Buying Process

Buying a property in the Algarve is relatively a very straight forward matter, provided the ownership of

the property is clear, all necessary licences have been obtained and the laws are strictly adhered to.

The process, if it does not involve an off/on-shore company, consists of two distinct stages;

The promissory contract (contracto promessa de compra e venda) and the final deed (escritura).
 

The Promissory Contract.

This is a legally binding contract between both parties, provided all signatures are verified by the local public notary. On signing the contract, the buyer pays a deposit which ranges from 10% – 25% of the agreed purchase price. This deposit is in principle non-refundable unless specifically stated in the contract.

If the buyer breaks the contract, he loses the deposit. When the seller breaks the contract, he is legally obliged to return the deposit plus compensation, which is usually equal to the sum of the deposit. It is acceptable for both parties to ask for a copy of the contract, translated into their mother tongue.

The contract covers a number of points including the following:

• confirmation of the precise identity of the vendor and the purchaser.

• Exact description of the property.

• Confirmation of clear title of ownership.

• Agreement for payment and terms of deposit if contract is broken.

• Agreement concerning stage payments if applicable.

• Confirmation of date of completion of sale.

Before the contract is signed, the vendor has to produce all the relevant paperwork relating to the property, to show to the buyer or his/her lawyer, so that necessary searches can be made to ensure there are no outstanding debts like rates, bank loans against the property. The habitation licence has to confirm that the property is for residential use.

The final deed.

This is the official document of the transfer of the property and has to be signed in the office of the official public notary. He will require documentary evidence issued by the local tax authorities (finanças) that the appropriate property transfer tax (IMT) has been paid. If the property is part of a condominium, an associated condominium agreement will also form part of the final deed. Unless the buyer understands Portuguese, the notary will insist on a verbal translation into the buyer’s mother tongue. When both parties have signed the deed, the balance of the purchase price is then paid to the vendor. The property is then to be transferred to the name of the new owner at the land registry office (conservatorio predial), preferably by the buyer’s lawyer.
 

Costs

The costs, associated with buying a property in the Algarve, are as follows:

• Property transfer tax (IMT-Imposto Municipal Sobre as Transmissões Onerosas de Imòveis) This is levied on a sliding scale from 2 to 8%, based on the agreed selling price of the property. There is a Euro 89.7600 threshold (2009)

• Notary Fees. This is calculated on the agreed purchase price and levied at 1.5% to 2%.

• Lawyer’s Fees. It is advised to always employ the services of a reliable lawyer. They normally charge from 1% to 2% of the purchase price, though some lawyers charge a set fee. VAT in Portugal is 20%.

• Local rates (IMI – Imposto Municipal Sobre Imoveis). This is an annual cost. It is calculated on the rateable value of your property and is levied at 0.8% to 1.3%. First time owners who are residents in Portugal or retires pensioners are eligible to claim exemption for a period of 3 to 6 years, subject to the size and the location of the property.

• Condominium charges are paid on a monthly or quarterly basis by owners in enclosed condominiums.

Different levies and procedures apply when it concerns “company owned” properties, off-shore or on-shore.

These terms are used when the property is not privately owned but by a company. These companies are usually established in countries with a beneficial tax regime.

On-shore properties are owned by companies located within the Portuguese jurisdiction.

The benefit of corporate ownership are:

• Transfer of property is very simple and tax-effective: a simple transfer of shares.

• IMT taxes, notary fees and registration fees are avoided.

• Company-owned properties are mortgaged quite simply.

• Transfer on death ensured that the heirs deal with their inheritance in accordance with the law of the residence of the share owner(s).

• Capital gains tax is not payable on the increased value of the property and capital gain on the sale of the shares is subject to the seller’s jurisdiction .

• Buyers and or owners enjoy anonymity.

It is obvious that the Portuguese fiscal authorities are not very pleased with these constructions and blacklisted a number of “tax-friendly” countries/locations like Gibraltar, Cayman Isles etc and others. At present only companies located in Delaware and Malta are whitelisted. Off-shore companies in blacklisted territories are taxed according to special tariffs. On-shore companies are companies registered in Portugal.

Before you decide to purchase a property through an off-shore construction, it is strongly advised to consult your fiscal specialist first.