5 Kore Rules on Purchasing Portuguese Real Estate
1. The role of agent and legal counsel when buying property
The first step for acquiring a property is to determine the range of price along with the characteristics and location desired. This would require knowledge from an agent in the field and therefore the role of the real estate agent is key to secure the right opportunities. The agent will search for a property that meets the requirements agreed, accompany you during the property viewing visits and will bridge between you and the seller.
Real estate brokerage is a licensed activity in Portugal and in 2022, there were more than 8.000 companies with a real estate brokerage license (which may be verified online). Property agents earn the commission, 5% being the most common commission practiced in Portugal, increased by the 23% VAT. The commission is the cost of the seller bears, and it is not common to find buyer agents, although for certain high-end property it is advisable. As it is common to split the commission between various agents who may be involved, it is advisable to secure agents that provide you with sufficient alternatives.
Once you choose a property it is essential to secure an independent lawyer before entering into any sort of agreement or finalize all conditions of the acquisition, even if we are dealing with a simple reservation. In a bull market, timings and process are as equally as important as price. There may be language barriers or practices that are different in Portugal, which may often lead to incorrect assumptions, and the role of the buyer’s legal counsel is also to bridge the gaps towards smooth closing of transaction.
The reservation is a non-binding agreement but a key document as it sets the timings for the transaction, such as signing of the promissory agreement, advance payment schedule and due diligence phase. We generally recommend securing external property or technical survey to minimize any risks of acquiring a property in an undesired state or with urbanistic (licensing) risks.
2. Determine the correct structure for your acquisition
Once you have the property lined-up, it is time to discuss the best structure for the acquisition with your legal counsel. In the high-end residential property market it is still common to see, apart of the typical direct acquisition (or asset deal), the indirect acquisition of companies (share deal) or property acquisition through companies.
There are several reasons for the high-value property owners to favour nowadays cleaner and simpler structures of asset deals, specially if the property is acquired as a main residence in the framework of a relocation. In Portugal, future capital gains on the disposal of a main home are not taxed if the sale proceeds are reinvested in another main home.
The trend has been to move away from share deals due, for example, to too high complexity and global reach of current tax rules, difficulty of due diligence procedures on local or foreign companies, pricing differences and discussions over warranties. Share transactions require careful legal analysis of the pros and cons. There may be still good non-tax reasons to use companies, such as confidentiality, estate planning, asset protection or development possibilities that may need to be evaluated.
3. Clarify the total cost of buying and annual expenses
When the structure for acquisition is decided, the maths to determine the overall transaction costs becomes clear. Legal counsel will provide you with an overview of total costs for the acquisition, including transaction taxes, notary fees, property registry fees, legal fees, as well as with other miscellaneous expenses that may follow the purchase. This should include any costs identified in the framework of the due diligence (such as condominium fees, insurances, etc.).
Property transaction taxes are the highest cost borne by the purchaser at closing. The acquisition of residential property is subject both to Municipal Transfer Tax (IMT) at 7.5% and Stamp Tax (IS) at 0.8% leading to a combined rate of 8.3% rate for properties with a price above € 1 million (7.3% for properties below € 1 million). Residential property is generally exempt of VAT in Portugal.
Due care should be taken when drafting contractual documentation not to trigger unnecessary tax impact on the promissory purchase phase, on financing and drawing up of guarantees or structuring acquisitions through entities domiciled in blacklisted jurisdictions.
Annual property tax on ownership (IMI) is due, by the registered owner at 31 December each year, with the rate up to 0.45% (varying from municipality to municipality but average is 0.3%), which is applied over the cadastral tax value (not the acquisition value). In the transaction phase, it is common to include pro-rata rule in the promissory agreement to establish that IMI becomes the cost of the buyer from the closing date onwards and evaluate if the cadastral tax value may be revaluated post-closing. Another element that requires validation is if the property will attract Additional Property Tax (AIMI), which applies in cases of cadastral tax values above €600k. Different rates apply for properties owned by companies and exemptions apply for individuals up to €1.2m (for married taxpayers) and €600k (for single taxpayers).
4. Securing third party funding for property purchase
Another important aspect to consider is if a third party funding for the transaction will be put in place as this may affect transaction timings. There may be many reasons to add a loan to the transaction and those may include, the need of liquidity, the increased return on equity via leveraging at lower rates than expected yield or the need for diversification and asset protection.
Normally only Portuguese local banks or Portuguese branches of foreign banks will offer mortgage financing opportunities. For international investors, we recommend securing a mortgage broker to review your financial situation and suggest the best financing terms available. The process may be bureaucratic and may take s up to 2-3 months and therefore it is important to start early. Depending on the circumstances of the deal and internal valuation of the bank, it is possible to achieve loan-to-value ratios of up to 70%-80% of the bank valuation with terms of 20-30 years.
Another possibility is to use a Lombard Loan that entails marketable securities owned are used as collateral for a loan. In exchange for a pledge of liquid securities, such as equities, bonds or funds, a financial institution will provide financing for a pre-agreed term and set margin call. The drawbacks are generally on the shorter term and advantages are an efficient underwriting process and precluding the need to sell securities and attract tax charges to access liquidity.
5. Signing, pre-payments and closing deed
After reservation, structuring outline and the assessment of costs and funding, it is time to enter into the binding phase. It is essential to understand that in Portugal it is common for parties to enter into, what is called, the “Promissory Contract of Purchase and Sale” or, in abbreviated form, “CPCV”. This private contract will address all key issues towards such as property identification, status, purchase price and payment terms, timeline and any specific conditions of the acquisition and any representations and warranties over the property.
There is generally a down payment upon signature of CPCV, usually ranging from 10% to 25% of the purchase price. As a rule, it is transferred directly to the seller. Escrow for the initial down payment is not common in Portugal. The binding effect is key because if the if the seller withdraws from the promissory contract, he/she are required to return the down payment in double. Further, purchaser may request a court execution of the agreement, replacing the deed of sale with the same legal effects of a final purchase contract. If the buyer breaches or withdraws from the promissory contract it forfeits the down payment.
Another protection is to undertake a provisional registration with the Land Registry Office in order to safeguard the position of the promising buyer as the future owner of the property against any third parties. For certain transactions, such as involving a property under development, it is critical to negotiate rules for non-performance by the builder or developer, long-stop dates for final delivery, potential penalties for late delivery and final inspection timelines and snag-list procedures. Before the final deed, it is crucial to make sure to schedule a visit to the property to confirm that all conditions and eventual improvement works are in conformity.
The purchase deed, by which the freehold title is transferred from the seller to the purchaser, is made at a notary’s office, who will certify that all documentation is in place, verify the fact of the full price settlement (with final payment usually performed by bank cheque), release or set-up of any mortgage, track the payment of taxes and perform the necessary registrations in the public registries in favour of the purchaser.
Portuguese residential market in the last years has been a success story, offering new opportunities as investors seize the occasion to tap into the quality of life that Portugal has to offer. Read our Guide for highend residential property that provides initial answers when approaching a potential deal – Click Here.
About Us
Kore Partners is a boutique law firm centered on the private wealth sector. With almost 40 nationalities within our client pool, we are involved in high value and complex multijurisdictional issues touching all the cornerstones of the private client business.
Downloand the Private Client Briefing
© Kore Partners, 2022.
This briefing provides for general information and is not intended to be an exhaustive statement of the law. Although we have taken care over the information, this should not replace legal advice tailored to your specific circumstances. This briefing is intended for the use of clients and selected recipients. Queries or comments regarding this including joining our mailing list can be directed to kore@korepartners.com