Portugal remains a target for investors, despite new 'marginal gains' property tax

7th November 2016

How do you tell which property markets are the hottest for investment? One surefire way is to look at where new taxes are popping up. If a country or region sees a flurry of property investment, normally from non-residents, so follows a reactive taxation policy designed to bolster the government’s coffers.

France’s socialist President Hollande showed an example of how not to do this back in 2012. When post-downturn non-residents began returning to the market, incentivized by falling mortgage rates to capitalize on France’s soft property prices, Hollande added 15.5% social charges on to capital gains and rental income taxes. He also walloped a wealth tax of 70% on HNW residents with over €1.3m in net assets.

The wealth tax caused France’s wealthy residents to up and leave, forcing a swathe of large properties onto the market, especially in Paris. This opened up further opportunities for property investors as big period apartments suddenly dropped in value due to the increased supply. These investors used mortgages to keep their net assets under the €1.3m threshold, essentially meaning the tax didn’t work as Hollande had intended.

And the social charges? They’ve since been deemed illegal by the EU courts, after an initial uproar led to a year of confusion and turbulence, reducing demand from non-resident buyers at a time when the country would have greatly benefitted from the increased flow of capital.

Although Portugal’s new prime minister, Antonio Costa, wears a similar colour of political trousers to Hollande, his approach to taxing property investors targeting the country’s buoyant markets appears to be considerably more tempered. His strategy, centered on adopting a marginal gains-style way of boosting revenue, is aligned with the positive impact foreign investment is having on the country, especially Lisbon. An impact Costa is keen to encourage rather than jeopardise.  

This strategy was demonstrated in the recent property tax announced for the draft 2017 budget. It introduces an annual real estate tax ‘surcharge’ called the ‘Adicional ao IMI’ or AIMI. At a glance, this looks like a Hollande-style reactionary measure to tax wealthy investors attracted to the country’s competitive property prices and rising markets. On paper though, the tax is measured, and at worst, only really moves Portugal slightly more in line with the way other European countries tax real estate.

The AIMI tax, if approved, will be applied at a rate of 0.3% of the cadastral value of property (normally 30-40% less than the market value) and this 0.3% will only apply to any value that is above €600,000. Also, married couples or unmarried cohabiting couples have twice the limit, so the tax is only applied on values above €1.2m.

Furthermore, the new AIMI tax eliminates the additional 1% stamp duty tax introduced 2 years ago for urban properties with a cadastral value exceeding €1m. As the 0.3% AIMI is less than the 1% stamp duty tax, it reduces the amount of tax investors will pay at the time of purchase, although any investor reaching this level of assets would be obliged to pay the much smaller tax annually. By setting taxes with a marginal approach, Costa demonstrates his long-term vision for creating a structure that will increase revenue over many years, rather than hitting out with massive taxes at the start, which  only serve to scare both investors and locals, just as Hollande did.

This measured approach comes at a time when Lisbon has become a global target for all types of buyers. Investors are being enticed by the city’s booming tourism demand, shown recently in new figures from Airbnb and supplemented by a growing tech-scene; Second-home buyers and retirees are attracted to the country’s non-dom programme offering zero tax on pensions and lower tax on worldwide income, while the third wave of interest comes from investors from far-afield (think Brazil, South Africa and China) attracted by a Golden Visa programme that paves the way to EU residency.

The one thing that all these types of buyers have in common is their appreciation for value, with prices of central Lisbon properties extremely competitive for a modern capital. At less than half the price of European cities like London or Paris, renovated property across the city is giving the city a facelift and international buyers are moving in.

Public investment is matching private in Lisbon’s upgrade. In November 2016 Lisbon became the first city in Europe to benefit from Plan Juncker, an investment initiative launched by the European Union that will see the city receive a €250m loan over the coming years to enable it to upgrade infrastructure and improve the already high quality of life in the Portuguese capital. 

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