Real Estate Tax Reforms in Portugal

Published on 2nd May, 2012

When the International Monetary Fund (IMF) and the European Union (EU) agreed to a financial bailout for Portugal last year, one of the international bodies’ conditions was that the national government will implement reforms in the real estate tax system. These reforms specifically touch on the property valuation system with the aim of ensuring higher tax revenues and with a planned implementation period from 2012 to 2013.

Despite the best of intentions, however, issues inevitably arise from said reforms that must then be addressed by the Portuguese government.

In 2003, the Imposto Municipal Sobre Imóveis (IMI) was subjected to significant reforms. IMI is Portugal’s annual municipal property tax.

Up until the end of 2003, the Contribuição Autárquica, which is Portugal’s annual real estate tax, was computed based on the property’s tax value. It should be noted that the tax value is substantially lower than the commercial value of the properties being levied.

Due to the unrealistic property valuation system in place then, many municipalities experienced shortages in revenues that then resulted in considerable budget deficits. The hardest-hit were expectedly the municipalities with high operating budgets.

Then in 2003, the reform in the property valuation system was implemented. New criteria were used to calculate property values with figures that closely approximated actual values instead of the traditional tax values.

The actual values were computed based on many factors. Although commercial value was used, it was not the main and sole determinant because of its volatile nature.

Instead, the most important factors included the location of the property and its surrounding area, its purpose, its lifestyle features, and its age of construction. These factors were predetermined by law with the location aspect evaluated on a periodic basis. Each municipal council also had the authority to define areas within the municipality where greater or lesser values than those mandated by law can be assigned.

Still, these contributing factors required an objective basis for its overall computation. As a result, the government issues an official average construction value per square meter, said issuance of which is made every year and is applicable to an entire jurisdiction.

This average construction value is then multiplied by the applicable factor. For example, the applicable factor may be the age of the property, thus, number of square meters times the corresponding factor.

From the above-mentioned basic values, the other factors are then added to reflect the property’s actual value. These factors include but are not limited to its purpose (commercial or residential), location, and on-site amenities (garage, elevator, and swimming pool).

As can be expected, the new property values for taxation purposes were higher than those of the old valuation system. In reality, however, the new applicable rates are of lower value, thus, lower in compensation for the government.

Consider these figures: According to the old valuation system, the rate was established from 0.5% to 0.8% where the municipality is concerned. With the reforms in place, the rate was 0.2% to 0.4% applicable on real property tax computations from 2004 onwards.

Furthermore, the proponents behind the 2003 law designed the new tax system to ensure that every single property will have updated tax values by the year 2014. This will be accomplished by reevaluating every new property that has transferred ownership from 2004 onwards. Within 10 years after the law takes effect, every single property will be gradually but surely evaluated by the tax department.

This is where a notable issue arises. While the new transfers of real estate complied with the best intentions of the reforms, the government failed in a crucial area – charging higher taxes to correspond to the higher taxation values. To think that the Portuguese government is usually very efficient in this regard!

Why was this so? The main reason appears to be that the official valuation for properties that did not undergo any changes in actual ownership was never re-evaluated according to the new taxation system.

The owners of real properties will be notified of the change in valuation via registered mail. Take note that the valuation can be challenged by the owners but only within a set of legal criteria.

Since the law was published in 2003 yet, property owners should have been well prepared by now. However, there are aggravating circumstances that make these reforms harder to accept for taxpayers.

For one thing, taxpayers are already suffering from too much tax strain. Even the gradual increases in real property tax still cannot take away the strain of higher taxes. For another thing, the bust in the real estate market means that many properties are idle. Paying for taxes on idle properties further adds to the strain. Indeed, the Portuguese government has its work cut out for it so we shall see what its next moves are in the taxation department.

Published in: Taxation