedure for the before the Land Registry Oice in Registry Oice. payment of an existing debt. order to be enforceable. Depending on the type of a speciic 3.4 Options The debtor’s assets are subject to an form may be required, although for Purchase options may be agreed encumbrance (via a legal procedure most cases a private contract with and granted to third parties by the iled with the relevant court), which the signatures duly legalized shall owner of the property. The option will be registered before the Land take place. shall be formalised via a unilateral Registry and evidenced by issuance contract and registered before of a land registry certiicate. 3.3 Pre-Emption Rights the Land Registry Oice to be Pre-emption rights may arise either legally binding. In order to be enforceable and to by legal provision or via agreement between the parties. Examples of have efect vis-à-vis third parties, 3.5 Overage mortgages and charges must be legal pre-emption rights are: Overage provisions are typically registered and evidenced in the found in contracts for the use of Land Registry Certiicate. There • co-ownership: if one co-owner units in shopping centres in order are speciic rules which apply for intends to sell its part, the to assess the rent payable. Although registration in the event that the other co-owners will have a the Contracts for the Use of Stores owner has sufered an insolvency pre- emption right; in Shopping Centres regime has event. In these cases, registration • owners of rural plots of land may not yet come into force, the regime of securities such as mortgages or have pre-emption rights for the has proved to be an alternative pledges granted for the beneit of sale of adjoining properties; to non-residential contracts the Government, local authorities when applied to a commercial or in favour of the Department of • public entities may have pre- space within and forming part of Social Security may be declared void emption rights for the acquisition a multi-let commercial property if the registration occurred less than of properties which are classiied which is managed by a property two months prior to the insolvency as assets of special historic and/or management company. proceedings. Other mortgages architectural value; can also be declared void if the • local authorities have pre- registration is not completed emption rights for certain types on the date of the relevant of transaction which involve insolvency ruling. dealings in real estate within their jurisdiction;

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4. Zoning and Planning Law Permits

Zoning and planning in Portugal approved for the area. However, The main relevant administrative is mainly governed by a planning the design and appearance of a authorities are the Municipalities policy, enacted by Decree Law new building will not always be the (local authorities). The Municipalities No. 80/2015, of 14 May 2015. All sole preserve of public law. The draw up and approve the municipal plans are binding on public bodies, method of construction is governed plans for land zoning and are the and in addition individuals are by building regulations such as authorities which have the power to subject to the requirement of special the General Regulations of Urban conduct control procedures for any plans and municipal plans. The Buildings – Regulamento Geral development scheme. relevant urban plan will prescribe das Ediicações Urbanas – dating whether a landowner may construct from 1951. A construction permit is required a new building or refurbish an to undertake a development which existing building. The parameters Municipal plans for land planning involves the erection of a building or and conditions contained in these determine the permitted use of signiicant alteration of an existing plans for urban areas are applicable development land according to the one. Depending on the nature of in the construction, alteration, sector (housing, commerce and the project and the proposed use, extension and demolition, and will services, industry, agriculture, etc.). speciic planning conditions may be also determine the uses permitted. Special plans (detailing protected imposed, including in relation to the areas, coastline, public reservoirs, architectural nature of the project. The design and appearance of a estuaries and archaeological parks) In order to implement industrial, new building may be governed deine unauthorised, conditional tourist and commercial projects, by public law if a detailed plan or and preferred uses. other speciic authorisations/ an urbanisation plan has been are required.

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5. Environmental Liability

In Portugal, the environmental • use of water areas environment, are subject to an law framework that governs environmental impact assessment. • water quality construction developments relects Depending on the area where such European Law principles. The main • specially protected areas projects are to be implemented, statutes are: Law No. 19/2014, (such as national parks and speciic requirements regarding of 14 April 2014 and Decree Law national reserves) decontamination of the soil may No. 141-N/2013, of 31 October be in place. • ecological and 2013. There are also other relevant agricultural reserves statutes on: It is very important to conduct • energy certiication of buildings speciic due diligence in • management connection with the environmental Public and private projects, search of the proposed site and • noise pollution which may be deemed to have the surrounding land. detrimental efects on the • air quality

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6. Leases

6.1 Duration request the Tax Authority for a The landlord is responsible for the The length of a residential or waiver from the VAT exemption. payment of the water rates, insurance non-residential lease is freely fees, property tax (“MI”) and stamp determined by agreement between The landlord may request the duty due on the grant of the lease the parties, with a minimum of waiver and charge VAT in order to (10% of the irst rent). 1 year and a maximum limit of recover sums of VAT incurred on 30 years (minimum limit not landlord expenses in connection Unless otherwise agreed, the landlord applicable to temporary contracts with the property. The tenant is responsible for property repair. It for professional, educational or must also be a VAT taxable is usual for the landlord to be liable touristic reasons). In the absence of person for the tax waiver from for any cases of extraordinary repair a speciic term, the contract shall be the VAT exemption to apply. that may be undertaken, and for the deemed to be in force for a 5-year The current VAT rate for leasing tenant to be responsible for ordinary term. A residential lease is subject purposes is 23%. repair costs. to the same maximum period and the rules regarding termination and 6.3 Rent Review 6.5 Maintenance, expiration are mandatory. Tenant A rent review shall be undertaken Repair and and Landlord may respect the in accordance with the legal Reinstatement at end prior-notices foreseen in the law, annual coeicient approved by of Lease which should be applied according the government. However, parties The tenant is only permitted to carry to the term / duration of the lease may also agree other criteria for out works when the landlord has agreement. For residential leases, rent review. given their prior written consent once one third of the initial term (except in emergencies). However, of the lease agreement or of its The landlord may operate additional the tenant may (and is under an renewal has elapsed, the tenant rent reviews in older leases (non- obligation to) carry out minor may terminate the lease agreement residential leases granted before repairs to the property to ensure at any time, through written notice 1995 and residential leases granted that it remains adequate for its sent to the landlord with a minimum before 1990), where the rents are very intended purpose. prior notice of 120 days to the lease low. Urban Lease Law provides scope agreement intended term.Recent for negotiation between the parties Should the tenant carry out changes to the law on leases were in order to agree a new rent which improvements to property they shall implemented to a more protective relects the current market. If the be entitled to receive compensation regime for tenants, therefore we parties do not reach agreement, the or remove these improvements advise any investor to seek for legal rent is reviewed in accordance with a provided their removal does not assistance before investing in real formula provided, being the annual cause damage to the property, estate for the lease market. rent equal to 1/15 of the VPT (with unless otherwise is agreed. some exceptions to this rule). 6.2 Rent The landlord is responsible for Rent is usually calculated by 6.4 Operating Expenses the repair and maintenance of reference to a sum per square The tenant is responsible for the the building common areas in meter of the area let. Typically, payment of charges and expenses which the property is located, rents are payable in advance for the supply of goods or services except if otherwise agreed in the (i.e. on the month prior to the one related to the use of the property lease agreement. it respects to) on a monthly basis. (for example: water, electricity, gas, telephone, and internet). The tenant Typically leases foresee that premises Rent is normally charged is only responsible for other expenses shall be let in a condition it for free of VAT. However, subject if it is expressly agreed between the purpose for which they are intended to satisfaction of certain parties in lease agreement. (subject to fair wear and tear). requirements, it is possible to

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6.6 Assignments/ 6.8 Termination A non-residential lease is also subject Transfers The landlord can only terminate the to the same provision, whilst the As a general rule transfers of leases agreement before the end of its irst opposition to renewal by the to a third party require the landlord’s initial term or of its renewals or in the landlord can only occur after 5 years consent. event of tenant’s default (e.g. non- of duration. payment of rent for a period equal In case of transfer of commercial or superior to three months after the Landlords may agree on non- establishment installed in leased due dates) The law sets out some of renewable lease contracts. premises (“trespasse”), the landlord’s the grounds on which the landlord authorization is not required may terminate. In addition to these 6.9 Sale of Leased although the landlord has a pre- grounds, the landlord may specify, Property emption right over the transfer. in the lease agreement, others The sale of a leased property does In such cases, the transferor must which will be deemed to be an event not afect the lease and all rights notify the landlord in order to of default. and obligations of the previous exercise such pre-emption right. owner are transferred to the new Non-residential leases are more owner. However, in case of a lease 6.7 Subleases lexible and parties may set out in force for more than 2 years, the The tenant cannot sub-let the speciic break options during the tenant has a pre-emption right in the property, either in whole or part, term or renewals of the lease transaction and must be given notice without the landlord’s prior written agreement, including the right for of the sale and purchase terms and consent. Should subletting occur the landlord to terminate the lease conditions in order to assess if the without this being obtained, prior to initial term. tenant intends to exercise its pre- the landlord may terminate the emption right. agreement based on the tenant’s The landlord and the tenant may deinitive default. agree that the contract can be automatically renewed for a similar The tenant may not charge the renewal period or for a diferent one. subtenant a higher or proportionally Regarding residential leases, with higher rent than is due under the recent changes in the law, regardless lease agreement, increased by of its duration, the irst opposition twenty percent, unless otherwise to the renewal by the landlord only agreed with the landlord. takes efect after 3 years of duration.

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7. Tax

7.1 Transfer Tax, the transaction or on the “VPT”, Stamp Duty, where applicable, is Stamp Duty whichever is higher. paid by the buyer before the public The applicable tax will be deed of transfer is signed. determined according to whether In the case of a share deal, IMT it is structured as an asset or as a applies on the purchase of shares IMT exemptions may be available share deal. In the case of an asset or units (in the case of funds) in the with respect to properties deal, Municipal Property Transfer following entities holding real estate purchased to be resold, or to Tax (IMT) will be levied on the assets: (i) private limited liability be subject to rehabilitation purchase price paid or on the “VPT” companies (“sociedade por quotas”), works, subject to speciic (value of the real estate assessed (ii) limited partnerships (“sociedade legal requirements. by the Tax Authority), whichever em comandita simples”) (iii) general is higher. partnerships (“sociedade em nome 7.2 Value Added Tax coletivo”), and (iv) privately placed Although as a rule the transfer of IMT is charged at the following closed-end Real Estate Investment property and shares in Portugal rates: Funds. IMT will be due if, following is exempt from VAT, it may be the transaction, one shareholder applicable in the case of transfer • A lat rate of 6.5% on the sale or / unit holder becomes holder of of property. In this case, the seller transfer of any urban property 75% or more of the company’s/ may waive the exemption if certain not used exclusively for residential fund’s total equity, or the number conditions have been met and the purposes. of shareholders / unit holders operation of the waiver is subject to is reduced to two married or compliance with several formalities. • A lat rate of 5% for rural unmarried civil partners properties. If the exemption is waived, VAT can • Progressive rates on the sale If the purchase of shares involves be recovered in accordance with and transfer of urban buildings a joint stock company (“sociedade speciic provisions set out in the or used exclusively anónima”), the transaction is not Portuguese VAT Code. for residential purposes that subject to IMT. The same also are intended to be the buyer’s applies to the purchase of a 7.3 Other Real Estate permanent residence, ranging shareholding in a private limited Taxes from 0% to 8% (top marginal liability company if the holding IMI is a municipal property tax, rates), with a combined rate not represents less than 75% of the total payable by the owner or the exceeding 6%. share capital. person entitled to use the property (excluding tenants) which is • Progressive rates on the sale The onerous transfer of shares assessed on the property’s VPT and transfer of urban buildings is not subject to Stamp Duty, (value of the real estate for tax or apartments exclusively for irrespective of the legal entity type. purposes) for urban and rural residential purposes and/or properties. For urban properties intended for letting purposes, In both cases – asset deals the applicable rates range between but not intended as the buyer’s and share deals – the buyer is 0.3% and 0.45%, depending on the permanent residence, ranging responsible for the assessment and rules of the municipality where they from 1% to 8% (top marginal payment of IMT. IMT must be paid are located (an IMI surcharge may rates), with a combined rate not prior to completion and the notary apply for urban properties with exceeding 6%. is obliged to conirm payment. a VPT exceeding €600,000 – the The onerous transfer of property rates range between 0.5% and 1% is also subject to Stamp Duty at depending on whether the taxpayer a lat rate of 0.8%. Stamp Duty is a legal entity or an individual, will be calculated on the price of and on the properties’ aggregate

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VPT). For rural properties a rate of Whether generated through an on- A corporate entity is entitled to 0.8% applies. shore corporate entity, a permanent deduct costs related to maintenance establishment in Portugal or a non- and repairs, general costs and Urban properties to be used solely resident vehicle with no permanent municipal property tax (IMI), and for residential use by the buyer, as establishment in Portugal, rents other speciic costs such as those his or his family’s primary domicile, from Real Estate located in Portugal incurred in connection with the may beneit from a temporary are always subject to Income Tax. construction or acquisition of exemption from IMI for up to three the property (to the extent not years, if the property’s VPT is less (i) Indirect investment through a capitalized) and depreciation than €125,000. To beneit from corporate entity (excluding land). this exemption, the buyer’s income for Personal Income tax purposes If the shareholder has its registered (ii) Direct investment through a in the previous year cannot oice in Portugal (i.e. it is a permanent establishment. exceed €153.300. Portuguese corporate entity) or if its place of efective management is Income attributable to a Portuguese Exemptions from IMI are also located in the Portuguese territory permanent establishment is subject available regarding buildings it is treated as a resident for tax to IRC under the same terms as classiied as being of national, purposes. a Portuguese-resident company public or local interest and buildings (i.e. subject to the same IRC rates, subject to rehabilitation (speciic The income of resident corporate and to the same rules in terms of legal rehabilitation criteria must taxpayers (including rental income) computation of the taxable income, be observed). is subject to IRC at a general as those applicable to resident rate of 21% (on the Portuguese corporations). IMI is borne by the owners of mainland). A reduced rate of 17% property and is collected by the may be applicable to the irst (iii) Direct investment without a local authorities according to the €15,000 of taxable income if the permanent establishment. property’s VPT. company is qualiied as a small or medium-sized company, meaning If the investor does not have (nor For real estate owned through a that it has, respectively: (i) fewer is deemed to have) a permanent company established in a country, than 50 or 250 employees (ii) its establishment in Portugal, Income territory or region classiied as a tax annual turnover does not exceed Tax is only payable on Portuguese- haven for Portuguese tax purposes, 10 or 50 million and (iii) its annual source income. the applicable rate is 7.5% per year. balance sheet does not exceed 10 or 43 million EUR. Rental income from properties 7.4 Taxation of located in Portugal is considered Rental Income From The income of resident corporate Portuguese-source income and is Real Estate taxpayers may also be subject to a subject to Corporate Income Tax Rents and gains arising from the municipal surcharge of up to 1.5%, at a rate of 25% for non-resident sale of property are the main which is levied by many Portuguese entities. As to Personal Income Tax, income-generating events in local authorities. the applicable rate is 28%. connection with the ownership of real estate. A state surcharge is also applicable A withholding tax may apply to non- at rates ranging between 3% and resident individuals or corporations, Rents from urban, rural or mixed- 9% when the corporate taxable if the lessee is a corporate entity use properties are classiied as income is higher than 1.5 million or an individual with organized taxable income for the purposes of EUR. Taxable income for IRC accounting in Portugal. This Portuguese Corporate Income Tax purposes is calculated on the basis would usually be the case with a (IRC). If the investor is an individual, of the net accounting proit as commercial lease. rents will be treated as taxable adjusted for tax purposes. income for Personal Income Tax (IRS) purposes.

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Foreign investors deriving rental participation exemption regime are 2) the referred holding must be income in Portugal must ile met. The main requirements are as maintained continuously during the an annual tax return with the follows: year prior to the distribution; Portuguese Tax Authority to declare such income in the cases 1) the taxpayer holds shares 3) the entity distributing the where there is no withholding representing at least 10% of the dividends must not be subject to the agent in Portugal (e.g. derived share capital or voting rights of the tax transparency regime; and, from a rental agreement with an entity distributing the dividends; individual not required to maintain 4) the shareholder must be subject organized accounting). 2) the relevant holding is maintained to and not exempt from a corporate during a consecutive period of at income tax mentioned in the EU 7.5 Taxation of least one year; Parent Subsidiary Directive, or, when Dividends From the shareholder is resident in a non- a Company Owning 3) the taxpayer is not subject to the EU country, to a corporate income Real Estate tax transparency regime; tax similar to IRC, at a rate not lower In Portugal a withholding tax may than 60% of the Portuguese tax apply on certain distributions 4) the entity distributing the (currently, 12.6%). of dividends to shareholders. If dividends is not exempt from IRC applicable, tax may be withheld on or is subject to a similar tax at a Additionally, proits distributed to a account of the inal tax due (for rate not lower than 60% of the company deemed to be tax resident residents) or as a inal withholding Portuguese tax (currently, 12.6%); in Switzerland are exempt from IRC (for non-residents). This depends in the terms set out in article 15 of on the investor’s status as follows: 5) the entity distributing proits is the EU-Switzerland Agreement if not resident in a country, territory or 7.5.1 PORTUGUESE-RESIDENT region classiied as a tax haven for 1) the company to which the proits CORPORATE SHAREHOLDERS Portuguese tax purposes. are distributed holds directly at (i) General Framework least 25% of the share capital of the 7.5.2 CORPORATE SHAREHOLDERS distributing company, for at least 2 Dividends may be distributed to NOT RESIDENT IN PORTUGAL years; corporate shareholders resident (FINAL WITHHOLDING TAX) in Portugal with no withholding Proits distributed by a legal entity 2) under the terms set out in the tax if the requirements under the which is tax resident in Portugal are DTAs entered into by Portugal and participation exemption regime are exempt from IRC if the shareholder Switzerland with any third countries, met and provided that the shares is resident (i) in a Member State of the distributing entity and the with respect to which the dividends the EU; (ii) in an EEA country which distribute are not deemed to be tax are distributed are held for at least has agreed to co-operate on tax resident in such country; one year (at the time the distribution administrative matters; or (iii) in takes place). a State with which a Double Tax 3) neither company beneits from an Agreement (“DTA”), with an exchange exemption from Corporate Income If the above requirements are of information provision, has been Tax; and, not met, a 25% withholding tax entered into. applies. If the requirements to meet 4) both companies are limited the participation exemption (see Besides the requirements as to tax liability companies. below) are not met the tax withheld residency of the shareholder, further is considered as an advance on conditions need to be satisied, If the above requirements are not account of the inal tax due. notably: satisied, 25% of any dividend paid must be withheld by the Portuguese (ii) Participation Exemption 1) the taxpayer must hold shares distributing entity, except if reduced representing at least 10% of the under an applicable DTA. Distributions of dividends to share capital or voting rights of the Portuguese-resident corporate entity distributing the dividends at Most of the DTAs entered into by shareholders are exempt from the time of the distribution; Portugal, following the OECD Model IRC if the requirements under the Treaty, provide that the applicable

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Portuguese withholding tax rate without a permanent establishment whose assets are comprised in more on dividend or proit distributions in the Portuguese territory are subject than 50% by real estate. However, cannot exceed 15%. This may be to IRC at a lat rate of 25%. For IRS immovable property used in an reduced to 5%, depending on the purposes, capital gains are taxed at a agricultural, industrial or commercial percentage of the shareholding in lat rate of 28% for non-residents.. activity (with the exception of the corporate vehicle. property acquired to be resold) 7.7 Taxation Of Capital should not be counted towards Dividends paid to shareholders Gains on Disposal Of determining if the 50% threshold established in a country, territory Shares by Corporate is met. or region classiied as a tax haven Resident Entities for Portuguese tax purposes will For corporate resident entities, 7.8 Taxation of Capital be subject to withholding tax at a capital gains arising from the sale Gains From the rate of 35%. of shares in a company owning Disposal of Shares by real estate are subject to IRC at Non-Residents Dividends deposited in accounts the standard rates (see the rates The following rates of taxation apply of trustee entities on behalf of described above in 7.4 (i)), unless on capital gains of non-residents undisclosed third parties, will be the requirements to apply the generated from the disposal of subject to withholding tax at a participation exemption are met, in shares in a Portuguese-resident rate of 35%. which case such gains are exempt. company:

7.6 Taxation of Capital The main requirements to apply • 25% for corporate entities. Gains on Real Estate the participation exemption are • 28% for individuals (however, only Capital gains arising from the disposal as follows: half of the capital gain will be of Portuguese real estate derived by a taken into consideration for tax corporate resident entity are subject 1) the taxpayer holds shares proposes if the company whose to IRC at the standard rates (see the representing at least 10% of the shares are sold is recognized as a rates described above in 7.4 (i)). The share capital or voting rights of the micro or small company not listed gain, for IRC purposes, corresponds entity being transferred; in a regulated market). to the diference between the amount realized and the asset’s 2) the transferred shares where held Certain exemptions from value for tax purposes (subject to for at least one year prior to the Portuguese income tax are available certain adjustment, e.g. for inlation) disposition; with respect to capital gains from and should be considered when the sale of shares in Portuguese- computing the entity’s taxable income. 3) the taxpayer is not subject to the resident companies derived by tax transparency regime; non-resident individuals or entities. Additionally, there are provisions However, these do not apply to the for a speciic reinvestment regime 4) the entity whose shares are disposal of shares in Portuguese- under which only 50% of the value of being disposed is not exempt from resident companies where more the capital gains is considered when IRC or is subject to a similar tax at than 50% of the company’s assets determining the taxable income, a rate not lower than 60% of the consist of real estate assets provided the sale proceeds are Portuguese tax (currently, 12.6%); located in Portugal (“Property-Rich reinvested in the acquisition of speciic Company”), or of shares in holding types of assets, set by law. 5) the entity whose shares are being companies in which a company disposed is not resident in a country, ailiated to or controlled by it is a A permanent establishment is taxed territory or region classiied as a tax Property-Rich Company. on capital gains arising from the haven for Portuguese tax purposes. disposal of real estate in the same way Further, as of January 1, 2019 indirect as a Portuguese corporate vehicle. Further, please note that the sales of shares of a Portuguese participation exemption on capital resident entity by non-residents Capital gains from the sale of real gains is generally not applicable to (through the transfer of shares of a estate held by non-resident entities Portuguese resident companies non-resident entity holding shares

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of a Property-Rich Company) may The income tax regime governing • – 0.0025% for UCIs investing only also be subject to tax in Portugal at REIFs, REICs and SIGIs can be in money market instruments and the abovementioned rates. This will summarized as follows: deposits; be the case if, at any time within the • – 0.0125% for other types of UCIs preceding 365 days, the value of • Subject to IRC at a rate of 21%. (including real estate funds and the transferred shares (of the non- The taxable income for these companies). resident entity) is derived – direct purposes will be calculated of indirectly – in more than 50% as the net income, excluding Taxation of Investors from immovable property or rights investment income, capital gains, RESIDENT INVESTORS: over immovable property located in rental income and related costs • Individuals – shall be subject to Portugal. Please note that immovable incurred, as well as income and IRS at a withholding tax rate of property used in an agricultural, expenses relating to management 28%. The withholding tax will industrial or commercial activity (with fees and other commissions be inal where income is not the exception of property acquired earned by REIFs, REICs and SIGIs. obtained under a commercial, to be resold) should not be counted industrial, or agricultural activity. • Tax losses may be carried forward towards determining if the 50% This will not apply where an for a period of 5 years (for tax threshold is met. investor elects to include this losses registered after 1 of income with his other taxable January 2017. Tax losses from 7.9 Real Estate Funds income, in which case the general previous periods must be subject Decree-Law No. 7/2015 of progressive tax rates (from 14.5% to an individual analysis). January 13, which came into force to 48%) and the IRS surcharges on July 1 2015, has introduced a new • Beneit from an exemption from shall apply; tax regime for collective investment the local authority surcharge • Corporate investors – subject to undertakings (UCI), and applies to (derrama municipal) and state IRC at a provisional withholding the following entities: (i) Securities surcharge (derrama estadual). tax rate of 25% (unless the Investment Funds (SIFs); (ii) Real • Mergers, demergers, or relevant beneiciaries are exempt Estate Investment Funds (REIFs); subscriptions in kind between the from IRC – excluding investment (iii) Securities Investment Companies mentioned entities may beneit income – in which case the 25% (SICs); and (iv) Real Estate from the tax neutrality regime withholding tax will be inal). Investment Companies (REICs). in the IRC code. This will allow NON-RESIDENT INVESTORS: a more eicient restructuring The newly adopted SIGIs (a special • Non-resident investors without operation or the transfer of assets type of real estate investment a permanent establishment in between investment vehicles. company, subject to a signiicantly Portugal, who receive income relaxed regulatory framework) • Subject to autonomous tax rates from REIFs, REICs, or SIGIs shall are also subject to the income tax (“taxas de tributação autónoma”) be subject to withholding tax at a regime applicable to UCIs (the set forth in Article 88 of the IRC rate of 10%. SIGIs’ regime entered into force on code – up to 50% of certain • Non-resident investors (i) failing February 1, 2019). expenses. to present proof of their non- • Income derived by these entities resident status in Portugal; Following a major trend in is not subject to withholding tax. (ii) that are established in a investment vehicles’ tax regimes country, territory or region in Europe, the UCIs tax regime • Subject to the obligations qualiied as a tax haven for adopts the “exit taxation method”, contained in the IRC code, Portuguese tax purposes; or whereby the income is taxed at the regarding organization of (iii) whose equity shares are investor level. accounting systems and tax held in more than 25% by administration. Portuguese residents either Income derived from units in REIFs’ • Further, Stamp Duty is payable, directly or indirectly are subject and from REICs’ shares shall be on a quarterly basis, on the global to withholding tax at the ixed classiied as income from property net asset value of an UCI. The tax rates of 25%, 28% or 35% (as for the purposes of this regime. rates are the following: applicable) – determined under

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the applicable regime for resident listed on a regulated market situated applicable law – the “Regime Geral investors. A punitive 35% rate also or operating in Portugal. In these dos Organismos de Investimento applies with respect to income situations, the legal regime of public Colectivo”) with similar proit that is paid or made available in companies as provided for under the distribution policies; accounts in the name of one or Portuguese Securities Code, besides more holders but on behalf of an the newly approved regime, shall b) Real Estate Funds and Real undisclosed third party. apply to SIGI. Estate Investment Companies for residential lease purposes subject 7.10. Portuguese Reits This diploma also allows that, by to the Law n. 64-A/2008, 102 article, The Decree-Law 19/2019, of complying with certain requirements, with similar proit distribution January 28, approves the legal existing S.A. companies and SICAVIs policies. regime of the Sociedades de and SICAFIs can be converted into Investimento e Gestão Imobiliária a SIGI, by means of a resolution of COMPOSITION AND CONTINUITY (“SIGI”). This is a new type of real the shareholders, subject to qualiied OF ASSETS estate investment companies, approval majorities. Each of the rights and/or interests envisaging the investment and must be held by the SIGI for a dynamization of the real estate CORPORATE PURPOSE minimum period of three years. market, particularly of the leasing The SIGI’s corporate purpose market. comprises the following: The SIGI must comply with speciic requirements regarding the SIGI correspond to the Portuguese • Acquisition of property rights, composition of its assets. In any of version of REIT (“Real Estate surface rights or other equivalent the following cases, the limits are Investment Trusts”). rights over real estate for leasing veriied by reference to the values or other forms of economic included in the SIGI’s accounts. SIGI are required to adopt exploitation, such as construction the corporate type of limited projects and rehabilitation of real From the second year after the liability company by shares (“S.A. estate, shop use agreements constitution of the SIGI: companies”), and their corporate (within shopping malls) and space name shall include «Sociedade de use contracts for oice purposes. • At least 80% of the total value Investimento e Gestão Imobiliária, of SIGI’s assets will have to S. A.» or «SIGI, S. A.». • For the purposes of this correspond to the value of the legislation, the concept of rights held on real estate and SIGI require a minimum subscribed real estate assets includes inancial participations held under and fully paid-up share capital rural properties susceptible its corporate purpose; of € 5,000,000, and share capital of autonomous economic contributions may not be postponed. exploitation (including for forestry • At least 75% of the total value SIGI may, or not, be incorporated purposes), urban buildings, of SIGI’s assets will have to following a public ofering and, autonomous units, as well as correspond to the value of real in the irst case, an incomplete land that may be classiied as estate rights subject to leasing or subscription will not prevent the urban buildings or autonomous other forms of exploitation, as per deinitive commercial registration of units within three years of their the corporate purpose. the incorporation, provided some acquisition.The acquisition The SIGI’s indebtedness is limited to conditions are met. of shares in other SIGI or in a maximum of 60% of its total assets. companies based in another The new legal regime provides Member State of the EU or the TRADING ON A REGULATED for the application of the public European Economic Area, as long MARKET companies (“sociedades abertas”) as such company complies with Within 1 year from incorporation, the legal regime to SIGI should they the main rules of the SIGI regime. shares representing the total of the achieve to qualify as such, which will • the acquisition of shares or units SIGI’s share capital must be admitted mandatorily occur should the SIG be of participation in: to trading on regulated markets or incorporated through an initial public on a multilateral trading facility. ofering or, even if not incorporated a) Collective Real Estate Investment by means of an IPO, should they be Institutions (incorporated under the

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From such moment, at least 20% of Failure to comply with some rental income and capital gains the shares representing the SIGIs’ requirements applicable to SIGI (except when income derives from share capital must be distributed by shall determine the loss of capacity entities domiciled in a tax haven). investors holding less than 2% of the as SIGI. • SIGI are exempt from State and voting rights. Municipal surcharge; TAX REGIME DISTRIBUTION The SIGI is a new category of • The income obtained by SIGI is The SIGI are also subject to speciic real estate investment company exempt from withholding. rules regarding the distribution of and therefore it is subject to the In what concerns the tax legal income and reinvestment. Within existing regime foreseen for framework applicable to the income 9 months from the end of each collective investment undertakings. paid by the SIGI to the participants tax year, the following minimum Contrary to what succeeded upon the Personal Income Tax rules thresholds of proit distribution are the creation of its Spanish REIT applies to individuals and the required: counterpart, which created a Corporate Income tax rules apply speciic tax regime for the SOCIMI, to companies. Depending on the • 90% of the proits arising from the Portuguese legislator created nature of the income obtained the dividends and other income SIGI as a type real estate investment and the participant’s statute of originated by the investments in companies, which determined the residence, withholding tax rates may shares and investment units held application of the already existing vary between 10% and 28%. The under the corporate purpose; regime foreseen in article 22 of the efective taxation will always depend Portuguese Tax Incentives Statute • 75% of the remaining on a casuistic analysis according (EBF) for this type of investment distributable proits as per to the speciicities of the type of companies. general corporate law; income and of the investor.

A minimum of 75% of the proits Following the above: arising from the sale of assets acquired following the SIGI’s • SIGI are taxed under the corporate purpose must be Corporate Income Tax Code, reinvested within 3 years from with the following particularities: sale date. exclusion from the assessment of taxable proit of capital income,

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8. Real Estate Finance

8.1 Interest Rate Risks necessary to determine in each following rates: Raising of inance for the acquisition case if there are any restrictions or of property or for reinancing debt further requirements relating to the • 0.04% of the total amount, for can be done by way of long-term execution of this type of security each month or part of a month, or short-term loans. Where a ixed under the articles of association of for agreements with maturity of interest rate is not agreed there the company or speciic legal rules. less than one year is always the risk of interest rate • 0.5% of the total amount, for luctuation which might be hedged Bank account pledge agreements: loans with a maturity of one year via derivatives or interest rate-swaps. bank account pledges as security or more, but less than ive years One of the most common types are permitted and are commonly of interest rate swap is the plain used to guarantee speciic • 0.6% of the total amount, for vanilla swap and is available from a agreements. The terms of the loans with a maturity of ive years inancial institution. In this case, the pledge including the right of the or more borrower agrees to pay a ixed rate pledgor to access the bank account • When the guarantee is not to the counterparty, while receiving must be set out in the written ancillary to the loan agreement, a loating rate indexed to a reference agreement between the parties. it will be taxed at the following rate. This plain vanilla swap aims to rates: mitigate the risks arising from any of rents: under this rise in the interest rates.. agreement all sums receivable • 0.04% of the total amount in connection with the grant of a secured, for each month or part 8.2 Assets Held as lease are assigned in favour of the of a month, for guarantees with Security lending institution. It is also possible maturity of less than one year Loan agreements are typically to execute a global assignment • 0.5% of the total amount secured, granted with real estate being used encompassing an assignment of for guarantees with a maturity of as security. A mortgage is granted all rights, claims and other sums one year or more, but less than over the property for this purpose. receivable (either present or future) ive years As mentioned above, to be valid in connection with a transaction. the mortgage must be registered • 0.6% of the total amount secured at the Land Registry Oice, and this 8.4 Taxation on the guarantees with a maturity of ive will usually be done by iling the Creation of Security years or more, or open-ended mortgage deed. Stamp Duty is levied in respect arrangements of both loan agreements and If the loan is made to a consumer, 8.3 Further Collateral guarantees. under to Decree Law No. 133/2009, Agreements of 2 June, the rates are as follows: Share/interest pledge agreement: When the loan agreement and shares and interest pledges can guarantee are jointly executed and • 0.08%, for each month or part be used as security for loans. when the guarantee is ancillary to month for loans maturing in less The execution of a share pledge the loan agreement, this guarantee than one year can be performed by means of is not taxed. In this case the a private contract, although it is loan agreement is taxed at the • 1% for maturities of one or more

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Contacts

Lisbon DLA Piper ABBC Largo S. Carlos, Nº 3 1200-410 Lisboa – Portugal T +351 21 358 36 20 F +351 21 315 94 34 [email protected] www.dlapiper.com

Luís Filipe Carvalho Partner T: +351 21 358 36 20 [email protected]

Paulo Anjo Senior Associate T: + 351 213 583 620 [email protected]

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About DLA Piper

With more than 600 lawyers globally, DLA Piper boasts the world’s largest real estate practice and is consistently top-ranked around the world. As real estate develops into a truly global industry, the ability to quickly and eiciently provide legal services in structuring cross-border investments and transactions is paramount. DLA Piper clients value the team’s global resources, regional strength and local delivery, and include private and public companies, institutional investors and government entities.

This guide was written predominantly by Luís Filipe Carvalho and Paulo Anjo of DLA Piper ABBC.

This guide was prepared in February 2019. Subsequent changes in law are therefore not taken into account. This guide cannot be considered as a substitute for obtaining speciic legal advice in individual cases. Neither DLA Piper nor DLA Piper ABBC assumes any liability in connection with this guide.

Visit www.dlapiperREALWORLD.com – DLA Piper’s online guide to international real estate.

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23 DLA Piper is a global law irm operating through various separate and distinct legal entities. Further details of these entities can be found at www.dlapiper.com. This publication is intended as a general overview and discussion of the subjects dealt with, and does not create a lawyer-client relationship. It is not intended to be, and should not be used as, a substitute for taking legal advice in any speciic situation. DLA Piper will accept no responsibility for any actions taken or not taken on the basis of this publication. This may qualify as “Lawyer Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome. Copyright © 2019 DLA Piper. All rights reserved. | MAR19 | 3346963